Use 


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The  book  when  sent  out  contains  the  law  and 
all  rulings  in  force  at  the  tin^  of  subscription. 

It  is  kept  up  to  date  by  the  insertion  of  new 
pages  as  often  as  new  rulings,  regulations  or 
decisions  appear. 


under  first-class 
instructions  for 


3 New  pages  are  sent  out 
postage,  accompanied  by 
proper  insertion. 


4 Ail  pages  are  numbered  consecutively;  all 
paragraphs  are  numbered  consecutively  in 
bold  figures. 


5a  On  new  pages,  unde^the  bold  face  para- 
graph numbers,  in  small  type,  are  back  refer- 
encCvS  to  preceding  paragraphs.  Correspond- 
ing forward  references  to  the  new  paragraph 
numbers  should  be  made  each  time  new  pages 
are  received,  thus  inaking  the  book  fully  cross 
referenced  at  all  times. 

The  pages  and  paragraphs  are  numbered 
consecutivel3^  If,  when  new  pages  are  re- 
ceived, corresponding  intennediate  pages  are 
found  to  be  missing,  notice  thereof  should  be 
sent  us  at  once,  so  that  we  may  forward  dupli- 
cates. 

The  Corporation  Trust  Company 

37  Wall  Street,  New  York 


111 


Corporation  Cmot  Compang 


SERVICE  DEPARTMENT 


8T  WAIX.  STREET  >fEW  YORK 


I 

f 


federal  income  tax/service 

-REPORT  NO.  SS-i 
DECEMBER  20,/lgZO. 

580  herewith  is  a/pink  sheet  to  face  page 

L°r  P^ee  520  /ow  in  your  binder  should 

be  removed.  Also  enclo^d.  to  follow  the  pink  sheet, 
are  pages  581  to  590.  / 

mo  likewis^^',  are  Supplementary  Pages  107- 

» ior  subs  ti  tut  ion",  and  new  Supplementary  Page  115 
/ * * * 

THE  DECEMBER  AS,  1920  TAX  INSTALLMENT  PAYMENT. 

/' 

House  Joint  J^esolution  415,  staying  penalties  for 
non-payment  for  Aifty  days  (the  one  per  centum  per  month 

has  been  favorably  reported  out 
Tvi.  t Committee  by  Chairman  Fordney. 

Th^t  jthe  resolution  will  beoo.ms  law  we  doubt. 

NEXT  YEAR’S  SERVICE. 

J'®^^®/^t®ntion  to  the  matter  of  renewing  by  those 
who  have  not  already  done  so,  to  insure  prompt  receipt 
of  the  new  Service  (ready,  co.mpletely  indexed,  on  sched- 
ule time),  and  to  avoid  possible  delay  in  the  receipt  of 
current  new  matters  (frequently  of  stupendous  importance 

iL'L!  w prevent  the  annoyance  miss- 

ing the  Weekly  Bulletins  of  the  Internal  Revenue  Bureau. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


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(litie  (Enrporation  ®ruat  Olompattg 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  HO.  54-  z'" 

DECEMBER  29,  1920./"" 


Enclosed  herewith  are  pagesy591-592.  Also  enclosed 
are  Supplementary  Pages  107-ipS  and  115,  revised  for  suh 
stitution.  These  enclosure^ a.re  for  the  1920  Service 

Book 


/ 


1921  SERVICE 

The  delivery  ou  the  1921  Income  Tax  Service  Book 
began jyesterday.  fihe  books  are  going  out  in  the  order 
of  th0  receipt  oy  renewal  subscriptions. 

T^e  new  se/ies  of  Bureau  of  Internal  Revenue 
Bulle^ns,  containing  the  special  Income  Tax  Rulings, 
begina  Januaj^  1,  1921. 

Very  truly  yours, 


THl  CORPORATION  TRUST  COMPANY 


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yuBiimtji)  terriS  imilBint|:taID 

TH3MT5=1A<=^3a  3DlVS=i3a 

MMOT  THHilTS  .I^FAV/  t*J 


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-^2  .051  THOTES- 

.o£Ci  ,es  HaaMHoaa 

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tfua  lol  bartivsT  ,311  bna  &QI-?OI  aa^&’i  ^iBclneffleIqqy3  ©ib 
aoxviea  OSei  ©is  e9^0soIo^9  ©ee.^T  .noiJwJx^s 


.aoivnaa  isei  aHX 


jfooa  90iYi9a  xsT  eraooni  ISei  arfJ  lo  Y;i9vil9b  ariT 
labio  9d.t  ni  •tuo  gnlos  eis  ejJoocf  stlT^  .^Bbteiaex  nssap 
. anoliqiioecSija  Iswenai  To  Jqiaoai  To 


ewnavafl  iB.ns^nl  To  yssiua  To  89 ties  wan  erfT 
,ganiXyH  xsT  araooni  Xsioaqe  ariJ  gninis^HOO  .ani^eXIuS 

.iSei  ,X  ■'CTBi^nBX,  anigecf 

.anrox  vXyiJ  "YisV  ' ' '' 

THAqiioo  tauHT  KoXTAaoqaoo  iht 


(Eor^nrattim  ©mat  Oliiiaiiat^ 


SERVICE  DEPARTMENT 


BT  WArx,  STRjesrr  iSKW  touk. 


FEDERAL  INCOME  TAX  SERVICE 


-BEPORT  NO.  55- 


DECEMBER  30,  1920. 


Enclosed  are  pages  591-592  for  sutstitution, 
showing  a new  Treasury  Decision  on  page  592. 

Also  enclosed  for  euhatitution  is  revised  Sup- 
plementary Page  115. 

Service  Book. 


•rtlE  1921  Service. 


Many  thousand  of  the  new  1921-lbooks  are  on  their 
way  to  subscribers.  Others  arr  going  forward  day  by 
day  without  delay.  As  there^has  been  no  postoffice 
congestion  th;  bers  should  receive 

their  books  e:  usly  with  or  very  soon 

after  the  care  pment  has  been  de- 


livered. 


THE  BlfEWSTER  DECISION. 


We  are  publi^ing  a pamphlet  edition  of  the  de- 
cision which  begins  at  ^ 3021' of  the  1920  Service 
2538  of  the  1921  Service;  sent  to  subscribers  on 
December  20.  We  shall  be  glad  to  supply  our  sub- 
scribers with  Judge  Thomas's  opinion  in  this  form  if 
it  is  wanted. 


Very  truly  youre, 


THE  CORPORATION  TRUST  COMPANY. 


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•qua  beeivsT  al  noi^ud^x J’adfaa  lol  beaoXona  balA^ 


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-9b  nsed  SBfl  dnemqirfa  sfixonuonn^  biBO  srid  n /S 

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‘ soxvTeS  OSGX  erf^t  *^0  XSOS  P ds  apigecf  rfoidw  noiaXo  '’ 

no  aiodxnoadJJa  od  dnea  leoxviea  XSGX  erf^  l6  SCaS  p] 

>^-aLr3  TXfO  YXqqua  od"  b^Xg  scf.  XXBffa  oW  .OS  ledmaoeCI 
li  anol  airier -nx  noXniqo  aVaBffloriT  eabuX*  dd’xw  aiediioa 
. ^ ' ' . bednBw  ax  d^x  - i 


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'.THA'IMOO  raUHT  HOlTAflO'IHOO  SHT 


>'  ' - V ;Sy. 


Q^or^joratinn  Sruat  (Enmpauy 

SERVICE  DEPARTMENT 

ST  WALL  STRBET  NEW  YORK 


FEBEItAL 


SESYISfE. 


"AX 


DSCSMBSR  31,  1920. 

Enclosed  berawitr-t  are  page8^^)3-694  carrying  T. 
D.  3103,  and  T.  dJ  3109,,  on  :ij^3iitoiries , the  gist 
of  which  was  giv*  yon  yest^day  in  the  special 
sheet  acGompanyl/g  B!ep0‘rt  jfc) » 55.  Also  enclosed  is 
Supplernentary  I'dga  115,  jCr  substitution. 


As  it  is 
safe  to  soy 

1920  SorviCi 

1921  Series^ 


fo?/  afti^ioon  of  BeceTuhsr  31,  It  is 
lat  tb^  will  he  the  last  report  of  the 
next  report  'will  be  lo.  1 of/  the 
A Si'w  of  our  present  subscribers  have 


not  renowol  for/1921.  Wa  realize  that  ranowal  sub- 
scription!# frojf  such  are.  presuiiably  on  the  way  to 
us.  Therifor/  W3  shall  continuo  to  beep  all  1920 
subecribi^s  ^formed  of  devsiop-aents , until  ample 
time  liaafbG/n  given  fen*  such  renewals  to  reach  ue 


-HBPORT  NO.  56- 


Very  truly  yours. 


•THE  COHPOHATIOh  TRUST  C0I^3PANY. 


1 


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THHMTS3iA‘=i"'a  3DIVf13a  ' 

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Cdorporstfon  OIruat  Cmuiiaiig 

SERVICE  DEPARTMENT 

3T  WAUL  STREET  ISEVT  TOUK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  52- 
DECEMBER  8,  1920. 

Enclosed  herewith,  for  substitution  are  revised 
Finder  Pages  1 to  6 bringing  up  to  date  the  list  of 
Article  numbers  of  Regulations  45. 

Also  enclosed  are  revised  Supplementary  Pages 
Hi  to  114,  for  substitution  for  Supplementary  Pages 
111  to  115. 

A revision  of  the  Index  is  also  enclosed,  blue 
Index  Pages  1 to  41.  The  Service  is  now  again  com- 
pletely indexed. 

A self  explanatory  check-your-service  sheet  is 
sent  herewith.  Please  note  on  this  that  the  last 
Supplementary  Page  is  114  and  not  115  (note  substi- 
tution above). 

The  Fourth  Tax  Installment. 

This  is  due  Dec.  15.  It  is  practically  certain 
that  Congress  will  not  extend  the  date  for  payment. 
The  matter  rests  entirely  with  Congress  as  the 
Treasury  Department  is  bound  by  the  present  law  pro- 
vision. 

'the  New  Service. 

The  new  Service  will  be  ready  according  to  sche- 
dule and  deliveries  will  be  made  in  the  order  of  the 
receipt  of  renewals. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


-TuaMT^Aqaa  33ivf!aa 

uyt<rr  wur.  xafaLWT^  rm 


\ 


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. ' ■ M- •'  .b9X9bnX  ^XeXeXq 

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.noxaiv 


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9rit  to  lebno  edt  nx  ebiioi  gcT  XXxw  aexievxisb  bna  eXub 

.aXBWsnei  to  tqXeoeT 


,a'iuoY  ^Xunt  >£i«V 


yMA'IMOO  TaUHT  MOlTAiOtflOr)  aUT 


(Eorporatton  ®ntst  (Hcmpattg 

SERVICE  DEPARTMENT 

•T  'WA.ix.  mritjswr  yirw  xxt-  K 


/ 

FEDERAL  INCOME  TAX  SERVICE 


f 

-REPORT  nf.  51- 

/ 

N0VEMBER^.-30,  19£0. 


Enclosed  herewith  afe  pages  573  to  580  for  sub-^ 
stitution,  and  Supplem^entary  Pages  107-108  and  115, 
for  substitution  alsoi 

The  chairman  of/the  Committee  on  Appeals  and  Re- 
view, Mr.\P.  S.  TaJ'iiert,  has  resigned  from  the  Gov- 
ernment service  t^ become  associated  with  a firm  of 
Philadelphia  attc^neys.  Mr.  Talbert’s  successor  as 
chairman  of  the  Committee  and  his  successor  as  one 
of  the  members  hereof  will  be  announced  in  the  very 
near  future,  pnbsumably. 

. .1-  A . : . 

Very  truly  yours , ■ 


THE  COBPOEATION  TRUST  COMPANY. 


/ 


^<^30  ao’Vflae 

. t-  ’«  .LJA.W  M» 


30i\  3bmo^^  jAsiaaai 


.<ji;a  10'  -;e3.iq-  3i:£-  i<  tfis'ied  b^Boi:  ..L 

,axx  fau^  .,.  ..  C-'SJ-ncjr;  IqquS  iDn^  . no r^u,r r 

.C3l5  no ^^u^ x^SG'ua  'to'i 

-eiX  on/.  / - . fv  rcM  lo  HBanlsdo  arlT 

-voD  o :.-  .00;  ,:  .cei  soli  ^JoooXbT  .2  .’iM 

lo  in-iM  '.:' :,v  boj.:i2cooBo  orococf  oX  soxvioa  j-aetnroB 
af^.  noab^oo-o  -■  ^ J ''o^M'oT  . oM  .. . s -/onto^^ £ £rrXql6£)B:  :r{^ 
ano  ' 0 '!L  : ■ .;  oi/i  Ofix;  .o/rnoo  sd^  lo  n^mnixdo 

V'l'^v  9:12  -.:.  ^0  ; ad  IXiw  Ico'tod.X  enocTmern  poj  do 

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.Y?'/v^'MG.'  T:iC"r  v{OlTd»2^Od[rLO0  sht 


OIIj?  Corporation  Cruot  Company 


SERVICE  DEPARTMENT 


»T  STREET  XEM'  VOI^K 


FEDERAL  INCOME  TAX  SERVICE 

/ 

-REPORT  NO.  50-  j. 

NOVEMBER  17,  1920. 

Enclosed  herewith  are^ Supplementary  Pages  21-22 
to  be  substituted  for  th’e  similarly  designated  pages 

I 

now  in  your  binder.  Revised  Form  1078  is  reproduced 

i 

on  Supplementary  Page  21, 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY, 


■ tmjjiimuID  tain®  nnftBinijinD  ^ 

TMBMTflASaa  33IV913a 

if'.irr  *ra'<  TaanT*-.  .uiav^  rm 

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... 

3DiV7138  XAT  BMOOMI  JAfiaa33 

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-oe  .OH  THOias- 
.osei  ,vx  HaaMavoH 

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aeaeq  bsJfinaiaeb  v;nBXtmX8  ariJ  ^o'i  be^ir^iifacfua  ad  ot 
baouboiqeT  ai  avox  mtoa  baarvaH  .lebnxd  tuo^  ni  won 
■ ' I is  esBS  ynB^nameXqqua  no 

, amox  XXIJ^^  xieV 

.YMAIMOO  TaUHT  HOITAflo'iaOO  aHT  ■ ^lUB 


.-fc 

©tyr  Olarporatton  OIntst  Olnmpanij 


SERVICE  DEPARTMENT 

3T  .STREET  XKW  VOKK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  49- 
NOVEMBER  10,  1920. 

Enclosed  herewith  are  pagee  543-544  reprinted 
for  substitution  to  show  the  denial  of  the  petition 
for  writ  of  certiorari  in  the  Prentiss  case  and  567 
to  573  of  the  Service,  for  substituLion  for  page  567 
now  in  your  binder. 

Also  enclosed,  for  substitution,  are  Supplemen- 
tary Pages  107-108,  and  115. 

COMMUNITY  PROPERTY. 

It  is  our  understanding  that  T.  D.  3071  (^2903) 
is  limited  in  its  direct  application  to  residents  of 
Texas;  and  that  the  manner  of  making  return  of  in- 
come from  community  property  in  other  States  whose' 
constitutions  or  statutes  make  provision  for  commu- 
nity income  will  be  outlined  in  official  pronounce- 
ments when  the  necessary  exhaustive  study  of  the 
pertinent  laws  of  such  respective  states  shall  have 
been  completed. 

BULLETINS  OF  BUREAU  RULINGS. 

Digest  11  (August  1920)  has  gone  forward  to  all 
subscribers,  on  our  order,  from  Washington.  This 
includes  digests  of  all  1919  and  1920  rulings,  still 
effective  on  that  date,  that  have  been  made  public. 
We  urge  subscribers  to  keep  their  Weekly  Bulletins 
and  particularly  the  1919  Cumulative  Bulletin. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


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2871  We  admit  that  the  New  York  cases  on  the  subject  of  taxable  transfers 
are  confused  and  not  always  clear  and  consistent.  But  until  the  New 
York  Court  of  Appeals  authoritatively  states  that  the  law  of  New  York  is 
not  what  the  Supreme  Court  of  the  United  States  said  it  was  in  the  Perkins 
case,  this  court  has  no  alternative  but  to  hold  that  the  New  York  transfer 
act  does  not  Impose  a tax  on  a legatee’s  right  of  succession  which  Is  deductible 
in  her  income  tax  return.  The  legacy  which  the  plaintiff  herein  received 
under  the  will  of  her  father  did  not  become  her  property  until  after  it  had 
suffered  a diminution  to  the  amount  of  the  tax,  and  the  tax  that  was  paid 
thereon  was  not  a tax  paid  out  of  the  plaintiff’s  individual  estate  but  was  a 
payment  out  of  the  estate  of  her  deceased  father  of  that  part  of  his  estate 
which  the  State  of  New  York  had  appropriated  to  itself  which  payment 
was  the  condition  precedent  to  the  allowance  by  the  State  of  the  vesting  of 
the  remainder  in  the  legatee. 

Judgment  affirmed. 

Note : Application  for  writ  of  certiorari  denied  by  United  States  Supreme 
Court,  October  25,  1920. 


2872  Taxability  of  discount  on  non-int<="rest>bearing  obligations  of  a state 
1130  or  municipality. — Reference  is  made  to  your  letters  of  July  8 and  July 
1135  27,  1920,  and  to  a recent  confeience  between  your  representative, 

^ Mr.  Robert  R.  Reed,  and  officials  of  the  Bureau,  relative  to  the 
taxability  of  discount  on  non-interest-bearing  obligations  of  a municipality. 
liYou  are  advised  that  profit  derived  from  state  and  municipal  securities 
purchased  at  a discount  and  held  until  maturity  is  not  taxable  where  it 
clearly  appears  that  the  return  from  the  investm.ent  in  the  hands  of  the 
taxpayer  Is  due  solely  to  the  compensation  received  from  the  state  or  muni- 
cipality in  lieu  of  interest  for  the  use  of  the  taxpayer’s  money.  In  no  case 
may  such  exemption  exceed  the  total  discount  at  which  the  securities  were 
originally  sold  by  the  state  or  municipality.  (Letter  to  Messrs.  Reed, 
Dougherty  and  Hoyt,  New  York,  N.  Y.,  signed  by  Acting  Commissioner 
Paul  H.  Myers,  and  dated  August  9,  1920.) 


(T.  D.  3053.) 

[Note:  To  indicate  the  changes,  which  are  in  subdivision  ih)  only,  would 
prove  more  confusing  than  helpful.] 

2873  Gross  income  of  life  insurance  companies:  Article  549  of  Regu- 
987  lations  45  amended. — Article  549  of  Regulations  45  is  hereby  amended 

to  read  as  follows: 

Art.  549.  Gross  income  of  life  insurance  companies — A life  insurance 
company  shall  not  include  In  gross  income  such  portion  of  any  actual 
preniium  received  from  any  individual  policyholder  as  is  paid  back  or 
credited  to  or  treated  as  an  abatement  of  premium  of  such  policyholder 
within  the  taxable  year.  (a)  “Paid  back”  means  paid  in  cash, 
(b)  “Credited  to”  means  applied  by  way  of  credit  to  the  payment  of 
the  premium  for  the  taxable  year.  It  does  not  Include  dividends  applied 
to  purchase  additional  paid-up  insurance  or  annuities,  or  to  shorten  the 
endowment  or  premium  paying  period,  or  in  any  way  that  does  not 
actually  reduce  the  premium-receipts  of  the  company  for  the  taxable 
year.^  (c)  “Treated  as  an  abatement  of  premium”  means  of  the 
premium  for  the  taxable  year.  Where  the  dividend  paid  back  is  in 

543  TAX 


INC. 


excess  of  the  premium  received  from  the  policyholder  within  the  taxable 

year  there  may  be  excluded  from  gross  income  only  the  amount  of  such 

premium  received,  and  where  no  premium  is  received  from  the  policy-  ^ 

holder  within  the  taxable  year  the  company  is  not  entitled  to  exclude 

from  its  premiums  received  from  other  policy-holders  any  amount  in 

respect  of  such  dividend  payment.  (T.  D.  3053,  signed  by  Acting 

Commissioner  Paul  F.  Myers,  and  dated  August  10,  1920.) 


(T.  D.  3055.) 

\Notei  To  indicate  changes  herein  would  prove  more  confusing  than  helpful.] 

2874  Computation  of  depletion  allowance  for  combined  holdings  of  oil 

1420  and  gas  v/ells:  Article  214,  Regulations  45,  amended. — Article 

1421  214  of  Regulations  45  is  hereby  amended  to  read  as  follows: 

Art.  214.  Computation  of  depletion  allowance  for  combined  holdings 
of  oil  and  gas  wells. — (1)  The  recoverable  oil  belonging  to  the  taxpayer  shall 
be  estimated  for  each  property  separately.  The  capital  account  for  each 
property  shall  include  the  cost  or  value,  as  the  case  may  be,  of  the  oil  or 
gas  lease  or  rights  plus  all  incidental  costs  of  development  not  charged 
as  expense  nor  returnable  through  depreciation.  The  unit  value  of  the 
recoA  erable  oil  or  gas  for  each  property  is  the  quotient  obtained  by  dividing 
the  capital  account  recoverable  through  depletion  for  each  property  by  the 
estimated  number  of  units  of  recoverable  oil  or  gas  on  that  property.  This 
unit  for  each  separate  property  multiplied  by  the  number  of  units  of  oil  or 
gas  produced  within  the  year  by  the  taxpayer  upon  such  property  will 
determine  the  amount  which  may  be  deducted  for  depletion  from  the  gross 
income  of  that  year  for  that  property.  The  total  allowance  for  depletion 
of  all  the  oil  or  gas  properties  of  the  taxpayer  will  be  the  sum  of  the  amounts 
computed  for  each  property  separately:  Provided^ 

227  5 (2)  That  in  the  case  of  gas  properties  the  depletion  allowance  for 

1421  each  pool  may  be  computed  by  using  the  combined  capital  account 
returnable  through  depletion  of  all  the  tracts  of  gas  land  owned  by 
the  taxpayer  in  the  pool  and  the  average  decline  in  rock  pressures  of  all 
the  taxpayer’s  wells  in  such  pool  in  the  formula  given  in  Article  211  [^[2902]. 
The  total  allowance  for  depletion  in  the  gas  properties  of  the  taxpayer  will  be 
the  sum  of  the  amounts  computed  for  each  pool.  (T.  D.  3055,  signed  by 
Acting  Commissioner  Paul  F.  Myers,  and  dated  August  12,  1920.) 


INC, 


544 


TAX 


11-194(0. 


I 

% 

t 


i 


% 

% 


taxable  year  on  account  of  sales  effected  in  earlier  years  as  well  as  those 
effected  in  the  taxable  year]),  which  the  annual  gross  profit  to  be  realized  on 
the  total  installment  sales  made  during  each  [the  taxable]  year  bears  to  the 
gross  contract  price  of  all  such  sales  made  during  that  respective  [the  taxable] 
year.  In  any  case  where  the  gross  profit  to  be  realized  on  a sale  or  contract  for 
sale  of  personal  property  has  been  reported  as  income  for  the  year  in  which  the 
transaction  occurred^  and  a change  is  made  to  the  installment  plan  of  computing 
net  income,  no  part  of  any  installment  payment  received  subsequently  to  the 
change,  representing  income  previously  reported  on  account  of  such  transaction, 
should  be  reported  as  income  for  the  year  in  which  the  installment  payment  is 
received',  the  intent  and  purpose  of  this  provision  is  that  where  the  entire  profit 
from  installment  sales  has  been  included  hi  gross  income  for  the  year  in  which 
the  sale  was  made,  no  part  of  the  installment  payments  received  subsequently  on 
account  of  such  previous  sales  shall  again  be  subject  to  tax  for  the  year  or  years 
in  which  received.  Where  the  taxpayer  makes  a change  [is  made]  to  this  method 
of  computing  net  income  his  [the  taxpayer’s]  balance  sheet  should  be  adjusted 
conformably  [as  of  the  date  when  the  change  is  effected].  If  for  any  reason  the 
vendee  defaults  in  any  of  his  installment  payments  and  the  vendor  repossesses 
the  property,  the  entire  amount  received  on  installment  payments,  less  the 
profit  already  returned,  will  be  income  of  the  vendor  for  the  year  in  which 
the  property  was  repossessed,  and  the  property  repossessed  must  be  included 
in  the  inventory  at  its  original  cost  to  himself,  less  proper  allowance  for  damage 
and  use,  if  any.  If  the  vendor  chooses  as  a matter  of  consistent  practice 
to  treat  the  obligations  of  purchasers  as  the  equivalent  of  cash,  such  a course 
is  permissible.  (T.  D.  3082,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  October  20,  1920.) 


2966  Relief  to  debtor  corporation  on  account  excess  liability  for  tax  on 
[1695  tax-free-covenant  bond  interest  due  to  compulsory  filing  of  Form 

1000  by  partnership  with  member  having  personal  exemption  in 
excess  of  taxable  income. — Receipt  is  acknowledged  of  your  letter  of  August 
5,  1920,  in  which  you  refer  to  Article  365  [1[1695]  of  Regulations  45,  which 
provides  that  Form  1000  shall  be  used  by  partnerships  in  collecting  the 
interest  on  bonds  containing  a tax-free-covenant  clause. 

2967  You  state  that  in  some  cases  where  the  partnership  consists  of  two 
members  who  share  equally  in  the  profits  and  losses,  one  of  the 

partners  may  be  subject  to  income  tax  and  the  other  may  not,  and  where 
tax  is  paid  on  the  interest  on  a bond  containing  a tax-free-covenant  clause, 
which  is  owned  by  the  partnership,  one  partner  can  credit  himself  for  his 
share  of  the  tax  paid  at  the  source,  and  the  other  partner  having  a personal 
exemption  greater  than  his  income,  cannot  take  credit  for  his  share  of  the 
tax  paid  at  the  source.  You  ask  whether  there  is  any  way  whereby  the  tax 
paid  by  the  corporation  to  the  Government  would  be  in  accordance  with  the 
true  facts  in  such  a case. 

2968  Section  221  (b)  of  the  Revenue  Act  of  1918  provides  that  a tax  equal 
to  2%  of  the  interest  on  bonds  containing  a tax-free-covenant  clause, 

shall  be  deducted  and  withheld,  when  such  interest  is  paid  to  a partnership. 
In  view  of  this  provision  of  the  law.  Article  365  of  Regulations  45,  provides 
that  partnerships  shall  file  Form  1000  revised,  when  presenting  for  payment 
interest  coupons,  from  bonds  containing  a tax-free-covenant  clause. 

2969  If  at  the  end  of  the  year,  the  distributive  share  of  any  member  of 
the  partnership,  combined  with  his  other  income,  is  less  than  his 

personal  exemption,  the  partner  ought,  in  justice  to  the  debtor  corporation, 
to  advise  it  of  that  fact.  This  may  be  done  by  filing  with  the  debtor  cor- 
poration an  exemption  certificate.  Form  1001  revised,  by  the  member  who  is 

567  TAX 


INC. 


not  liable  for  tax.  The  member  should  show  by  a notation  on  the  certificate 
that  he  is  a miember  of  the  partnership  and  what  proportion  of  the  interest 
received  by  the  partnership  represents  his  distributive  share.  The  debtor 
corporation  would  then  be  in  a position  to  pay  the  tax  to  the  government  in 
accordance  with  the  true  facts  in  the  case. 

2970  In  case  the  annual  withholding  return  has  been  filed  and  assessment 
made  or  the  tax  paid,  a claim  for  abatement  or  refund,  respectively, 
may  be  made  by  the  debtor  corporation  for  the  proper  proportion  of  the  tax. 
(Letter  to  Halsey,  Stuart  & Co.,  Chicago,  111.,  signed  by  Commissioner  Wm. 
M.  Williams,  and  dated  October  28,  1920.) 


297 1  Taxability  of  discount  on  interest-bearing  municipal  bonds. — Further 
1135  reference  is  made  to  your  letter  of  August  23,  1920,  in  which  you 
2872  asked  whether  the  discount  on  interest-bearing  bonds  of  a munici- 
pality, which  are  sold  by  the  municipality  at  a discount,  is  exernpt 
from  tax.  IfYou  are  advised  that  profit  derived  from  interest-bearing  munici- 
pal bonds,  purchased  at  a discount  and  held  until  maturity,  is  not  taxable 
where  it  clearly  appears  that  such  return  from  the  investment  in  the  hands 
of  the  taxpayer  is  due  solely  to  the  compensation  received  from  the  munici- 
pality in  lieu  of  additional  interest  for  the  use  of  the  taxpayer’s  money.  In 
no  case  may  such  exemption  exceed  the  total  discount  at  which  the  securi- 
ties were  originally  sold  by  the  municipality.  (Letter  to  Franklin  Carter, 
Jr.,  Income  Tax  Department,  The  Equitable  Trust  Company,  New  York, 
N.  Y.,  signed  by  Deputy  Commissioner  G.  V.  Newton,  and  dated  October 
29,  1920.) 


(T.  D.  3089.) 

2972  Allowance  for  depletion  in  case  of  discovery  by  the  taxpayer  sub- 
1410  sequent  to  March  1, 1913 — Apportionment  between  lessor  and  lessee. 
1426^  — The  following  opinion  [T[2975]  rendered  b}^  the  Acting  Attorney 
1427;'  General  under  date  of  October  29,  1920,  relative  to  the  right  of  a 

lessor  to  share  in  the  depletion  allowed  in  the  case  of  mines,  oil  and 
gas  wells  as  the  result  of  discovery  on  or  after  March  1,  1913,  is  published 
in  full  for  your  information  and  guidance.  (T.  D.  3089,  signed  by  Com- 
missioner Wm.  M.  Williams,  and  dated  November  6,  1920.) 

2973  (1)  The  deduction  for  depletion  in  the  case  of  mines,  oil  and  gas  wells, 
as  the  result  of  discovery  on  or  after  March  1,  1913,  is  allowed  only 

to  the  party  or  parties  in  possession  at  the  time  of  the  discovery,  and  not  to 
subsequent  purchasers. 

2974  (2)  The  value  which  may  be  set  up  in  the  case  of  the  discovery  of 
mines,  oil  and  gas  wells,  pursuant  to  the  second  proviso  of  Section 

234  (a)  (9^  Revenue  A.ct  of  1918,  to  be  depleted  in  accordance  with  such 
reasonable  rules  and  regulations  as  the  Commissioner  of  Internal  Revenue  and 
the  Secretary  of  the  Treasury  miay  prescribe  according  to  the  peculiar  con- 
ditions in  each  case,  is,  in  the  case  of  a lease,  to  be  equitabl)^  apportioned 
between  the  lessor  and  the  lessee. 


Department  of  Justice, 

Washington,  October  29,  1920. 

Dear  Mr.  Secretary: 

2976  This  will  acknowledge  receipt  of  your  letter  of  October  9,  1920, 
submitting  for  my  opinion,  the  question  “whether  the  value  which 
may  be  set  up  in  the  case  of  the  discovery  of  mines,  oil  or  gas  wells,  pursuant^ to 
the  second  proviso  of  Section  234  (a)  (9),  to  be  depleted  in  accordance  with 

568  TAX 


INC. 


11-10-20. 


such  reasonable  rules  and  regulations  as  the  Commissioner  and  the  Secretary 
may  make  according  to  the  peculiar  conditions  in  each  case,  requires  that  the 
lessor  be  permitted  a portion  of  such  discovery  value. 

2976  Section  234  (a)  (9)  of  the  Act  of  February  24,  1919,  provides: 

“(a)  That  In  computing  the  net  Income  of  a corporation  subject 

to  the  tax  imposed  by  section  230  there  shall  be  allowed  as  deductions: 

(9)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits, 
and  timber,  a reasonable  allowance  for  depletion  and  for  depreciation 
of  Improvements,  according  to  the  peculiar  conditions  in  each  case,  based 
upon  cost  Including  cost  of  development  not  otherwise  deducted: 
Provided,  That  In  the  case  of  such  properties  acquired  prior  to^ March  1, 
1913,  the  fair  market  value  of  the  property  (or  the  taxpayer’s  Interest 
therein)  on  that  date  shall  be  taken  in  lieu  of  cost  up  to  that  date: 
vided  further.  That  in  the  case  of  mines,  oil  and  gas  wells,  ^discovered 
by  the  taxpayer,  on  or  after  March  1,  1913,  and  not  acquired  as  the 
result  of  purchase  of  a proven  tract  or  lease,  where  the  fair  market  value 
of  the  property  Is  materially  disproportionate  to  the  cost,  the  depletion 
allowance  shall  be  based  upon  the  fair  market  value  of  the  property 
at  the  date  of  the  discovery,  or  within  thirty  days  thereafter;  such 
reasonable  allowance  in  all  the  above  cases  to  be  made  under  rules  and 
regulations  to  be  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary.  In  the  case  of  leases  the  deduction  allowed  by  this 
paragraph  shall  be  equitably  apportioned  between  the  lessor  and  lessee. 

2977  This  section  Is  properly  divisible  into  two  parts:  the  first  part 
prising  all  but  the  last  sentence  thereof,  deals  exclusively  with  the 

establishment  of  a basis  for  the  determination  of  allowance  for  depletion; 
and  the  second,  contained  in  the  last  sentence  alone,  apportions  the 
ance,  when  same  shall  have  been  determined,  between  the  lessor  and  the 
lessee  in  case  of  leases. 

2978  The  bases  for  allowance  provided  for  in  part  one  are: 

(1)  Where  the  property  was  acquired  after  March  1,  1913,  as  the 
result  of  purchase  of  a proven  tract,  or  lease,  the  cost,  including  cost  of 
development  not  otherwise  deducted,  is  determinative  of  the  amount  of  the 
allowance. 

(2)  Where  the  property  was  acquired  prior  to  March  1,  1913,  as  the  result 
of  the  purchase  of  a proven  tract  or  lease,  the  fair  market  value  on  March  1, 
1913,  is  to  be  taken  as  the  basis  of  the  allowance  for  depletion,  in  lieu  of 
cost  up  to  that  date. 

(3)  Where  the  property  was  at  the  time  of  Its  acquisition  unproven, 
and  discovery  was  made  thereon  after  March  1,  1913,  the  allowance  is  to  be 
determined  by  the  fair  market  value  at  the  date  of  discovery  or  within 
thirty  days  thereafter,  provided  that  the  discovery  was  made  by  the  party, 
or  parties,  in  possession  (the  taxpayer.) 

2979  I take  it  that  the  phrase  “discovered  by  the  taxpayer”  must  be  read 
with  the  phrase  “and  not  acquired  as  the  result  of  purchase  of  a 

proven  tract  or  lease,”  and  taken  together  they  mean  that  if  a discovery 
is  made  after  March  1,  1913,  upon  an  unproven  tract,  acquired  either  before  or 
after  that  date,  the  allowance  is  to  be  determined  by  the  discovery  value 
only  where  the  discovery  was  made  by  the  party  or  parties  in  possession;  that 
is,  only  when  no  transfers  of  the  tract  or  lease  have  intervened  between 
the  date  of  the  discovery  and  the  incidence  of  the  tax.  In  other  words,  if  A, 
cither  owning  or  leasing  a property  makes  discovery  thereon  after  March  1, 
1913,  and  continues  in  possession,  then  the  allowance  for  depletion  is  to 
be  based  upon  the  discovery  value;  but  if  after  discovery  made  the  property 
is  transferred  to  B,  then  the  cost  is  determinative  of  the  allowance  to  B, 


INC. 


569  TAX 


since  there  is  “acquisition  after  March  1,  1913,  as  the  result  of  purchase  of  a 
proven  tract  or  lease.” 

2930  By  “discovered  by  the  taxpayer  on  or  after  March  1,  1913,  and 
not  acquired  as  the  result  of  purchase  of_  a proven  tract  or  lease,” 
Congress  intended  to  provide  a basis  for  determination,  of  what  should  be 
the  depletion  allowance,  and  did  not  attempt  to  determine,  as  between  a 
lessee  and  a lessor,  which  of  them  should  be  entitled  to  the  allowance  for 
discovery  value.  That  is  provided  for  in  the  last  sentence  of  the  section 
which  says  that  “In  the  case  of  leases  the  deductions  allowed  by  this  para- 
graph shall  be  equitably  apportioned  between  the  lessor  and  lessee.”  Such 
interpretation  gives  effect  to  all  the  language  of  the  section,  and  brings 
all  parts  of  it  into  accord;  and  under  the  general  rules  of  construction  such 
interpretation  should  be  adopted  in  preference  to  an  interpretation  which 
results  in  repugnance.  To  hold  that  by  the  language  aiscovered  by  the 
taxpayer”  Congress  intended  to  give  the  discovery  allowance  to  the  actual 
discoverer,  and  to  deny  the  lessor  any  part  of  such  allowance  on  the  theory 
that  the  lessee  is  usually  the  discoverer,  would  be  repugnant  to  language 
of  the  latter  portion  of  the  section  which  in  the  case  of  leases  equitably 
apportions  the  allowance  between  lessor  and  lessee. 

2981  My  conclusion,  therefore,  is  that  “the  value^which  may^be  jet  up 
in  the  case  of  the  discovery  of  mines,  oil  or  gas  wells,  pursuant  to 
the  second  proviso  of  Section  234  (a)  (9),  to  be  depleted  in  accordance  with 
such  reasonable  rules  and  regulations  as  the  Commissioner  and  the  Secretary 
may  make  according  to  the  peculiar  conditions  in  each  case,”  requires  that 
the  lessor  be  permitted  a portion  of  such  discovery  value. 

Respectfully, 

Wm.  L.  Frierson, 

Acting  Attorney  General. 

Hon.  David  F.  Houston, 

Secretary  of  the  Treasury. 

(Opinion  appended  to  and  made  a part  of  T.  D.  3089,  1[2974.) 


2982  Held  that  conditions  under  which  the  United  States  permits  itself 
2177  j to  be  sued  have  been  met  if  claim  for  abatement  has  been  filed 
2189  and  rejected,  subsequent  claim  for  refund,  the  tax  having  been 
paid  under  protest,  being  considered  unnecessary. — The  right  of 
the  plaintiff  to  maintain  this  suit  is  challenged  in  this  court  for  the  reason 
that  the  plaintiff  did  not  appeal  to  the  Commission  of  Internal  Revenue 
after  the  tax  was  paid.  This  contention  is  based  upon  section  3226,  Rev. 
St.  U.  S.  (Comp.  St.  §5949).  The  object  of  the  statute  requiring  a party  to 
exhaust  his  remedies  in  the  Internal  Revenue  Department  before  he  shall 
bring  suit  is  to  give  the  department  an  opportunity  to  decide  whether  in  its 
judgment  the  tax  is  legal  or  illegal,  and  thus  save  the  delay  and  expense  of 
litigation.  The  point  under  consideration  was  not  made  in  the  court  below, 
nor  is  it  mentioned  in  the  assignment  of  errors;  but,  as  it  may  be  claimed 
to  be  jurisdictional,  it  will  be  considered.  We  had  a similar  question  before 
us  in  Weaver  v.  Ewers,  195  Fed.  247,  115  C.  C.  A.  219,  and  we  then  held  that, 
notwithstanding  section  3226,  an  appeal  to  the  Commissioner  before  the  tax 
was  paid,  answered  the  purpose  for  which  the  statute  was  enacted.  In  the 
case  cited  we  said: 

“What  the  Commissioner  of  Internal  Revenue  thought  about  the 
assessment  had  been  obtained  upon  full  statement  of  the  facts,  and 
it  would  have  been  a useless  form  again,  after  the  tax  was  paid,  to  appeal 
to  the  Commissioner  and  obtain  the  same  judgment.  T.  he  reason  for  the 
appeal  did  not  exist,  and  hence  the  appeal  after  tax  was  paid  was  not 
necessary.” 

570  TAX 


INC. 


2983  The  following  cases  sustain  our  ruling:  Schwarzchild,  etc.,  Co.  v. 
Rucker  (C.  C.)  143  Fed.  656;  San  Francisco  Sav.  & Loan  Society  v. 

Carey,  2 Sawy.  333,  Fed.  Cas.  No.  12,317;  Grier  v.  Tucker  (C.  C.)  150 
Fed.  658;  Tucker  v.  Grier,  160  Fed.  61 1,  614,  615,  87  C.  C.  A.  513;  De  Bary 
et  al.  V.  Dunne  (C.  C.)  162  Fed.  961. 

2984  Counsel  for  defendant  cites  Savings  Bank  v.  Blair,  116  U.  S.  200,  6 
Sup.  Ct.  353,  29  L.  Ed.  657;  Stewart  v.  Barnes,  153  U.  S.  456,  14 

Sup.  Ct.  849,  38  L.  Ed.  781,  and  Hastings  v.  Herold  (C.  C.)  184  Fed.  759. 
These  cases  have  been  examined,  and  when  the  facts  of  each  case  are  con- 
sidered they  sustain  the  ruling  of  this  court  in  Weaver  v.  Ewers,  supra. 
We  therefore  see  no  reason  for  departing  from  the  ruling  heretofore  made, 
and  hence  decide  that  the  contention  is  without  merit.  (Extract  from 
opinion  in  Loomis,  Collector,  vs.  Wattles,  Circuit  Court  of  Appeals,  Eighth 
Circuit  (266  Fed.  876).) 


{Decision.) 

Ultimate  beneficiary  of  a trust  subject  to  tax  as  an  entity  being  a person 

exempt  from  tax. 

Circuit  Court  of  Appeals,  Third  Circuit. 

Lederer,  Collector,  vs.  Stockton. 

(266  Fed.  676.) 

In  Error  to  the  District  Court  of  the  United  S ates  for  the  Eastern 
District  of  Pennyslvania;  Oliver  B.  Dickinson,  Judge. 

Action  by  Alexander  D.  Stockton,  sole  surviving  trustee,.^under  the 
will  of  Alexander  J.  Derbyshire,  deceased,  against  Ephraim  Lederer,  Collector 
of  Internal  Revenue.  Judgment  for  plaintiff,  and  defendant  brings  error. 
Affirmed. 

For  opinion  below,  see  262  Fed.  173. 

Before  Buffington,  Woolley,  and  Haight,  Circuit  Judges. 

2985  Buffington,  Circuit  Judge.  In  the  court  below,  Stockton,  trustee 
6-12  under  the  will  of  Alexander  J.  Derbyshire,  brought  suit  and  recovered 

a verdict  against  Lederer,  United  States  collector  of  internal  revenue, 
to  recover  income  taxes  illegally,  as  he  alleged,  collected  from  )iim.  On 
entry  of  judgment  on  such  verdict,  the  defendant  sued  out  this  writ. 

2986  By  his  will  Alexander  J.  Derbyshire,  who  died  in  1879,  devised  his 
residuary  estate  to  “the  contributors  to  the  Pennsylvania  Flospital,” 

a corporation  of  Pennsylvania  created  for  charitable  uses  and  purposes,  and 
no  part  of  the  net  income  thereof  is  for  the  benefit  of  any  private  stockholder 
or  individual.  The  devise  was  subject  to  the  payment  to  certain  annuitants, 
all  of  whom,  save  one,  have  died.  The  residuary  estate  amounts  to  several 
hundred  thousand  dollars,  its  annual  income  is  substantially  $15,000  and 
upwards,  and  the  remaining  annuity  is  for  a few  hundred  dollars  per  year. 
The  construction  of  the  will  came  before  the  Supreme  Court  of  Pennsylvania 
in  Biddle’s  Appeal,  99  Pa.  525,  wherein  the  title  to  the  residuary  estate  was 
adjudged  vested  in  the  hospital;  the  court  saying: 

“The  residuary  devise,  being  in  trust  for  a charitable  use  and  purpose, 
comes  within  the  proviso  to  the  ninth  section  of  the  act  of  April  18,  1853, 
and  therefore  is  not  within  the  prohibitory  clause  of  the  section  forbidding 
accumulations  after  the  death  of  the  testator  for  a term  longer  than 
therein  specified.” 


INC.  571 


TAX 


2987  The  court  further  held  that  it  should  not  be  paid  to  the  hospital 
until  after  the  death  of  all  the  annuitants.  As  stated  by  the  court 
below  in  its  opinion: 

“Resort  was  then  had  to  the  practical  expedient  of  the  trustee  invest- 
ing the  funds  of  the  estate  in  the  form  of  a loan  to  the  institution  repre- 
senting the  charity,  upon  which  loan  the  charity  paid  an  interest  sufficient 
to  take  care  of  the  administrative  charges  and  the  payment  of  the 
annuities.  The  annuities  have  all  fallen  in,  except  one  small  one.” 

2983  It  will  thus  be  seen  that,  while  the  residuary  estate  remains  theo- 
retically and  for  purposes  of  accounting  in  the  hands  of  the  trustee, 
it  is  already  in  the  possession  of  the  hospital  in  the  shape  of  money  loaned 
on  mxortgage,  and  upon  such  loan  the  hospital  is  paying  to  the  trustee  only 
such  interest  as  takes  care  of  administrative  charges  and  the  surviving 
annuity.  Under  such  circumstances,  the  collector  assessed  and  collected, 
under  protest,  from  the  trustee  on  June  26,  1917,  the  sum  of  $4,273.42,  being 
on  the  incom^e  of  the  residuary  estate  for  the  years  1913,  1914,  1915,  and 
1916,  and  on  June  11,  1918,  an  income  and  excess  profit  tax  of  $6,842.02 
upon  the  income  of  the  residuary  estate  of  1917.  It  is,  of  course,  apparent 
the  trustee  has  no  financial  interest  in  the  residuary  payment,  and  while 
this  large  sum  is  in  theory  assessed  as  a tax  on  income  received  by  the  trustee 
or  the  testator’s  estate,  the  whole  sum  is  paid  at  the  expense,  and  from  the 
property,  of  the  hospital.  The  question,  then,  in  substance  and  practice, 
resolves  itself  into  this:  Is  this  hospital  liable  for  income  tax.? 

2989  In  view  of  the  fact  that  Congress  in  the  pertinent  taxing  act  of  1913 
(Act  Oct.  3,  1913,  c.  16,  38  Stat.  168,  172)^said: 

“All  persons,  firms,  companies,  copartnerships,  corporations,  joint- 
stock  companies  or  associations,  and  insurance  companies  except  as 
hereinafter  provided,  in  whatever  capacity  acting,  having  the  control, 
receipt,  disposal,  or  paymient  of  fixed  or  determinable  annual  or  periodi- 
cal gains,  profits,  and  income  of  another  person  subject  to  tax^  shall  in 
behalf  of  such  person  deduct  and  withhold  from  the  payment  an  amount 
equivalent  to  the  normal  income  tax  upon  the  same  and  make  and 
render  a return.  * * * Nothing  in  this  section  shall  apply  * * * 

to  any  corporation  or  association  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  no  part  of 
the  net  income  of  which  inures  to  the  benefit  of  any  private  stockholder 
or  individual.” 

— it  follows  that  he  who  construes  and  applies  that  statute  to  warrant 
taxation  of  a charity  is  doing  what  Congress  said  should  not  be  done,  viz., 
“that  nothing  in  this  section  shall  apply,”  etc.  So,  also,  when  Congress 
in  the  act  of  1916  (Act  Sept.  8,  1916,  c.  463,  39  Stat.  756)  again  said: 

“That  there  shall  not  be  taxed  under  this  title  any  income  received 
by  any  * * * corporation  or  association  organized  and  operated 

exclusively  for  religious,  charitable,  scientific,  or  educational  purposes, 
no  part  of  the  net  income  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual.” 

— it  follows  that  he  who  taxes,  under  this  statute,  the  income  of  a ^hospital, 
is  taxing  that  which  Congress  expressly  said  should  not  be  taxed,  viz.,  “that 
there  shall  not  be  taxed  under  this  title  any  income  received  by  any  * * * 

corporation  for  * * * charitable  * * * purposes.”  Section  11  (Comp. 

St.  §6336k).?’’ 

2990  As  justification  for  assessing  this  tax,  it  contended,  jiowevcr,  that 
as  the  act  of  1916  forbids  taxation  on  “any  income  received  hy 

* * * corporation  * * * for  * * * charitable  * * * pur- 

poses,” that  the  income  of  this  residuary  estate  was  not  exempt  because  it 


% 

% 

% 


INC. 


572  . TAX 


11-10-20, 


has  not  been  “received/’  but  remains  in  the  hands  of  the  trustee.  But, 
apartjrom  the  fact  that  the  corpus  of  the  residuary  estate  has  in  fact  already 
been  “received”  by  the  hospital  in  the  shape  of  a mortgage,  and  the  hospital 
Itself  is  pro  forma  paying  to  its  own  trustee  the  money  which,  pro  forma, 
constitutes  the  income  here  taxed,  the  construction  thus  urged  and  the 
effect  given  to  the  word  “received”  does  not  commend  itself  to  our  judg- 
rnent.  The  sections  in  question  in  the  acts  of  1913  and  1916  are  to  be  con- 
sidered and  construed  jointly.  They  concern  the  same  'subject-matter, 
and  that  of  1916  was  evidently  meant  to  continue  the  broad  and  absolute 
purpose  and  provisions  of  the  act  of  1913  “that  nothing  in  this  section  shall 
apply  * * * to  any  corporation  * * * operated  exclusively  for 
* * charitable  * * * purposes.”  Such  being  the  case,  the  residu- 
ary estate  which  produced  this  income  being  the  property  solely  of  the 
hospital,  no^  one  but  the  hospital  owning  the  income  thereof,  and  the  tem- 
porary holding  of  the  income  being  by  a trustee,  who  was  the  agent  and  rep- 
resentative solely  of  the  hospital,  it  is  clear  that  when  substance  and  spirit, 
and  not  mere  form  and  words,  are  the  interpreters  of  the  statute,  the  receipt 
of  this  income  by  the  hospital’s  agent  and  representative  was  in  truth  and 
reality  a receiving  by  the  hospital,  for  he  who  acts  by  the  hand  of  another 
himself  acts.  If  this  income  was  received  from  a third  person  by  the  trustee 
and  afterwards  lost,  surely  the  hospital  could  never  have  collected  it  again 
from  such  third  person  on  the  theory  the  hospital  had  never  received  it. 
Moreover,  it  will  also  appear  that,  if  the  trustee  had,  without  protest,  used 
the  money  of  the  hospital  to  pay  this  income  tax,  such  trustee  could  not, 
on  settlement  of  his  trusteeship,  have  justified  such  payment  under  section  2 
of  the  act  of  1913,  for  that  section  only  warrants  such  deduction  and  with- 
holding where  the  income  is  the  “income  of  another  person  subject  to  tax,” 
and  elsewhere,  as  we  have  seen,  the  same  section  provided  “that  nothing  in 
this  section  shall  apply  * * * to  any  corporation  * * * operated 
exclusively  for  * * * charitable  * * * purposes.” 

2991  From  the  above,  it  is  clear  to  us,  first,  that  the  United  States,  the 
taxing  power^and  real  defendant  in  this  case,  speaking  by  its  legis- 
lative branch  in  plain  language  enacted  its  purpose  and  will  to  exempt 
from  taxation  the  income  of  “any  corporation  or  association  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or  educational 
purposes,  no  part  of  the  net  income  of  which  enures  to  the  benefit  of  any 
private  stockholder  or  individual;”  second,  that  the  action  of  the  United 
States  by  its  executive  officer,  in  this  case  the  collector  of  internal  revenue, 
in  assessing  and  collecting  this  income  tax  from  the  hospital,  was  not 
warranted  by  the  taxing  statutes;  and,  third,  that  it  is  the  duty  of  the  United 
States,  acting  by  its  third  agency,  the  federal  courts,  to  prevent  its  executive 
branch  from  illegally  defeating  its  expressed  will  in  the  law  enacted  by  its 
legislative  branch. 

2992  It  follows,  therefore,  that  the  judgment  entered  by  the  court  below 
in  favor  of  the  hospital  and  against  the  collector  should  be  and  is 

affirmed.  (266  Fed.  ;676.) 


INC. 


573  TAX 


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11-10-20. 

TABLE  OF  CASES. 


Paragraph 

Ailca:  Aitheimer  k Rawlings  investment  Co.  vs.  (248  Fed.  638). .........  905 

Alien:  National  Bank  of  Commerce  in  St.  Louis  vs.  (223  Fed.  472) 125S 

Aitheimer  & Rawlings  Investment  Co.  vs.  Alien  (248  Fed.  688).... 905 

Anderson:  Brady  vs.  (240  Fed.  665) 688 

Anderson:  Jacobs  and  Davies  (Inc.)  vs.  (228  Fed.  505) 1218 

Anderson:  Jewelers  Safety  Fund  Society  vs.  (T.  D.  3078) 2960 

Anderson:  Mail  & Newspaper  Transportation  Company  vs.  (234  Fed,  590). 2184 

Anderson:  Thorne  vs.  (240  U.  S.  115). 2290 

.Anderson:  Tyee  Realty  Company  vs.  (240  U.  S.  115) 2290 

Baldwin  Locomotive  Works  vs.  McCoach  (221  Fed.  59) 960 

Baltic  Mining  Co.:  Stanton  vs,  (240  U.  S.  103). 2297 

Brady  vs.  Anderson  (240  Fed,  665) 688 

Brady:  Dodge  vs,  (240  U.  S.  122) .2295 

Bfushaber  vs.  U.  P.  Railroad  Company  (240  U.  S.  1) 2260 

Carter:  Union  Hollywood  Water  Company  vs.  (238  Fed.  329), .727,  1233 

Chicago  & Alton  Railroad  Co.  vs.  U.  S.  (53  C,  of  C.  41).. 95.5 

Cohen  vs.  Lowe  (234  Fed.  474) 496,  1355 

Crocker,  et  a!.,  Trustees:  Malley  vb.  (249  U.  S.  223) 2399 

Cryan  vs.  Warded  (263  Fed.  248) 2695 

DeGanay  vs.  Lederer  (250  U,  S.  376). 2408 

Digest  of  Recent  Decisions  of  the  Supreme  Court  (Acts  of  1909  and  1913).  .2317 

U—  ..  - A.  ....  A ,h.  as  « » V a-v  t « w 4 ««  r'.  1-*  A.  ^ ^ 9 t « Ji  A 


Dodge  vs.  Brady  (240  U,  S.  122) 2295 

Dodge  vs.  Osborn  (240  U.  S.  118) 2166 

Doyle:  Grand  Rapids  and  Indiana  Railway  Co.,  vs.  (245  Fed.  792) 1206 

Eliot  National  Bank  vs.  Gill  (218  Fed.  600) 1257 

Eisner;  Macomber  va.  (Jan.  23,  1919) 853 

Supreme  Court  decision  (252  U.  S.  189) 2573 

Eisner:  Mente  vs.  (T.  D.  3029).  2754 

Eisner;  Peabody  vs.  (247  U.  S.  347) .2378 

Eisner:  Prentiss  vs.  (260  Fed.  589) 1265 

U.  S.  Circuit  Court  of  Appeals  Decision  (T.  D.  3050) 2848 

Eisner;  Towne  vs.  (245  U.  S.  418) 2313 

Evans  vs.  Gore  (262  Fed.  550) 2669 

Supreme  Court  Decision  (253  U.  S.  245) 2713 

First  Trust  and  Savings  Bank,  Trustee  under  the  will  of  Otto  Young  v*. 

Smietanka,  Collector  (C.  C^.  A.,  7th  Cir.,  Oct.  1920  Term) 2935 

General  Inspection  & Loading  Co.:  U,  S.  vs.  (192  Fed.  223) 1781 

General  Inspection  & Loading  Company:  U.  S.  va.  (204  Fed.  657) .2027 

Gill:  Eliot  National  Bank  vs,  (218  Fed.  600) . 1237 

Gore:  Evans,  vs.  (262  Fed.  550} 2669 

Supreme  Court  Decision  (253  U.  S.  245) 2713 

Gould  vs.  Gould  (245  U.  S.  151) 2306 


Grand  Rapids  & Indiana  Railway  Company:  U.  S.  vs.  (239  Fed,  153) 2043 

Gulf  Oil  Corporation  vs.  Lewellyn;  Example  of  procedure 2189 

U.  S.  Supreme  Court  Decision  (248  U.  S.  71) 2395 

Haiku  Sugar  Co.  et  al.  vs.  Johnstone  (249  Fed.  103) 550 

Heller,  Hirsh  & Co.;  In  re  (258  Fed.  203) 970 

Hornby:  Lynch  vs.  (247  U.  S.  339) 2337 

Jackson  vs.  Smietanka  (U.  S.  District  Court)  (T.  D,  2960) 2421 

facobs  and  Davies  (Inc.)  vs.  Anderson  (228  Fed.  505) 1218 

Jewelers  Safety  Fund  Society  vs.  Lowe,  Collector:  Same  vs.  Anderson, 

Collector  (T.  D.  3078) 2960 

Johnstone:  Haiku  Sugar  Co.  et  al,  vs.  (249  Fed.  103) 550 

Kohlhamer  vs.  Smietanka  (239  Fed.  408) 2175 

Lederer:  Dc  Ganay  vs.  (250  U.  S.  376) 2408 

Lederer:  Penn  Mutual  Life  Insurance  Co.  vs.  (253  Fed.  81) 988 

Supreme  Court  Decision  (253  U.  S.  523) 2673 

Lederer;  Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  (242 

Fed.  492) 2203 

Lederer  vs.  Stockton  (266  Fed.  676) 2985 

Lewellyn:  Gulf  Oil  Corporation  vs.  (Example  of  procedure) 2189 

U.  S.  Supreme  Court  Decision  (248  U.  S.  71) 2395 

Income  Tax. 

Supplementary  Page  107. 


TABLE  OF  CASiSS.-~ConclGded. 


Pftragrftph 

Lowe:  Cohea  vs.  (234  Fed.  474) 496,  1355 

Loomis  vs.  Wattles  (266  Fed.  876) 2982 

Lowe:  Jewelers  Safety  Fund  Society  vs.  (T.  D.  3078) 2960 

Lowe;  Peck  vs.  (247  U.  S.  165).. . . 2329 

Lowe:  Roberts  vs.  (236  Fed.  604) 2201 

Lowe:  Southern  Pacific  Company  vs.  (247  U.  S.  330).. 2380 

Lynch  vs.  Hornby  (247  U.  S.  339) 2337 

Lynch  vs.  Turrish  (247  U,  S.  221) 2351 

Mf'Coach:  Baldwin  Locomotive  Works  vs.  (221  Fed.  59) 960 

McKatton:  U.  S.  vs.  (U.  S.  District  Court)  (T.  D.  3043) 2770 

Macomber  vs.  Eisner  (Jan.  23,  1919) * 853 

Supreme  Court  decision  (252  U.  S.  189) 2575 

Maii.&  Newspaper  Transportation  Company  vs.  Anderson  (234  Fed.  590).. 2184 

Malley  vs,  Alvah  Crocker,  et.  ai.,  Trustees  (249  U.  S.  223) 2396 

Marion  Hotel  Company:  Urquhart  vs.  (194  S.  W.  1).  ..  1632 

Maryland  Casualty  Company  vs.  United  States  (251  U.  S.  342) .2517 

Mente  vs.  Eisner  (T.  D.  3029) 2754 

Mohawk  Mining  Co.;  Weiss  vs.  (264  Fed.  502) 2668 

Nashville,  Chattanooga  & St.  Louis  Railway:  U.  S.  vs.  (249  Fed.  678). ...  .2050 

National  Bank  of  Commerce  in  St.  Louis  vs.  Allen  (223  Fed.  472) 1258 

Oregon- Washington  R.  & Nav.  Co.:  U.  S.  vs.  (251  Fed.  211) 944 

Osborn:  Dodge  vs.  (240  U.  S.  118)., 2166 

Peabody  vs.  Eisner  (247  U.  S.  347).. 2378 

Peck  vs,  Lowe  (247  U.  S.  165) 2329 

Penn  Mutual  Life  Insurance  Co.  vs.  Lederer  (258  Fed.  81) 988 

Supreme  Court  Decision  (253  U.  S.  523) 2673 

Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  Lederer 

(242  Fed.  492) 2203 

Pittaro:  U.  S,  vs.  (U.  S.  District  Court.)  (T.  D.  2874) 2104 

Prentiss  vs.  Eisner  (260  Fed.  589) 1265 

U.  S.  Circuit  Court  of  Appeals  Decision  (T.  D.  3050) 2848 

Roberts  vs.  Lowe  (236  Fed.  604) 2201 

Skinner:  U.  P.  Coal  Co.  vs.  (U.  S.  Supreme  Court,  March  22,  1920) 2651 

Smietanka:  First  Trust  and  Savings  Bank,  Trustee  under  the  will  of  Otto 

Young,  vs.  (C.  C.  A.,  7th  Clrc.,  Oct.  1920  Term) 2935 

Smietanka:  Jackson  vs.  (U.  S.  District  Court.)  (T.  D.  2960) 2421 

Smietanka;  Kohlhamer  vs.  (239  Fed.  408) 2175 

Southern  Pacific  Company  vs.  Lowe  (247  U.  S.  330) 2380 

Stanton  vs.  Baltic  Mining  Co.  (240  U,  S.  103) 2297 

Stockton;  Lederer  vs.  (266  Fed.  676) 2985 

Thorne  vs.  Anderson  (240  U . S.  115) 2290 

Towne  vs.  Eisner  (245  U.  S.  418) 2313 

Turrish:  Lynch  vs.  (247  U.  S.  221) 2351 

Tyee  Realty  Company  vs.  Anderson  (240  U.  S.  115) 2290 

Union  Hollywood  Water  Company  vs.  Carter  (238  Fed.  329) 727,,  1205 

U.  P.  Coal  Co.  vs.  Skinner  (U.  S.  Supreme  Court,  March  22,  1920) 2651 

U.  P.  Railroad  Company:  Brushaber  vs.  (240  U.  S.  1) 2260 

U.  S.t  Chicago  & Alton  Railroad  Co.  vs,  (53  C,  of  C.  41) 955 

U.  S,  vs.  General  Inspection  & Loading  Co,  (192  Fed,  223) 1781 

U S.  vs.  General  Inspection  & Loading  Company  (204  Fed.  657) 2027 

TJ.  S.  vs.  Grand  Rapids  & Indiana  Railway  Company  (239  Fed.  153) 204.3 

U.  S.  vs.  McHatton  (U.  S.  District  Court)  (T.  D.  3043) 2770 

U.  S.:  Maryland  Casualty  Company  vs.  (251  U.  S.  342) 2517 

U.  S.  vs.  Nashville,  Chattanooga  & St.  Louis  Railway  (249  Fed.  678) 2050 

U.  S.  vs.  Oregon-Washineton  R.  & Nav.  Co.  (251  Fed.  211) 944 

U.  S.  V8.  Pittaro  (U.  S.  District  Court.)  (T.  D.  2874) 2104 

Urquhart  vs  Marion  Hotel  Company  (194  S.  W.  1) 1652 

Waddell;  Loomis  vs.  (266  Fed.  876) 2982 

Wardell;  Cryan  vs.  (263  Fed.  248) 2695 

Welts  vs.  Mohawk  Mining  Co.  (264  Fed.  502) . .2668 


Income  Tax 

Supplementary  Page  108. 


11-10-20. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 


(Page  433  (^2420)  et  seq.). 


Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  December  22,  1919. 


T.  D. 

Date 

3070 

Sept.  10, 

1920 

3071 

18, 

it 

3072 

ii 

24, 

iC 

3073 

<< 

27, 

it 

3074  _ 
Decision 

Oct. 

Oct. 

1, 

it 

3075 

Oct. 

5, 

it 

3076 

5, 

it 

3077 

a 

7, 

it 

3078 

a 

13, 

it 

3079 

u 

15, 

it 

3080 

19, 

ti 

3081 

19, 

a 

3082 

“ 

20, 

a 

3083 

ic 

22, 

ic 

3084 

it 

26, 

3085 

a 

27, 

it 

3086 

cc 

27, 

a 

3087^ 

it 

28, 

a 

Special 

it 

28, 

it 

3088 

“ 30,  “ 

Special 

“ 30,  “ 

3089 

Nov.  6,  “ 

Decision  July  28,  “ 

Decision  July  8,  “ 


Subject  ^ Paragraph 

(Reg.  56,  Rev.,  Motion  Picture  Films. — War 
Tax  Service.) 

Return  of  income  by  husband  and  wife  from 

community  property 2903 

(Distillery  warehouses.) 

(Tobacco.) 

(Tobacco.) 

Liability  to  tax  of  estates  and  trusts  as  entities 


under  the  Act  of  1913 2935 

(Tax  on  brokers. — War  Tax  Service.) 

Arts.  228,  229,  230,  231,  233,  234  and  235,  Reg. 

45,  amended,  and  Arts.  236  and  237  added. — 

Depletion  of  timber 2944 

(Commercial  cider.) 

A mutual  fire  insurance  society  is  a fire  insurance 
company  under  the  1909  and  1913  Acts. 
(Captions  of  court  decision) 2960 


(Federal  prohibition.) 

(Excess  Profits  Tax  (1917  Act).— War  Tax 
Service.) 

(Denatured  alcohol.) 

Art.  42,  Reg.  45,  amended. — Sale  of  personal 

property  on  installment  plan 2965 

(Federal  prohibition.) 

(Federal  prohibition.) 

(Narcotic  law.) 

(Federal  prohibition.) 

(Excise  taxes. — Wool  rugs. — War  Tax  Service.) 

Relief  to  debtor  corporation  on  account  excess 
liability  for  tax  on  tax-free-covenant  bond 
interest  due  to  compulsory  filing  of  Form 
1000  by  partnership  with  member  having 
personal  exemption  in  excess  of  taxable 


income 2966 

(Estate  Tax. — Power  of  Appointment. — War 
Tax  Service.) 

Taxability  of  discount  on  interest-bearing 

municipal  bonds 2971 

Allowance  for  depletion  in  case  of  discovery  by 
the  taxpayer  subsequent  to  March  1,  1913. — 
Apportionment  between  lessor  and  lessee. . . . 2972 

Conditions  precedent  to  bringing  suit  for  recov- 
ery of  taxes  paid  on  second  assessment 2982 

Ultimate  beneficiary  of  a trust  subject  to  tax  as 

an  entity  being  a person  exempt  from  tax..  ..  2985 


Income  Tax. 
Supplementary  Page  115. 


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SERVICE  DEPARTMENT 

^ mr  WXIJ.  STKMST  ?r*w  york 


WAR  TAX  SERVICE 
-REPORT  NO.  37- 
HOVEMBBR  10,  1920. 

Enclosed  herewith  are  pages  103-104  for  substi- 


tution for  page  103  now  in  your  binder. 


Also  enclosed  is  Supplementary  Page  1-  Estate 
Tax,  for  substitution. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


* '* 

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11-10-20. 


ESTATE  TAX  REGULATIONS. 


% 

% 


jurisdiction  thereof;  and  the  value  of  any  property  included  in  the  grosi 
estate  which  was  transferred,  or  with  respect  to  which  a trust  was  created  by 
the  decedent,  in  contemplation  of  or  intended  to  take  effect  in  possession 
or  enjoyment  at  or  after  his  death  (except  where  the  making  of  such  transfer 
or  the  creating  of  such  trust  by  the  decedent  constituted  a bona  fide  sale  for 
a fair  consideration  in  money  or  money^s  worth),  where  the  transferee  or 
trustee  has  sold  such  property  to  a bona  fide  purchaser  for  a fair  considera- 
tion in  money  or  money’s  worth.  No  other  part  of  the  gross  estate  is  divested 
of  the  lien  by  virtue  of  Section  409  of  the  said  Act,  nor  may  it  be  divested 
of  such  lien  except  by  discharge  of  the  tax  liability  of  the  estate  or  by  a 
certificate  issued  by  the  Commissioner  of  Internal  Revenue  releasing  it  from 
the  lien. 

320  It  will  be  seen  from  the  foregoing,  therefore,  that  any  stock  of  a 
corporation  which  was  owned  by  a decedent  on  the  date  of  his 

death  is  not  divested  of  the  lien  by  virtue  of  anything  contained  in  Section 
409  of  the  Revenue  Act  of  1918. 

321  This  Bureau  is  at  all  times  willing  in  any  proper  case  to  issue  a 
release  of  lien  with  respect  to  any  part  of  the  gross  estate  where 

the  tax  liability  of  the  estate  has  been  discharged  or  provided  for  to  the 
satisfaction  of  the  Commissioner.  Any  transfer  made  by  an  executor  of 
property  forming  a part  of  the  gross  estate  of  a decedent  whose  estate  is 
liable  for  the  payment  of  Federal  estate  tax,  or  the  transfer  by  any  person 
having  in  his  possession  property  forming  a part  of  such  gross  estate,  except 
as  provided  in  Section  409  aforesaid,  will  not  operate  to  divest  such  property 
of  the  lien.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Deputy 
Commissioner  James  Hagerman,  Jr.,  and  dated  June  26,  1920.) 


322  U.  S.  Bonds  owned  by  non-resident  alien  decedent. — Please  wire 

173  our  expense  whether  United  States  bonds  held  in  trust  for  non- 

174  resident  alien  individual  but  situated  in  United  States  are  included  in 
gross  estate  for  purposes  of  estate  tax.  Has  ruling  published  Corpo- 
ration Trust  Company  War  Tax  Service  nineteen  twenty  paragraph  one- 
seventy-three,  denying  exemption,  been  modified?  (Answer.)  United 
States  bonds  situated  in  the  United  States  owned  by  non-resident  alien 
decedent  form  no  part  of  gross  estate  of  such  decedent  situated  in  the  United 
States  for  purposes  of  federal  estate  tax.  (Telegram  of  inquiry  from  Herrick, 
Smith,  Donald  & Farley,  Boston,  Mass.,  and  the  answer  thereto  signed 
by  Deputy  Commissioner  James  Hagerman,  Jr.,  and  dated  Aug.  6,  1920.) 

323  [Letter  supplementing  the  telegram  above.]  Referring  to  your 
letter  dated  May  26,  1920,  relative  to  the  taxability  of  bonds,  notes 

and  certificates  of  indebtedness  of  the  United  States  and  bonds  of  the  War 
Finance  Corporation  owned  by  or  held  in  trust  for  a nonresident  alien  at 
the  time  of  his  death,  you  are  advised  that  bonds  of  the  United  States, 
beneficially  owned  by  a nonresident  alien,  should  not  be  included  as  a part  of 
the  gross  estate  in  the  United  States  for  the  purpose  of  the  estate  tax  (Revenue 
Act  of  1916,  Sec.  202  (a);  Revenue  Act  of  1918,  Sec.  402  (a);  Victory  Liberty 
Loan  Act,  Act  of  March  3,  1919,  Sec.  4 [11733]  amending  Fourth  Liberty 
Bond  Act,  Act  of  July  9,  1918,  Sec.  3).  This  ruling  is  not  in  conflict  with 
Treasury  Decision  No.  2530  [11175],  and  applies  only  to  bonds  enumerated 
in  the  above-mentioned  Acts.  (Letter  to  Herrick,  Smith,  Donald  & Farley, 
Boston,  Mass.,  signed  by  Deputy  Commissioner  James  Hagerman,  Jr.,  and 
dated  August  21,  1920.) 


WAR  103 


TAX 


ESTATE  TAX  REGULATIONS. 


324  Property  passing  under  general  pcv/er  of  appointment  under  the 
121  laws  of  Pennsylvania.  Revenue  Act  of  1916. — Property  passing 

under  general  power  of  appointment,  where  the  construction  and 
effect  of  the  power,  and  the  rights  of  the  parties  thereunder,  are  governed 
by  the  laws  of  Pennsylvania,  should  not  be  included  in  the  gross  estate  of 
the  decedent  exercising  the  power  in  a case  arising  under  Title  II  of  the 
Revenue  Act  of  1916. 

325  This  T.  D.  which  merely  incorporates  a decision  of  the  United 
States  Circuit  Court  of  Appeals  for  the  Third  Circuit,  in  the  case 

of  Lederer,  Collector,  v.  Pearce,  Executor,  266  Fed.  497  is  published  for 
the  information  of  internal  revenue  officers  and  others  concerned. 

326  This  decision  is  accepted  by  the  Treasury  Department  as  to  all 
cases,  arising  under  Title  II  of  the  Revenue  A^ct  of  1916,  in  which 

the  construction  and  effect  of  the  power  of  appointment,  and  the  rights  of 
the  parties  thereunder,  are  governed  by  the  laws  of  Pennsylvania.  In  such 
cases  the  appointed  property  will  not  be  included  in  the  gross  estate  of  the 
decedent  exercising  the  power.  It  has  no  application  to  cases  arising  under 
Title  IV  of  the  Revenue  Act  of  1918.  Treasury  Decision  2477  [April  7,  1917] 
is  m.odified  accordingly.  (T.  D.  3088,  dated  October  30,  1920.) 


WAR 


104 


TAX 


11-10-201 

RUNNING  TABLE  OF  CONTENTS— ESTATE  TAX. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Estate  Tax  Law  Provisions  of  the  Revenue  Act  of  191S. 


(The  Law  appears  at  paragraphs  1 to  39.) 


Giving  Treasury  Decision  Number  or  other  Designation,  Date  of  Issue,  and 
General  Subject  Content. 


T.  D. 

No.  Date  Subject 


Paragraph 

No. 


Consult  the  pink  sheet  facing  page  99. 

The  following  matters  are  unindexed  temporarily. 


Decision  1919 


2976 

Feb. 

11,  1920 

3027 

June 

2,  “ 

Special 

(< 

24, 

Special 

26,  “ 

Special 

Aug. 

6,  “ 

Special 

Aug. 

21,  “ 

3088 

Oct. 

30,  “ 

The  Pennsylvania  collateral  inheritance  tax  held 
to  be  deductible,  by  a court  decision,  under 

the  1916  Act 299,  313 

The  New  York  Transfer  Tax. — Court  decision 

under  the  1916  Act 300 

Decision. — Pennsylvania  collateral  inheritance 

tax  deductible  under  the  1916  Act 299,  313 

Tax  payment  may  be  enforced  any  time  after 
expiration  of  one  year  period,  in  absence  of 
en tension,  without  regard  to  180  day  interest 

provision 314 

Transfer  of  stock:  lien  on  stock  and  release  of  lien.  319 
U.  S.  bonds  owned  by  non-resident  alien  decedent  322 
U.  S.  bonds  owned  by  non-resident  alien  decedent  323 
Property  passing  under  general  power  of  ap- 
pointment under  the  laws  of  Pennsylvania. 
Revenue  Act  of  1916 324 


Insert  this  page  immediately  before  the  blue  Estate  Tax  index. 


Estate  Tax. — War  Tax  Service 
Supplementary  Page  1. 


Ctihc  OIiii*;iaration  (itrust  (llnm|iang 

SERVICE  DEPARTMENT 

3T  WAI^L  STRKET  >E\V  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO,  48- 
OCTOBER  22,  1920, 

Enclosed  herewith  are  pages  565  to  567,  for  eut- 
stitution  for  page  565  now  in  your  binder. 

Also  enclosed,  for  substitution,  are  pages  303-304 
to  correct  typographical  error  in  f 1704  {but  see 
q 2703  for  this  Article  as  revised),  and  Supplementary 
Pages  107-108  and  115. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANT. 


-ai'^  ■ 

, _ OSC'I  . 

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, letonr-f.  . 


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10-23-20. 


2956  The  total  value  or  total  cost,  as  the  case  may  be,  of  land  and  timber 
shall  be  equitably  allocated  to  the  timber  and  land  accounts  re- 
spectively. 

2957  Each  of  the  several  land  and  timber  accounts  carried  on  the  books 
of  the  taxpayer  shall  be  definitely  described  as  to  their  location  on 

the  ground  either  by  maps  or  by  legal  descriptions. 

2958  For  good  and  substantial  reasons,  to  be  approved  by  the  Commis- 
sioner, or  as  required  by  the  Commissioner,  the  timber  of  the  land 

accounts  may  be  readjusted  by  dividing  individual  accounts,  by  combining 
two  or  more  accounts,  or  by  dividing  and  recombining  accounts. 

2959  Art.  237.  Timber  depletion  and  depreciation  accounts  on  books. — 

1446  Every  taxpayer  claiming  or  expecting  to  claim  a deduction  for  depletion 
and/or  depreciation  of  timber  property  (including  plants,  improve- 
ments and  equipment  used  in  connection  therewith)  shall  keep  accurate 
ledger  accounts  in  which  shall  be  charged  the  fair  market  value  as  of  March 
1,  1913,  or  the  cost,  as  the  case  may  be,  of  (a)  the  property,  and  (b)  the 
plants,  improvements  and  equipment,  together  with  such  amounts  subse- 
quently expended  for  the  administration,  protection  and  other  carrying 
charges,  or  development  of  the  property  or  additions  to  plant  and  equip- 
ment as  are  not  chargeable  to  current  operating  expenses.  (See  Articles  231 
and  236.)  In  such  accounts  there  shall  be  set  up  separately  the  quantity  of 
timber,  the  quantity  of  land,  and  the  quantity  of  other  resources,  if  any,  and 
a proper  part  of  the  total  value  or  cost  shall  be  allocated  to  each.  (See  Article 
236.)  These  accounts  shall  be  credited  with  the  amount  of  the  depreciation 
and  depletion  deductions  claimed  and  allowed  each  year,  or  the  amount  of 
the  depreciation  and  depletion  shall  be  credited  to  depletion  and  deprecia- 
tion reserve  accounts,  to  the  end  that  when  the  sum  of  the  credits  for  deple- 
tion and  depreciation  equals  the  value  or  cost  of  the  property,  plus  the  amount 
added  thereto  for  administration,  protection,  and  other  carrying  charges, 
or  development  or  for  additional  plant  and  equipment,  less  salvage  value  of 
the  physical  property,  no  further  deduction  for  depletion  and  depreciation 
will  be  allowed.  (T.  D.  3076,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  October  5,  1920.) 


(T.  D.  3078.) 

2960  A society  organized  to  insure  its  members  against  fire  (and  other 
767  casualty)  is  liable  to  tax  on  its  statutory  net  income  as  a “fire  insur- 
ance company”  under  the  1909  and  1913  Acts. — The  appended 

decision  [captions  only,  1(2961  to  1[2964],  dated  July  19,  1920,  of  the  United 
States  District  Court  for  the  Southern  District  of  New  York  in  the  cases  of 
Jewelers  Safety  Fund  Society  v.  Lowe,  collector,  and  Jewelers  Safety  Fund 
Society  v.  Anderson,  collector,  is  published  for  the  information  of  internal 
revenue  officers  and  others  concerned.  (T.  D.  3078,  signed  by  Commissioner 
Wm.  M.  Williams,  and  dated  October  13,  1920.) 

[Captions  referred  to  in  1[2960  above.] 

2961  1.  Gross  Income  of  Insurance  Companies — Premium  Receipts. 

The  premium  receipts  of  ^‘every  insurance  company’^  by 
whatever  name  they  are  called  are,  unless  specifically  exempted  by  the 
terms  of  the  taxing  statutes  in  question,  a part  of  such  company’s  gross 
income. 

2962  2.  Same — Premium  Deposits. 

Premium  deposits  made  in  advance  by  members  of  a mutual 
insurance  company  to  cover  estimated  losses  and  expenses  are,  so  long 

INC.  565  TAX 


as  the  payment  thereof  constitutes  the  consideration,  fox  contract,  of 
insurance,  insurance  premiums  constituting  gross  income  of  the  company. 

29S3  3.  Same— Interest  on  Bank  Balances  and  Profits  from  Investment  of 

Premium- Deposits. 

Moneys  received  by  way  of  interest  upon  bank  balances  and  from 
Investment  of  such  portion  of  premium  deposits  as  are  not  currently 
required  for  the  payment  of  losses  and  expenses  are  profits  earned  by 

an  insurance  company  subject  to  tax.  ^ ^ . ttt.  , • 

2964  4.  Mutual  Fire  Insurance  Companies — Corporation  Coming  Within 

Meaning  of.  ^ ^ ^ .... 

A corporation,  organized  to  insure  its  members,  limited  to  jewelers 
and  dealers  in  goods  ordinarily  carried  in  the  jewelry  trade,  against 
loss  or  damage  by  fire,  theft,  barratry,  enibezzlement  and^  transporta- 
tion, which  requires  each  member  to  deposit  in  advance  a definite  sum 
sufficient  to  cover  estimated  losses  and  expenses  for  the  ensuing  year, 
the  balance  of  such  deposits  being  returned  to  niembers,  is  a mutual 
fire  insurance  company  and  subject  to  the  taxes  imposed  by  the  Acts 
of  August  5,  1909,  and  October  3,  1913.  (Captions  of  decision  appended 
to  T.  D.  3078  [112960].) 


(T.  D.  3082.) 

\McitteT  in  italics  is  newi  that  in  hold  face  hvackets  [ 1 is  old  viattef  cut  out.\ 

2965  Gross  income  defined — Inclusions — Article  42,  Regulations  No.  45, 
914  amended. — Article  42  of  Regulations  No.  45  is  hereby  amended  to 

2672  read  as  follows:  ^ -r^  i 

2822  Art.  42.  Sale  of  personal  property  on  instaiinxent  plan.  Dealers  in 
personal  property  ordinarily  sell  either  for  cash,. or  on  the  personju 
credit  of  the  - buyer,  or  on  the  installment  plan.  Occasionally  ai  fourth 
type  of  sale  is  met  with,  in  v/hich  the  buyer  makes  an  initial  payrnent  of  such 
a substantial  nature  (for  example,  a payment  of  more  than  25  per  cent) 
that  the  sale,  though  involving  deferred  payments,  is  not  one  on  the  in-stall- 
ment  plan.  In  sales  on  personal  credit,  and  in  the  substantial  payment  type 
just  mentioned,  obligations  of  purchasers  are  to  be  regarded  as  the  equNalent 
of  cash,  but  a different  rule  applies  to  sales  on  the  installment  plan.  Dealers 
in  personal  property  who  sell  on  the  installm.ent  plan  usually  adopt  one  of 
four  ways  of  protecting  themselves  in  case  of  default:  (a)  through  an  agree- 
ment that  title  is  to  remain  in  the  seller  until  the  buyer  has  completely  per- 
formed his  part  of  the  transaction;  (b)  by  a form  of  contract  in  which 
is  conveyed  to  the  purchaser  immediately,  but  subject  to  a hen  for  the  unpaid^ 
portion  of  the  purchase  price;  (c)  by  a present  transfer  of  title  to  the  pur- 
chaser, who  at  the  same  time  executes  a reconveyance  in  the  form  of  a chattel, 
mortgage  to  the  seller;  or  (d)  by  conveyance  to  a trustee  pending  performance 
of  tlie  contract  and  subject  to  its  provisions.  The  general  purpose  and 
being  the  same  in  all  of  tliese  plans,  it  is  desirable  that  a uniformly  applicable 
rule  be  established.  The  rule  prescribed  is  that  in  the  sale  or  contract  for 
sale  of  personal  property  on  the  installment  plan,  whether  or  not  title  remains 
in  the  vendor  until  the  property  is  fully  paid  for,  the  income  to  be  returned 
by  the  vendor  will  be  that  proportion  of  each  installment  payment  which  the 
gross  profit  to  be  realized  when  the  property  is  paid  for  bears  to  the  gross 
contract  price.  . Such  income  may  be  ascertained  by  taking^  as  projit 
proportion  of  the  total  cash  collections  [payments]  received  in  the  taxable 
year  from  installment  sales,  {such  collections  being  allocated  to  the  year  against 
the  sales  of  zvhich  they  apply  [always  including  payments  receited  in  the 

566 


INC. 


TAX 


taxable  year  on  account  of  sales  effected  in  earlier  years  as  well  as  those 
effected  in  the  taxable  year]),  which  the  annual  gross  profit  to  be  realized  on 
the  total  installment  sales  made  during  each  [the  taxable]  year  bears  to  the 
gross  contract  price  of  all  such  sales  made  during  that  respective  [the  taxable] 
year.  In  any  case  where  the  gross  profit  to  be  realized  on  a sale  or  contract  for 
sale  of  personal  property  has  been  reported  as  income  for  the  year  in  which  the 
transaction  occurred^  and  a change  is  made  to  the  installment  plan  of  computing 
net  income,  no  part  of  any  installment  payment  received  subsequently  to  the 
change,  representing  income  previously  reported  on  account  of  such  transaction, 
should  be  reported  as  income  for  the  year  in  which  the  installment  payment  is 
received;  the  intent  and  purpose  of  this  provision  is  that  where  the  entire  profit 
from  installment  sales  has  been  included  in  gross  income  for  the  year  in  which 
the  sale  was  made,  no  part  of  the  installment  payments  received  subsequently  on 
account  of  such  previous  sales  shall  again  be  subject  to  tax  for  the  year  or  years 
in  which  received.  Where  the  taxpayer  makes  a change  [is  made]  to  this  method 
of  computing  net  income  his  [the  taxpayer’s]  balance  sheet  should  be  adjusted 
conformably  [as  of  the  date  when  the  change  is  effected].  If  for  any  reason  the 
vendee  defaults  in  any  of  his  installment  payments  and  the  vendor  repossesses 
the  property,  the  entire  amount  received  on  installment  payments,^  less  the 
profit  already  returned,  will  be  income  of  the  vendor  for  the  year  in  which 
the  property  was  repossessed,  and  the  property  repossessed  must  be  included 
in  the  inventory  at  its  original  cost  to  himself,  less  proper  allowance  for  damage 
and  use,  if  any.  If  the  vendor  chooses  as  a matter  of  consistent  practice 
to  treat  the  obligations  of  purchasers  as  the  equivalent  of  cash,  such  a course 
is  permissible.  (T.  D.  3082,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  October  20,  1920.) 


INC. 


567  TAX 


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10-28-20. 


WITHHOLDING  AT  THE  SOURCE. 


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holding  at  the  source  is  accordingly  unnecessary  except  in  the  case  oi 
interest  payments  on  corporate  bonds  or  other  obligations  containing  a tax- 
free  covenant  where  no  exemption  is  claimed.  The  alien  property  custodian 
should  use  form  looo  (revised)  in  collecting  interest  on  bonds  containing 
a tax-free  covenant  and  in  all  other  cases  should  use  form  looi  (revised). 
No  distinction  is  to  be  made  between  payments  directly  to  the  alien  property 
custodian  and  to  his  depositaries  and  between  interest  on  registered  bonds 
and  interest  on  coupon  bonds.  In  the  case  of  enemies  or  allies  of  enemies 
holding  a license  granted  under  the  provisions  of  the  Trading  with  the 
Enemy  Act,  withholding  is  required  as  in  the  case  of  any  nonresident  alien 
not  an  enemy  or  ally  of  enemy.  See  article  44^  [for  extension  of  time  for 
filing  returns  in  the  case  of  enemies/’  ^1854].  (Art.  375,  Reg.  45,  Rev., 
April  17,  1919.) 

1700  Use  of  Substitute  Certificates. — Resident  collecting  agents  and 
responsible  banks  and  bankers,  receiving  interest  coupons  for  collec- 
tion with  ownership  certificates  attached,  may  present  the  ^coupons  with  the 
original  certificates  to  the  debtor  corporation  or  its  duly ‘authorized  with- 
holding agent  for  collection  or  may  detach  and  forward  the  original  cer- 
tificates directly  to  the  Commissioner,  provided  each  such  collecting  agent 
shall  substitute  for  such  original  certificates  its  own  certificates  (form  1058 
(revised)  or  form  1059  (revised))  and  shall  keep  a complete  record  of  each 
transaction,  showing  (a)  serial  number  of  item  received;  (h)  date  received; 
(c)  name  and  address  of  person  from  whom  received;  (d)  name  of  debtor 
corporation;  (e)  class  of  bonds  from  which  coupons  were  cut  (whether 
containing  a tax-free  covenant  or  not)  ; and  (f)  face  amount  of  coupons. 
For  the  purpose  of  identification  the  substitute  certificates  shall  be  numbered 
consecutively  and  corresponding  numbers  given  the  original  certificates  of 
ownership.  The  use  of  substitute  certificates  by  collecting  agents,  banks  and 
bankers  is  not  permitted,  however,  in  the  case  of  ownership  certificates  pre- 
sented with  coupons  for  collection  by  nonresident  alien  individuals,  partner- 
ships, or  corporations.  [Nor  is  it  in  the  collection  of  foreign  items, 
P752.]  (Art.  367,  Reg.  45,  Rev.,  April  17,  1919.) 

1701  No  License  Required  of  Collecting  Agents  for  Substituting  Their 
Own  Certificates  for  Ownership  Certificates. — Until  the  further 

ruling  by  this  department,  the  banks,  bankers,  and  other  collecting  agents 
who  may  substitute  their  certificates  for  the  certiflcates  of  owners  under  the 
foregoing  plan  will  not  be  required  to  secure  a license  from  the  Treasury 
Department  for  being  permitted  to  make  such  substitutions  of  their  own 
certificates  for  those  of  the  owners,  provided  these  regulations  are  strictly 
complied  with.  (1\  D.  1903,  Nov.  28,  1913.) 

1702  Endorsement  by  Collecting  Agent  Required  on  Certificates  of 
Ownership  for  Which  Own  Certificate  is  Substituted. — The  cer- 
tificate of  the  owner,  for  which  the  foregoing  certificate  of  the  collecting 
agent  may  be  thus  substituted  by  the  collecting  agent  first  receiving  said 
coupons  for  collection  must  be  given  the  following  indorsement  by  the  col- 
lecting agents  and  should  be  made  preferably  with  a rubber  stamp. 

Owner’s  certificate  No 


(Name  of  collecting  agency.) 

191—- 

(Give  date  of  certificate.) 

303  TAX 


r 


INC. 


WITHHOLDING  At  THE  SOURCE. 

The  counterpart  of  the  within  certificate  bearing  ' 
like  number  was  attached  to  the  coupons  within  " • 

mentioned  for  delivery  to  the  debtor  or  withhold-  ' V 

ing  agent,  by  whom  the  coupons  are  payable. 

(T.  D.  1903,  Nov.  28,  1913.) 

1703  Fac-simile  Signature  May  Be  Used  by  Collecting  Agents  in  Sign- 
ing Their  Own  Certificates  Substituted  for  Ownership  Certificates. 

— You  are  advised  that  as  a convenience  to  banks  and  collecting  agents  who 
desire  to  substitute  their  certificates  Form  1058  and  1059  for  the  owner’s 
certificate  accompanying  the  coupons  deposited  for  collection,  it  is  hereby 
provided  that  the  name  of  the  bank  or  collecting  agent  may  be  printed  or 
stamped,  and  that  a fac-simile  of  the  signature  of  the  person  authorized  to 
sign  the  substitute  certificate  for  the  bank  or  collecting  agent  may  also  be 
printed  or  stamped  on  the  certificate:  Provided,  that  in  all  cases  the  bank 
shall  first  file  with  the  Commissioner  of  Internal  Revenue  a certificate  of  its 
authorization  in'  substantially  the  form  following: 


The  Commissioner  of  Internal  Revenue: 
Washington,  D.  C. 


(City)  (Date) 


The  undersigned  hereby  authorizes  the  use  of  the  fac-simile  signature 
shown  below  upon  all  substitute  income  tax  certificates  issued  in  its  name 
until  this  authorization  is  revoked  by  written  notice  to  you. 


(Fac-simile  signature  of  person 
authorized  to  sign.) 


(Name  of  bank  or  collecting  agent) 

By 

(Signature  of  person  authorized  to  sign.) 


Official  position. 


(T.  D.  i986.  May  29,  1914.) 


1704  Interest  Coupons  Without  Ownership  Cettificates. — Where  interest 
coupons  are  received  unaccompanied  by  certificates  of  ownership 
the  first  bank  shall  require  of  the  payee  an  affidavit  showing  the  name  and 
address  of  the  payee,  the  name  and  address  of  the  debtor  corporation,  the 
date  of  the  maturity  of  the  interest,  the  name  and  address  of  the  person 
from  whom  the  coupons  were  received,  the  amount  of  the  interest,  and  a 
statement  that  the  owner  of  the  bonds  is  unknown  to  the  payee.  Such  affi- 
davit shall  be  forv/arded  to  the  collector  with  the  monthly  return  on  form 
1012  (revised).  The  first  bank  receiving  such  coupons  shall  also  prepare  a 
certificate  on  form  1000  (revised),  crossing  out  “owner”  and  inserting  “payee” 
and  entering  the  amount  of  interest  in  the  space  provided  for  a foreign  cor- 
poration having  no  office  or  place  of  business  within  the  United  States,  and. 
shall  stamp  or  write  across  the  face  of  the-  certificate  “Affidavit  furnished,” 
adding  the  name  of  the  bank.  (Art.  368,  Reg.  45,  Rev.,  April  17,  1919.)  ] i 


1705  Wffien  interest  coupons  are  unaccompanied  by  ownership  certificates 
affidavits  should  be  secured  by  first  bank  as  provided  in  Article  368 
flll704J,  Regulations  45.  Such  affidavit  should  accompany  the  own- 


4# 


A 


A 


A 


INC. 


304  TAX 


10-23-20. 


TABLE  OF  CASES. 


Paragraph 

Allen:  Altheimer  & Rawlings  Investment  Co,  vs.  (248  Fed.  688).. 905 

Alien:  National  Bank  of  Commerce  in  St.  Louis  vs.  (223  Fed.  472) 1258 

Aitheimer  & Rawlings  Investment  Co.  vs.  Allen  (248  Fed.  688) 905 

Anderson:  Brady  vs.  (240  Fed.  665) 688 

Anderson:  Jacobs  and  Davies  (Inc.)  vs.  (228  Fed.  505) 1218 

Anderson:  Jewelers  Safety  Fund  Society  vs.  (T.  D.  3078) .... * • j ' 

Anderson:  Mail  & Newspaper  Transportation  Company  vs.  (234  Fed.  590). 2184 

Anderson:  Thorne  vs.  (240  LT.  S.  115) 2290 

Anderson:  Tyee  Realty  Company  vs.  (240  U.  S.  115) 2290 

Baldwin  Locomotive  Works  vs.  McCoach  (221  Fed.  59) 960 

Baltic  Mining  Co.:  Stanton  vs.  (240  U.  S.  103) 2297 

Brady  vs.  Anderson  (240  Fed.  665) 6°® 

Brady:  Dodge  vs.  (240  U.  S.  122) 2295 

Brushaber  ve.  U.  P.  Railroad  Company  (240  U.  S.  1) • • - 2260 

Carter:  Union  Hollywood  Water  Company  vs.  (238  Fed.  329).. 727,  1205 

Chicago  & Alton  Railroad  Co.  vs.  U.  S.  (53  C.  of  C.  41) . 953 

Cohen  vs.  Lowe  (234  Fed.  474) 496,  1355 

Crocker,  et  al.,  Trustees:  Malley  vs.  (249  U.  S.  223) 2399 

Cryan  vs.  Warden  (263  Fed.  248) 2695 

DeGanay  vs.  Lederer  (250  U.  S.  376) ........ . . ••••••  *^408 

Digest  of  Recent  Decisions  of  the  Supreme  Court  (Acts  of  1909  and  1913).  .2317 

(The  opinions  in  the  cases  involving  the  1909  Act  are  not  included 
herein.  But  see  the  Digest,  paragraph  2317.) 

Dodge  V8.  Brady  (240  U.  S.  122) 2295 

Dodge  vs.  Osborn  (240  U.  S.  118) ; ' tin? 

Doyfe:  Grand'Rapids  and  Indiana  Railway  Co.,  vs.  (245  Fed.  792) ^^92 

Eliot  National  Bank  vs.  Gill  (218  Fed.  600) 1257 

Eisner:  Macornber  vs.  (Jan.  23,  1919) 

Supreme  Court  decision  (252  U.  S.  189) 2575 

Fisner:  Mente  vs.  (T.  D.  3029) 2754 

Eisner:  Peabody  vs.  (247  U.  S.  347) 2378 

Eisner:  Prentiss  vs.  (260  Fed.  589) ^265 

U.  S.  Circuit  Court  of  Appeals  Decision  (T.  D.  3050) 2848 

Eisner:  Towne  vs.  (245  U.  S.  418) 2313 

Evans  vs.  Gore  (262  Fed.  550) 2669 

Supreme  Court  Decision  (253  U.  S.  245) . • ....  • • • 2713 

First  Trust  and  Savings  Bank,  Trustee  under  the  will  of  Otto  Young  vs. 

Smietanka,  Collector  (C.  C.  A.,  7th  Cir.,  Oct.  1920  Term) 

General  Inspection  & Loading  Co.:  U.  S.  vs.  (192  Fed.  223). ...  1781 

General  Inspection  & Loading  Company:  U.  S.  vs.  (204  Fed.  657) 2027 

Gill:  Eliot  National  Bank  vs.  (218  Fed.  600) 1257 

Gore:  Evans,  vs.  (262  Fed.  550) 2669 

Supreme  Court  Decision  (253  U.  S.  245) 2713 

Gould  vs.  Gould  (245  U.  S.  151) ’ * ' V T’  

Grand  Rapids  & Indiana  Railway  Company  vs.  Doyle  (245  Fed.  792). 120o 

Grand  Rapids  & Indiana  Railway  Company:  U.  S.  vs.  (239  Fed.  153) 2043 

Gulf  Oil  Corporation  vs.  Lewellyn:  Example  of  procedure 2189 

U.  S.  Supreme  Court  Decision  (248  U.  S.  7l) 239. 

Haiku  Sugar  Co.  et  al.  vs.  Johnstone  (249  Fed.  103) 550 

Heller,  Hirsh  & Co.:  In  re  (258  Fed.  208) ?70 

Hornby:  Lynch  vs.  (247  U.  S.  339) 2337 

Jackson  vs.  Smietanka  (U.  S.  District  Court)  (T.  D.  2960) 2421 

Jacobs  and  Davies  (Inc.)  vs.  Anderson  (228  Fed.  505) • 1218 

Jewelers  Safety  T’uiid  Society  vs.  Lowe,  Collector:  Same  vs.  Anderson, 

Collector  (T.  D.  3078) 2960 

Johnstone:  Haiku  Sugar  Co.  et  al.  vs.  (249  Fed.  103) 550 

ICohlhamer  vs.  Smietanka  (239  Fed.  408) 2173 

Lederer:  De  Ganay  vs.  (250  U.  S.  376) 2408 

Lederer:  Penn  Mutual  Life  Insurance  Co.  vs.  (258  Fed.  81) 988 

Supreme  Court  Decision  (253  U.  S.  523) 

Lederer:  Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  (242 

Fed.  492) 2203 

Lewellyn:  Gulf  Oil  Corporation  vs.  (Example  of  procedure) 2189 

U.  S.  Supreme  Court  Decision  (248  U.  S.  71) • • •2395 

Lowe:  Cohen  vs.  (231  Fed.  474) ^^6,  1353 

Income  Tax. 

Supplementary  Page  107. 


TABLK  OF  Cases.— CoBcluaed. 


P&rtgr»pb 

Lowe:  Jewelers  Safety  Fund  Society  vs.  (T.  D.  3078) 

Lowe:  Peck  vs.  (247  U.  S.  165) 

Lowe:  Roberts  vs.  (236  Fed.  604) • . • • 

Lowe:  Southern  Pacific  Company  vs.  (247  U.  S.  330) 

Lynch  vs.  Hornby  (247  U.  S.  339) 

Lynch  vs.  Turrish  (247  U.  S.  221) ; ' ‘ K V ofiO 

McCoach:  Baldwin  Locomotive  Works  vs.  (221  Fed.  59) 

McHatton:  U.  S.  vs.  (U.  S.  District  Court)  (T.  D.  3043) 

Macomber  vs.  Eisner  (Jan.  23,  _ 

Supreme  Court  decision  (252  U.  S.  189) eorA 

Mail  & Newspai  cr  Transportation  Company  vs.  Anderson  (234  red. 

Malley  vs.  Alvah  Crocker,  et.  al..  Trustees  (249  U.  3.  223) * 

Marion  Hotel  Cbmpanv:  Urquhart  vs.  (194  S.  W I).-  : 

Maryland  Casualty  Company  vs.  United  States  (2ol  U.  S.  342) 251/ 

Mente  vs.  Eisner  (T.  D.  3029) 

Mohawk  Mining  Co.-.  Weiss  vs.  (264  Fed.  502).  ..  . AVAf' WcS 9nsn 

Nashville,  Chattanooga  & St.  Louis  Railway;  U.  S.  vs.  (249  F/d  678) 2050 

National  Bank  of  Commerce  in  St.  Louis  vs.  Allen  red.  472) 

Oregon-Washington  R=  & Nav.  Co.:  U.  S.  vs.  (25 i Fed.  211) 

Osborn:  Dod?e  vs.  (240  U.  S.  

Peabody  vs.  Eisner  (247  U.  S.  347). 2378 

Peck  vs.  Lowe  (247  U.  S.  165) ' V. ' I ‘ orb 

Penn  Mutual  Life  Insurance  Co.  vs.  Lederer  (258  Fed.  81) 

Supreme  Court  Decision  (253  Lk  S.  523) " 

Philadelphia,  Harrisburg  & Pittsburgh  Railroad  Company  vs.  Lederer 

(242  Fed.  492) 22U3 

Pittaro:  U.  S.  vs.  (U.  S.  District  Court.)  (T.  D.  2874) 2104 

Prentiss  vs.  Eisner  (260  Fed.  589) :•.••• ; • • • • * orab 

U.  S.  Circuit  Court  of  Appeals  Decision  (T.  D.  3050) 2848 

Roberts  vs.  Lowe  (236  Fed.  604) V/  'ry  

Skinner:  U.  P.  Coal  Co.  vs.  (U.  S.  Sunrcrne  Court,  Maroh  22,  1920)  . .2651 

Smietanka:  First  Trust  and  Savings  Bank,  Trustee  under  the  will  of  Otto 

Young,  vs.  (C.  C.  A.,  7th  Circ.,  Oct.  1920  Term) .2935 

Smietanka:  Jackson  vs.  (U.  S.  District  Court.)  (T.  D.  2960) 2421 

Smietanka:  Kohlhamer  vs.  (239  Fed.  408) 2175 

Southern  Pacific  Company  vs.  Lowe  (247  U.  S.  330) 2380 

Stanton  vs.  Baltic  Mining  Co.  (240  U.  S.  103) 22  7 

Thorne  vs.  Anderson  (240  U.  S.  115).. 2290 

Towne  vs.  Eisner  (245  U.  S.  418). 2313 

Turrish;  Lynch  vs.  (247  U.  S.  221) 2351 

Tyee  Realty  Company  vs.  Anderson  (240  U.  S.  115) • • *2290 

Union  Hollywood  Water  Company  vs.  Carter  (238  Fed.  329) 72»,  1205 

U.  P.  Coal  Co.  vs.  Skinner  (U.  S.  Supreme  Court,  March  22,  1920) 2651 

U.  P.  Railroad  Company:  Brushaber  vs.  (240  U.  S.  1) 2260 

U.  S.;  Chicago  & Alton  Railroad  Co.  vs.  (53  C.  of  C.  41) 955 

U,  S.  V8.  General  Inspection  & Loading  Co.  (192  Fed.  223) 1781 

U.  S.  V8.  General  Inspection  & Loading  Company  (204  Fed.  657).... -027 

U.  S.  VS.  Grand  Rapids  & Indiana  Railway  Company  (239  Fed.  153) 2043 

U.  S.  vs.  McHatton  (U.  S.  District  Court)  (T.  D.  3043).. 2770 

U,  S.:  Maryland  Casualty  Company  vs.  (251  U.  S.  342) 2517 

U.  S.  vs.  Nashville,  Chattanooga  & St.  Louis  Railway  (249  Fed.  678) 2050 

U.  S.  vs.  Oregon-Washington  R.  & Nav.  Co.  (251  Fed.  211) 944 

U.  S.  V3.  Pittaro  (U.  S.  District  Court.)  (T.  D.  2874) 2104 

Urquhart  vs.  Marion  Hotel  Company  (194  S.  W.  1) 1652 

Wardell:  Ciyan  vs.  (263  Fed.  248) 2695 

VVcIss  %8.  Mohawk  Mining  Co.  (264  Fed.  502) 2668 


Income  Tax 

Supplementary  Page  108. 


1043-20. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 


(Page  433  (1[2420)  et  seq.). 


Regulations,  Special  Rulings,  Decisions,  etc.,  Issued  since  December  22,  1919. 


T.  D. 

Date 

3070 

Sept.  10, 

1920 

3071 

“ 18, 

ii 

3072 

“ 24, 

3073 

“ 27, 

ii 

3074 

Oct.  1, 

Decision 

Oct. 

3075 

Oct.  5, 

3076 

“ 5, 

3077 

7, 

3078 

“ 13, 

(( 

3079 

“ 15, 

3080 

“ 19, 

U 

3081 

“ 19, 

ii 

3082 

“ 20, 

ii 

Subject  Paragraph 

(Reg.  56,  Rev.,  Motion  Picture  Films. — War 
Tax  Service.) 

Return  of  income  by  husband  and  wife  from 

community  property 2903 

(Distillery  warehouses.) 

(Tobacco.) 

(Tobacco.) 

Liability  to  tax  of  estates  and  trusts  as  entities 


under  the  Act  of  1913 2935 

(Tax  on  brokers. — War  Tax  Service.) 

Arts.  228,  229,  230,  231,  233,  234  and  235,  Reg. 

45,  amended,  and  Arts.  236  and  237  added. — 

Depletion  of  timber 2944 

(Commercial  cider.) 

A mutual  fire  insurance  society  is  a fire  insurance 
company  under  the  1909  and  1913  Acts. 
(Captions  of  court  decision) 2960 


(Federal  Prohibition.) 

(Excess  Profits  Tax  (1917  Act). — War  Tax 
Service.) 

(Denatured  alcohol.) 

Art.  42,  Reg.  45,  amended. — Sale  of  personal 

property  on  installment  plan.  2965 


SupplementaiT'  Page  115. 


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Corporation  Croat  Company 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


WAR  TAX  SERVICE 
-REPORT  NO.  35- 
OCTOBER  23,  1920, 

Enclosed  herewith  are  pages  315-318,  both  inclu- 
sive, for  substitution  for  page  315  now  in  your  bind- 
er. Also  enclosed  for  substitution,  is  Supplementary 
Page  1-  Excess  Profits  Tax. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. 


897  The  following  is  the  order  of  the  court  dismissing  the  petition,  and 

memorandum  therewith  [referred  to  in  ^[893]: 

Court  of  Claims  of  the  United  States.  No.  34603. 

(Decided  June  28,  1920.) 

La  Belle  Iron  Works,  a corporation,  v.  United  States. 

898  This  cause  coming  on  to  be  heard  was  submitted  to  the  court — three 

judges  sitting — upon  the  defendant’s  demurrer  to  the  plaintiff’s  pe- 
tition, as  amended,  and  was  argued  by  counsel.  On  consideration  whereof, 
the  court  is  of  the  opinion  that  the'demurrer  is  well  taken.  It  is  therefore 
adjudged  and  ordered  that  the  defendant’s  demxurrer  to  the  petition  so 
amended  in  this  cause  be,  and  the  same  is  hereby,  sustained  and  the  petition 
as  amended  is  dismissed. 

MEMORANDUM. 

899  The  court’s  conclusions  are: 

(1)  That  the  act  in  question  (40  Stat.,  306)  undertakes  to  define 
‘‘invested  capital”  and  the  averments  of  the  petition  can  not  be  said  to  bring 
the  plaintiff’s  case  within  the  definition  of  section  207. 

(2)  That  the  increase  in  value  of  plaintiff’s  ore  lands,  which  was  first  de- 
clared to  be  surplus,  and  afterwards  treated  as  the  basis  of  a stock  dividend, 
did  not  thereby  become  earned  surplus  or  undivided  profits  or  invested 
capital  within  the  m.eaning  of  the  act  of  1917.  The  stock  dividend  added 
nothing  to,  and  took  nothing  from,  the  corporation’s  invested  capital. 

(3)  That  the  inequalities,  which  can  arise  in  the  application  of  the  statute 
to  particular  cases,  can  not  be  corrected  by  judicial  construction,  where  the 
enactm.ent  is  otherwise  valid. 

(4)  That  where  the  act  is  ambiguous  or  uncertain,  the  construction  of  it 
by  the  administrative  officers  charged  with  its  execution  is  entitled  to  great 
respect. 

(T.  D.  3080.) 

900  Decision  of  Court. — Revenue  Act  of  1917. — Partnerships. — Ihe 

appended  decision  of  the  District  Court  of  the  United  States  for  the 
Western  District  of  Michigan,  Southern  Division,  in  the  case  of  Cartier 
Holland  Lumber  Company,  a partnership,  v.  Doyle,  collector,  rendered 
August  7,  1920,  is  published  not  as  a ruling,  but  for  the  information  of  internal 
revenue  officers  and  others  concerned.  (T.  D.  3080,  signed  by  Commissioner 
Wm..  M.  Williams,  and  dated  Oct.  19,  1920.)^ 

901  1.  Partnership — Single  Trade  or  Business. 

In  determining  liability  under  section  209  of  the  act  of  October  3, 
1917,  incom.e  derived  from  a single  timber-land  deal  by  a partnership  whose 
principal  business  is  dealing  in  lumber  cannot,  by  reason  of  section  201  of 
the  act,  be  considered  and  treated  separate  and  apart  from  other  partner- 
ship income  or  profits. 

902  2.  “Invested  Capital”  defined. 

The  term  “invested  capital,”  as  used  in  section  209  of  the  Act  of 
October  3,  1917,  includes  all  working  capital  consisting  of  money  or  property 
employed  in  the  business  or  for  its  benefit,  and  furnished  or  paid  in  by  one 
or  more  of  the  partners. 

903  3.  Partnership — Rate  of  Assessment  Where  1 laving  J nvested  Capital. 

Where  during  the  year  1917,  a partnership  had  invested  capital, 

as  above  defined,  more  than  nominal  in  amount,  excess  profits  taxes  upon  its 
income  could  not  be  assessed  at  the  lower  rate  provided  by  section  209  of 
the  Act  of  October  3,  1917. 


WAR 


315 


TAX 


WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. 


904  4.  Partnership — Objection  to  Method  of  Determining  Invested 

Capital. 

A partnership  which  had  invested  capital  more  than  nominal  in  amount 
cannot  complain  of  regulations  promulgated  or  of  the  method  employed  in 
determining  the  amount  of  such  capital,  where  the  arbitrary  or  supposi- 
titious invested  capital  fixed  upon  was  larger  in  amount  than  the  invested 
capital  actually  possessed  and  employed,  and  the  taxes  imposed  were  corre- 
spondingly diminished. 

905  5.  Partnership — Brokers. 

Members  of  a partnership  who  are  paid  neither  a salary  nor  com- 
missions for  their  services,  but  who  buy  and  sell  lumber  and  undertake  and 
assume  all  the  risks  and  enjoy  all  the  benefits  of  a merchandising  business, 
employing  a large  amount  of  capital,  are  not  brokers. 

906  6.  Partnership — Property  pledged  as  Collateral  Security  as  Part 
of  Invested  Capital. 

Property  of  member  of  partnership  deposited  with  bank  and  pledged  as 
collateral  security  for  the  repayment  of  a loan  by  or  for  the  benefit  of  the 
partnership  in  pursuance  of  the  articles  of  partnership  is  part  of  the  invested 
capital  of  such  partnership. 

DISTRICT  COURT  OF  THE  UNITED  STATES  FOR  THE  WESTERN 
DISTRICT  OF  MICHIGAN,  SOUTHERN  DIVISION. 

CHARLES  E.  CARTIER  and  EDWARD  M.  HOLLAND,  Co-partners, 
doing  business  under  the  firm  name  and  style  of  CARTIER-HOLLAND 
LUMBER  COMPANY,  Plaintiffs, 

vs. 

EAIANUEL  J.  DOYLE,  Collector,  Defendant. 

907  SISSONS,  District  Judge:  Cartier-FIolland  Lumber  Company  is 
a partnership  composed  of  Charles  E.  Cartier  and  Edward  M.  Holland 

engaged  in  the  business  of  buying,  selling  and  dealing  in  timber,  lumber  and 
other  forest  products.  The  net  income  or  profits  of  the  firm  during  the  tax- 
able year^  1917  amounted  to  $47,018.00.  Of  this  sum,  $20,353.00  resulted 
from  an  isolated  sale  of  timbered  land  and  the  balance  from  the  regular 
or  customary  lumber  business  of  the  partnership.  The  Company  has  never 
owned  any  lands,  timber,  plant,  mill  or  yard  and  has  never  done  any  manu- 
facturing or  carried  any  stock  of  manufactured  lumber.  Its  principal  business 
consisted  of  buying  lumber  from  manufacturers  and  reselling  the  same  to 
its  own  customers.  The  business  was  conducted  by  the  partners  personally 
with  the  assistance  of  a small  clerical  office  force,  one  bookkeeper  and  two 
stenographers.  Since  its  organization  in  1912,  the  firm  has  at  all  times 
been  a heavy  borrovv^er  of  money.  According  to  its  books,  on  January  1, 
1917,  the  Company’s  indebtedness  to  banks  for  borrowed  money  was  the 
sum  of  $36,300.00,  and  its  other  indebtedness,  presumably  for  lumber  pur- 
chased, amounted  to  $12,309.22,  making  a total  indebtedness  of  $48,609.22; 
its  accounts  and  bills  receivable,  probably  representing  lumber  sold,  aggre- 
gated $39,281.72,  and  its  other  assets,  including  petty  cash,  office  furniture, 
insurance  paid,  and  cash  in  bank,  amounted  to  the  sum  of  $2,108.65,  making 
a total  of  assets  of  $41,390.37.  In  other  words,  at  the  beginning  of  the 
taxable  year,  the  liabilities  of  the  firm  exceeded  its  assets  by  the  sum  of 
$7,218.85.  The  account  of  each  member  of  the  firm  was  then  several  thousand 
dollap  overdrawn.  At  the  end  of  the  year  1917,  the  firm  assets  exceeded  its 
liabilities  by  nearly  $14,000.00,  which  consisted  entirely  of  profits  made 
during  the  taxable  year. 


WAR 


316 


TAX 


10-23-20. 


WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. 

908  Plaintiff^s  articles  of  agreement  of  co-partnership  contained  the 
following  provision: 

“The  paid-in  capital  of  the  partnership  is  to  be  Thirty  Thousand 
^-"'($30,000.00)'  Dollars,  any  or  all  portion  of  which  amount  is  to  be 
furnished  to  the  partnership  by  above  named  Charles  E.  Cartier  as 
the  requirements  of  the  partnership  appear;  and  upon  the  note  or 
notes  of  such  partnership;  such  note  or  notes  not  to  be  made  trans- 
ferable nor  made  items  of  record.  Such  notes  are  to  be  paid  at  the 
earliest  practicable  opportunity  out  of  the  net  earnings  of  the  part- 
nership business,  and  to  bear  legal  rate  of  interest.” 

909  For  a time,  in  carrying  out  this  provision  of  the  partnership  agree- 
ment, plaintiff  Cartier  borrowed  money  from  the  banks  upon  his 

own  note  secured  by  collateral  and  furnished  the  same  to  the  Company. 
Later  and  probably  before  January  1,  1917,  the-  agreement  was  modified 
and  working  capital  was  obtained  by  borrowing  money  from  banks  upon 
firm  notes,  indorsed  by  both  members  of  the  firm  and  secured  by  collateral 
furnished  by  Cartier,  the  property  so  pledged  as  collateral  security  in  all 
cases  and  at  all  times  being  of  greater  value  than  the  face  of  the  notes.  This 
method  was  pursued  during  the  entire  year  1917. 

910  Plaintiffs,  as  co-partners,  made  due  return  of  net  income  of  $47,018.00 
for  the  year  1917  and  voluntarily  paid  an  excess  profits  tax,  computed 

at  8%  in  accordance  with  the  provisions  of  Sec.  209  of  Title  II  of  the  Act 
of  October  3,  1917,  and  amounting  to  $3,761.44.  Apparently,  their  right  to 
a deduction  of  $6,000.00  from  the  income  before  computing  the  tax  was  in- 
advertently overlooked.  Thereafter  the  Commissioner  of  Internal  Revenue, 
claiming  that  plaintiffs  were  not  entitled  to  the  benefit  of  the  provisions 
of  Section  209  of  the  Act  of  October  3,  1917,  but  were  taxable  under  the 
provisions  of  Section  201  and  210  of  that  Act,  assessed  against  them  an  addi- 
tional excess  profits  tax  for  1917  amounting  to  $9,027.46.  Plaintiffs  paid  the 
additional  tax  under  protest  and  have  brought  this  suit  for  its  recovery. 

9 1 1 The  conclusions  reached  upon  questions  of  law  involved  in  this  case 
may  be  thus  summarized: 

912  1.  Plaintiff"s  contention  that,  in  the  assessment  of  excess  profits 
taxes,  the  income  derived  from  the  single  timber-land  deal  amounting 

to  the  sum  of  $20,353.00  must  be  considered  and  treated  by  itself  and  separate 
and  apart  from  other  partnership  income  or  profits  is  negatived,  in  express 
terms,  by  the  statute  hereunder  consideration. 

“For  the  purpose  of  this  title  every  corporation  or  partnership 
not  exempt  under  the  provisions  of  this  section  shall  be  deemed  to 
be  engaged  in  business,  and  all  the  trades  and  businesses  in  which 
it  is  engaged  shall  be  treated  as  a single  trade  or  business,  and  all  its 
income  from  whatever  source  derived  shall  be  deemed  to  be  received 
from  such  trade  or  business.” 

Confessedly  the  company’s  principal  business  was  dealing  in  lumber  and, 
under  this  statute,  its  entire  income  must  be  attributed  to  that  business. 

913  2.  If,  during  the  year  1917,  Carticr-Holland  Lumber  Company  had 
invested  capital,  within  the  purview  and  meaning  of  that  term  as 

employed  in  the  statute,  more  than  nominal  in  amount,  excess  profits  taxes 
upon  its  income  could  not  be  assessed  under  the  provisions  of  Sec.  209  of 
the  statute,  and,  if  the  amount  of  such  invested  capital  could  not  be  satis- 
factorily determined,  excess  profits  taxes  must  have  been  assessed  under 
Secs.  201  and  210  in  accordance  with  proper  regulations  prescribed  by  the 
Commissioner  of  Internal  Revenue.  If  the  Lumber  Company  had  invested 
capital  more  than  nominal  in  amount,  plaintiffs  are  not  in  a position  to 
complain  of  the  regulations  promulgated  or  of  thehnethod  employed  in  deter- 

WAR  317  TAX 


WAR-PR OFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. 

mining  the  amount  of  the  firm’s  invested  capital  which  forms  the  basis  of  the 

computation  of  the  taxes,  because,  under  the  undisputed  evidence,  the 
arbitrary  or  supposititious  invested  capital  fixed  upon  was  larger  in  amount 
than  the  invested  capital  actually  possessed  and  employed  and  the  taxes 
imposed  were  correspondingly  diminished.  These  taxes  are  assessed  upon 
percentages  of  income  to  invested  capital.  The  larger  the  capital  the  smaller 
the  percentage  and  resulting  tax. 

914  3.  Plaintiffs  are  not  brokers  within  any  accepted  definition  of  that 
term.  They  are  paid  neither  a salary  nor  commissions  for  their 

services.  They  buy  and  sell  lumber  and  undertake  and  asstime  all  the  risks 
and  enjoy  all  the  benefits  of  a merchandising  business.  They  employ  a 
large  amount  of  capital;  their  income  is  dependent  upon  their  personal 
services  and  efforts  only  in  the  same  way  and  to  the  same  extent  that  the 
farmer  who  works  his  own  farm  or  the  merchant  who  conducts  his  own  store 
derives  his  income  from  his  individual  endeavors. 

915  4.  The  rights  of  these  parties  cannot  be  made  to  depend  upon  non- 
statutory  classifications,  regulations,  or  definitions.  The  statute 

applies  to  all  trades  and  businesses  without  regard  to  their  class  or  character. 
While,  in  doubtful  cases,  Departmental  regulations  may  be  an  aid  in  construc- 
tion and  interpretation,  they  can  neither  add  to  nor  subtract  from^  plain 
Congressional  enactments.  In  this  instance,  differences  in  the  meaning  of 
the  terms  “invested  capital”  and  “capital”  are  wholly  immaterial.  If  Cartier- 
Holland  Lumber  Company  had  any  invested  capital,  it  was  substantial 
and  not  merelv  nominal  and  plaintiffs  must  fail.  On  the  other  hand,  if  the 
Company  had  no  invested  capital,  plaintiffs  are  entitled  to  recover,  regardless 
of  the  amount  of  its  borrowed  or  other  non-invested  capital. 

916  That  the  partnership  was  doing  business  upon  borrowed  money  is 
beyond  dispute  and  that  invested  capital  does  not  include  borrowed 

money  is  settled  by  the  express  terms  of  the  statute,  but  it  by  no  means 
follows  that  plaintiffs  are  right  in  their  contentions.  The  term  invested 
capital”  as  here  used  includes  all  v^orking  capital  consisting  of  money^  or 
property  employed  in  the  business  or  for  its  benefit  and  furnished  or  paid-in 
by  one  or  more  of  the  partners.  Applying  this  test,  it  is  clear  that  this  part- 
nership had  invested  capital  within  the  purview  and  meaning  of  the  statute. 
In  the  determination  of  this  question,  money  borrowed  from  banks  or 
viduals  other  than  members  of  the  firm  and  solely  upon  the  credit  of  the  firm 
must  be  excluded  and  may  not  be  considered;  and,  for  the  purpose  of  this 
decision,  it  is  unnecessary  to  determine  whether,  as  claimed  by  counsel  for 
defendant,  money  borrowed  upon  the  notes  of  the  firm,  indorsed  by  the 
individual  partners,  and  largely,  if  not  wholly,  upon  the  credit  of  the  latter, 
is  to  be  deemed  invested  capital  of  the  partnership.  If  the  original  partne^ 
ship  agreement  had  been  carried  out  and  performed,  it  "would  not  be  claimed 
that  the  moneys  paid  in  and  furnished  by  plaintiff  Cartier  in  accordance 
with  its  term  would  not  constitute  invested  capital  of  the  firm,  without 
regard  to  the  manner  in  which  or  the  source  from  which  such  moneys  were 
obtained  by  him.  The  method  or  plan  adopted  and  used  in  1917  was  a charige 
in  form  rather  than  in  substance.  The  evidence  shows  conclusively  that,  for 
every  dollar  of  money  borrowed  from  the  bank,  property  of  one  of  the  members 
of  this  firm,  exceeding  in  value  the  amount  of  the  loans,  was  deposited  with 
the  bank  and  pledged  as  collateral  security  for  the  repayment  of  such  borrowed 
money.  The  property  so  furnished  and  pledged  become  a part  of  the  working 
capital  and  was  used  and  employed  in  the  business  of  the  Company  to  the 
same  extent  as  if  it  had  been  paid  directly  into  the  firm  treasury. 

917  ludgment  will  be  entered  for  defendant  with  costs  of  suit  to  be  taxed. 

(Decision  appended  to  and  made  a part  of  1 . D.  3080,  •iOOO.) 

WAR  318  TAX 


10-22-20. 

RUNNING  TABLE  OF  CONTENTS— EXCESS  PROFITS  TAX. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

War-Profits  and  Excess-Profits  Tax  Provisions  of  the  Revenue  Act  of  1918. 

(The  Law  appears  at  paragraphs  500  to  595.) 

Giving  Treasury  Decision  Number  or  other  Designation,  Date  of  Issue,  and 
General  Subject  Content. 

Paragraph 
No. 


T.  D. 

No. 


Date 


Special 

Dec. 

9, 

1919 

Special 

D-c. 

17, 

Special 

Jan. 

12, 

1920 

3017/ 

May 

3. 

Law 

June 

5, 

3051 

July 

27, 

a 

3080 

Oct. 

19, 

a 

Subject 

Consult  the  pink  page  facing  page  301. 

The  following  matters  are  unindexed  temporarily. 

Original  issue  of  stock  sold  at  par  on  commission 

in  relation  to  invested  capital 870 

An  example  of  what  is  not  a government  contract 
Determination  of  first  installment  of  tax  in  the 

case  of  a foreign  corporation 

War  Excess  Profits  Tax  (Act  of  1917) 879 

Special  deduction  allowed  and  exemption  granted 
to  owners  of  certain  vessels  documented  under 

the  laws  of  the  United  States 

Decision  of  Court — Revenue  Act  of  1917 892 

Decision  of  Court— Revenue  Act  of  1917 — ’Part- 
nerships  900 


874 


877 


890 


Insert  this  page  immediately  before  the  blue  Excess-Profits  Tax  Index. 


Ercess- Profits  Tax.— War  Tax  Service. 
Supplementary  Page  1. 


t' 

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f 


Corparation  ®ntst  Olaittiiattg 

SERVICE  DEPARTMENT 

3T  W^LJL  STXiEET  XJEW  "VORK 


FEDERAL  INCOME  TAX  SERVICE 


/ 


-REPORT  1^.  47- 
OCTOBER  i,  1920. 

Enclosed  herewith  ar^ pages  557  to  56^  of  the 
Service.  Page  557-558  ^ow  in  your  hinder  should  bi 
removed . 

Also  enclosed,  fhr  substitution,  are  Supplemen- 
tary Pages  107j-108/and  115 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


■ , •»  ■';,  =r^  W .aK/y 


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SERVICE  DEPARTMENT 

3t  WAIJj  STUEKT  .NKW  -i'ORK 


FEDERAL  INCOME  TAX  SERVICE 


-REPORT  NO.  46- 
SEPTEMBER  23,  1^20. 

Enclosed  herewith  are  pa§^'s  551  to  558,  both  i 
elusive.  Page  551  now  in  Service  should  be  re 
moved . f 

Also  enclosed  are  Su^lementary  Pages  113-114, 
and  115,  for  substibuti^  for  Supplementary  Page 
113.  / 

\ y * * * 


Digest  No.  10  of  Income  Tax  Rulings. 


Digest  No.  10  (June,  1920),  just  off  the  Govern- 
ment presses,  has  gone  forward,  on  our  order,  to  the 
subscribers  to  the  Service.  This  digest  together 
with  Bulletins  27  to  37  of  the  1920  Series,  both  in- 
clusive (No.  37,  is  the  current  weekly  Bulletin), 
cover  all  rulings,  not  revoked  or  superseded,  issued 
in  Bulletin  form  since  the  inception  of  the  Bulletin 
system.  Therefore  the  Cumulative  Bulletin  for  1919, 
all  prior  digests,  and  Bulletins  1 to  26,  both  in- 
clusive, of  the  1920  Series,  may  be  placed  aside. 
These  should  not  be  destroyed  however  but  should  bo 
retained  for  reference  purposes  should  occasion  de- 
mand . 


Very  truly  yours , 

THE  CORPORATION  TRUST  COMPANY. 


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V ^91  9cf  bXjjorfa  eoivTaa  nx  won  les  ©afi^  .©vxa^Io 
V ' ^ . bevom 

,Mi~CXX  eeajsa  v:ifi.tn9ai8Xciaija  ©ifi  beaoXon©  oalA 
9Sf<a  yifiJ-neraeXqqixa  nol  ^i:J'x;|fxtacfxr8  nol  ,aXX  bnjB 


.asnxIuH  xjsT  ©nio^nl  ^1o  01  .oH  craegia 

-mevoD  eri^t  llo  ^ant  , (OSeX  , ©nxxL ) OX  .oH  d-aegxa 
sdJ’  oJ"  fTsbio  nuo  no  , fa'iBW'iol  snog  afirf  ^aasaenq  .tnein 
narfjsgo^  ^sagxb  axilT  .soivnsa  ©rl^  oct  a'ledx'ioacfua 
-.nx  il^ocf  ,«8Xi9a  OSeX  ©flJ  *10  VS.  oct  VS  anxJ-sXXna  rf.txw, 
.(nUeXXua  ^(X>f99w  ^nsnno  ©rfcf  ax  ,VS  .oH)  ©viaaXo 
bauaax  .bsbsa'ieqna  no  b0>(ov9i  d'on  .agnxXm  XXjs  i§voo 
nx^oXXaa  ed'^  lo  nox^qeonx  9x1^  eonxa  nnol  nx^teXXua  ni 
,9XeX  noTt  nxJ-sXXxra  avi^BXnnujO  sxlJ-  snoleierlT  .meJ-a^e 
-ni  rf^oi  ,as  oj-  X aniJeXXxra  bn£  ^a^asgxb  noinq  XX£ 
,9bx8«  bsoislq  9cf  \;£in  ^aexnea  OSGX  erf^  *^0  .eviax/Xo. 
ocf  bXuorfa  ^x/cf  n9V8woff  be\£on^e9b  eb  ^on  bXnorfe  ©aerlT 
-si.  noxa^DOO  bXxjoria  aoaoqnnq"  eonenolon  no*!  benx^^en 

---  .bnBOi 


'll 


,tnaoY  '^XmJ'  ^^^eV 
.YHA^IMOO  TaUflT  HOlTAHO^flOO  SHT 


V 


(Jorpnrattim  ®nisf  (E 


X 


ms 


SERVICE  DEPARTMENT 

37  WA.1JL  HTHtKBT  TXMW  ^'OltK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  45- 

SEPTEMBE^  8,  1920. 

/ 

/ 

Enclosed  herewith  is ^/|>age  551  showing  new 
matter.  Also  enclosec^  for  substitution  are  Sup- 
pi  ementary  Pages  ial3~114 . 

^ / Yours  very  truly, 


TH3  CORPORATION  TRUST  COMPANY. 


gnBtpimJD  tain®  irnttBinifin®  i(i® 


r\A3MT9\A^3Q  3DIVf*3a 


JUrOTT  THHMTM  .ULJ>:^  rs 


3DIV9I38  XAT  3MODMI  JAnBQBl 

- .;  ' ■ . f"  > ' 

V ."V  ; .OM  THO^afl- 


I 


.osGX  ,0  HaaMaT'iaa 

wsn  grtiwode  X6S  si  ri^iweieri  bssoXona 


.^a 


•quS  fioiiiuJ-ictBcfuB  lol  ).p9aoXon9  oaXA  .le^^ain 

: ..^XX~CxK 'ssa^a  \;'iaj’n9fli9  **Xq  ■ 


\ 


icjav  aiuoY  \ 


YWA^uoD  Tsuar  HotTAfloaaoo  bht 


: : i 

. \ 


QInrporation  ©rust  €mnpattg 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  44-  / 

SEPTEMBER  3,  1920.  / 

Enclosed  herewith  are  new  pages  ^49-550  and,  for 
substitution,  revised  Supplenknta^  Page  113. 

Yours  very /truly, 

THE  CORPORATIoM’BUST  COMPAKY, 


l8wi4)  rmitBini^inlD 


TH3MT«A<=53a  30IVn3a 


jiHO'r  wa'^  TaaMT#?  .i^iaw  re 

vi^i- 


3DIVSI38  XAT  BMODkIl  JASIBaSl 

.OW  THOiafl- 

.osei  ,5  flaaMaraaa 

iol  ,6n«  026-6^^  aesaq  wen  eis  rfJiweneri  beaolona 

= - , \ 

.5X1  egsa  ^fiJ-na^eXqqua  beeivei  .noiJ'uii^acXi/a 

.xXuiAri^v  aiuoY 

\ U 

.yuA'JMoo  TauaT  woiTAsoaHoo  eht 


(Jorporatton  Q^mst  Cnmpang 


SERVICE  DEPARTMENT 


3T  WALI^  STREET  NEW  YORK 


FEDERAL  INCOi'WIE  TAX  SEIWICE 

-HBPORT  HO.  43-  y 

AUGUST  30,  1920. 

Enolosed  herewith  are  page®  547-548  for  siahstitution 
new  matter  heginning  at  q 2894. 

Also  enclosed  is  Supplementary  Page  113  f^r  euh- 
etitution.  / 

Very  truly  yours, 

THE  CORPORATIOH  TRUST  COMPANY. 


nnjxnatj'ioID 

TH3lvi;THA‘R3a  30!VH3a 

Hi!  yrHv.  TaaHT^  rv. 


301V5I33  XAT  mnOOm 
-Cl'  .OH  TH09aa- 
.osei  ,oe  Tauo'JA 

,nold'i;d’14'Qcft;3  io1  8I'3-V^2  aegjsq  gib  rf^lwaieri  beaolona 


.l^esa  p Jb  gninnlsecf  wen 

-tfua  lol.  CXI  egeg  \;iBXnefiieIqq);;3  al  baaolona  oalA 


.aiwoY  Y-IU’iJ  YteV 


.nolJi/*lJa 


.YHAaMOO  TaUHT  HOITAHO'MOO  SHT 


Ebe  dnrpnrattoit  ®ru0t  (Enmpanij 

SERVICE  DEPARTMENT 

ar  AS'AI.IL,  STREET  NEW  YORK 


FEDERAL  INCOME  TAJC  SERVICE 

-BEPOBT  NO.  42- 
AUGUST  27,  1920. 


Encloeed  herewith  are  pages  547^8  for  insertion 

reproducing  new  matter.  x/ 


Also  enclosed  is  Supplementary  Page  113  for  sub- 


etitution. 


Very  truly  yours, 


TES  COKPOEATIOH  THUST  COMPAHY. 


|iriiji;mnli)  tmn©  rfrjjtJ3iftt|itiID  'Jt!® 


TH3MTf1Aq3Crj3DIVfiaa 


HHO  A TaHMTH  »IvlAV^  TV. 


Si 


’ \ :j»' tr-  - - 


TO 

mv 


a 

($ 


aO!¥S53®  XAT  3MOOMI  JAfl3^3^ 

-s*  .oM  THonaa-  ,.,  j 

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'■  -li 


.noi^ioenl  tol  8H-V^e  .»fS«I  ditvoi^d  boaolona 


-lol  SIX  888<I  rJfi-^nemoXqqua  ex  ^efoXona  paU 


-dua 


:':'D0i.?3ar'3''O?‘;i  A / : •■  f 


,a*:uo^  ciaV  " 

.YMAWOO  TSUST  HOIT/kSO^OO  SHT 


h j { 

noX,tu^i;t8 


9, 


.YKA^'Ori  SD,J'* 

m'i.K 


/ 


,■:  iA  ' 


Cnrpnraftnn  ®r«at  Company 

SERVICE  DEPARTMENT 

3T  ^VALl,  STREET  NEW  YORK 


FEDEK/iL  IWCOME  T/UiL  SEE¥i 

-EEPOBT  NO.  41- 
AUGUST  19,  1920. 

Enclosed  herewith  are  pages  545-546  for  insertion, 


reproducing  new  matter. 

Also  enclosed  is  Supplementary  Page  113  for  sul3- 

etitution.  ^ 


Very  truly  yours, 

TKS  COEPOEATIOH  THUST  COMPAifl, 


M' 


txrtciimtilD  isjnIS  jioitBtniitalD  ^tllD 


TH3MTflAq3a  30IV5=l3e 

>iHOY  Y/avr  TaaH'j«  ji^iav/  t« 


Jl: 


3DBV20a  XAT  JAStaO^’^l  ■ " 

- ' " ■ > 


.OH 

"'■  '?.V...T 


m 


.o&ci  ,ex  ‘raoouA 

.^.notJioeai  lol  di-a-ei^a  aea/q  sto  ri^iwsiori  bBeoIoni 

.’iBj'J'Boi  wen  ;QntosjbO’iqei 


-cfi/a  lol  SIX  egfi*!  ^'iB^nemelqqna  el  beeoXone  osIA  ^ 


s. 


« 


'-i 

.nol^u^i^a 


^Xu“i^  \.*X0V 

■ .YHAMOD  TaUHT  HOITASIO^OO  SHT 


■e-v.A 


©lye  Olnrporatton  ®nt0t  Company 

SERVICE  DEPARTMENT 

ar  WAUL.  STREET  WEM^  YORK 


I'ECEKAL'  i'l’tiCOf4E£  ‘‘I'AIC  £IER¥SCE 

-HEJPOM  m.  40- 
AUGUST  16,  1920. 

Enclosad  herewith  are  pages  543-544  and  Supple. 

mentary  Page  113.  s/ 

Similarly  numbered  pages  now  in  your  binder 
should  be  removed. 


Very  truly  yours, 

THE  COHPOEATIOH  THUST  COMPANY. 


i 

tamS  rtnrtBiut^inlD 


TH3MT«A<R3a  30IV«3a 


WHO’r  V/MVr  T5£aJIT8  ..ILIAV/  T8 


■l-Mt 


iOaVHSS  XAT  3'N10i>Vll  JAS13a3'=l 


§ 


F'fl 


./i 


' V. ' 


-o^  .OH  Tfio^aa- 
.oaex  ,ai  TauDUA 


9l(iqua  fcns  i>^3-5f'3  eescq  sif?  dJlwaiod  beaoXona 

V '.6Xi  03b5  ’Cifijaem 


r -r  • 


lebnid  -Ufov;  kX  won  aasaq  i>ei$dmiin  nXiBXXmxa 

m .fcGVOmei  ecfj^bXuoaB 

- \yS% 

.a^^0Y,  Xii5i.it  XioV 
.yilA^MOO  TSUST  KOITAHO^HOD  MT 


1 '•■ 


^ ■ . -Vr 


©nrporatfnn 

SERViCE  DEPARTMENT 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  39- 
AUGUST  13,  1920. 

Enclosed  herewith  are  pages  designated  as 
foil owe : 

Pages  537  to  544 
Sup.  Pages  107-108  \/‘/ 

Sup.  Page  113  y/ 

Page  537  and  Supplementary  Pages  107-108  and 
113,  now  in  your  tiinder  should  he  romoved. 

Very  truly  yours, 

THE  CORPOHATION  TRUST  COMPANY. 


gnutpttalD  tamS  noftBinijinlD 

■-’  ■ . .;  ..  ':;  .;a- 

TH3MT5^Aq3a  3DIVf!38 


HaOT  W31X  'rWIH«TH  TB 


30IVfi33  XAT  3MOOm  JAS13a33 


«r 


-G5  .OH  THO^aa- 
.0S9I  T3UDUA 


; .r - 


8J5  £)9ct'Bnai:895  eiB  rfd'iwsTeri  beaoXqna 

:awoIIol 

N>  f.f>e  oJ  rse  eesBl 

''  V 80I-roX  eeasa  ,qsj3 

\ SXX  sgsa  .qua 


bnfi  80X-y0X  asa^q  xil^cr-fiQmelqqua  bci&  VS5  asjsq 

.bevomoT  ecf  bXuorfa  Tsbnicf  ^uoy;  ni  won  ,SXX 


,a*iuo^  >cXu't.t  vrieV 
.YPiA^MOO  TSUflT  HOITAROaflOO  SHT 


5' 


f ■ 


< . ii 


I 


•I 


I 


Olorpnrattnn  ©ruat  Cnmpang 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVi^^E 

-REPORT  NO.  38- 
AUGUST  6,  1920. 


Enclosed  herewith  are  pages  designated  as  follows: 
Page  537-  - For  insertion.  \/ 

Sup.  Page  113  - Revised,  for  substitution^ 


Very  truly  youre, 

THE  CORPORATION  TRUST  COMPANY. 


linctimnlD  JainlD 


TH3MTf^Aq3a  3DIVq38 

A Sta  r y/ziy:  tmmhth  tk 


3^W«38  X^t  SMODMI  JASiaOBl 

-85  .OM  THoqaH- 
■osei  ,3  T3U0UA  . ; 

awoIXc'l  a£  b^^fiaaiEiet)  eeg^q  aijs  Atiwa^ed  beeolona 
V .noxJiaenx  loU  - -^£3 

naxJxrj-xJatfua  lol  .beei^sH  - £xx  ag^q  .qua 
,a-ii;oY  Y^sV 

.yMAquoo  iguax  moitahoshoo  hht 


I 


Cnrporatinn  ©mat  Olompattg 

’ ■ . \ 

SERVICE  DEPARTMENT 

S’?  M’A.UL  .STKKKT  new  N'ORIv 

FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  37- 
AUGUST  2,  1920. 

The  pages  listed  below  and  enclosed  herewith  are 
to  be  substituted  for  the  similarly  designated  pages 
now  in  your  binder. 

Pink  sheet  to  face  page  520,'/ 

Pages  533-534  - Reprinted  to  change  style  of  set-/ 

up  at  bottom  of  paragraph  2829.  v , 
Pages  535-536  - New  matter  beginning  at  paragraph  J 

j 2835 . 

Sup.  Page  113  - Revised.  J 

Very  truly  yours , 

THE  CORPORATION  TRUST  COMPANY. 


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1 


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Qlorporaltnn  ^rmt  OInmpang 

SERVICE  DEPARTMENT 


3T  WALL.  STREET  NEW  YORK 


-HEPOHT  iro.  36- 


JOLY  £8,  1920. 


Enclosed  herewith  are  pages  539  to  535. 
Page  5£9  now  in  ^J^our  binder  shonld  be  reraoved. 


Also  enclosed,  for  snbstitut ion,  are  Supple 
mentary  Pages  lll-112,j  and  113.  ^ 

With  the  next  report  will  go  forward  a 
revised  pink  page  reprinted  for  the  purpose 
merely  of  showing  the  shift  of  Supplementary 
Page  113  to  Supplementary  Page  112. 

Committee  on  Review  and  Appeal  Recesses. 

The  Committee  on  Review  and  Appeal  (see 
paragraph  2224)  will  not  be  in  session  during 
the  month  of  August. 


Very  truly  yoin's 


THE  COHPOHATIOH  TliUGT  CCIdPAHY. 




Vv'  y-"v>  ^ •■ 


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saoq-iug  odd-  toI  ' as^g  jfftxg  Baa'lvsT 

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Snx'Ufjb  goxaSoa  xti  scf  Xcn  IXxw  (X^SSS  dq^'i^s'iBq 

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rV-  .^.‘i 


A 

OInrporatfDn  ©ruBt  (Eompat^ 

SERVICE  DEPARTMENT 

3T  WALL  JSTKKHT  XKM'  YO«K 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  35- 
JULY  15,  1920. 

Enclosed  herewith,  for  substitution,  are  pages 
307-308,  reprinted  to  correct  the  first  line  of  ^ 
paragraph  1724  by  substituting  for  the  word  “re-  ^ 
ceived“  where  it  first  appears,  the  word  “returned" 

Also  enclosed  are  new  pages  523  to  529,  and,  fo 
substitution,  revised  Supplementary  Page  113. 

Very  truly  yours. 


THE  CORPORATION  TRUST  COMPANY. 


* ' ' - ^ - iium  ^■ll«fl'll  HIM  ' -' ■'■-iiiiiiii  ■ lll-M■■lV^i  l■ll^■iin>.l.l>*■l  iVwjMiMiipAh^iii^Pj!Wii»i»i<i^  .rnriiji  ijniiwiiui 

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OInrpnratton  ®ruat  dnmpang 

SERVICE  DEPARTMENT 

ST  WALt.  STREKT  NEW  YORK 


FEDERAL  INCOIV^E  TAX  SERVICE 

-REPORT  NO.  34- 
JULY  8,  1920. 


Enclosed  herewith  are  pages  numbered  as  follows: 

521-522  (for  substitution  for  page  521).  \/ 

Supplementary  Page  107-108  (revised  for  substitu- 


Supplementary  Page  113  (revised  for  subst 

Very  truly  yours, 


tion).  / 
i tut  ion) 


THE  CORPORATION  TRUST  COMPANY. 


ifVr  '' 


'*0  i 


f , V j gniittmoID  tsmS  f - 


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oily?  Corporation  Croat  Companp 

SERVICE  DEPARTMENT 

8T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 
-REPORT  NO.  33- 
JULY  1,  1920. 

Enclosed  herewith  are  pages  designated  as  follows; 

Pink  Page  to  face  page  520.  (The  Pink  Page  now  in 
your  hinder  facing  page  446  should  he  removed.)  v 

Supplementary  Pages  103  to  106.  (For  substitution: 
these  pages  are  reprinted  to  show  the  list  of  "Collec- 
tion Districts  and  Collectors  as  officially  "corrected 
to  July  1,  1920".  Note  particularly  North  and  South  v 
Dakota,  Texas  and  Virginia.) 

Supplementary  Pages  109-110  and  113.  (For  sutsti-  > 
tution:  reprinted  to  bring  in  adjustment  with  the  new  v/. 
Pink  Page  and  revised  index. 

Index  Pages  1 to  40.  (For  substitution  for  the  blue  ^ 
index  pages  now  in  the  binder.) 

Very  truly  yours , 

THE  CORPORATION  TRUST  COMPANY. 


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®l|e  (lorpatatinn  ajrufit  (Eompaug 


SERVICE  DEPARTMENT 


3T  WALL  »TR*ET  NKW  YORK 


federal  income  Ti%X  SE!1¥ICI 

-BEPOHT  HO.  32- 


JUHB  25,  1920. 


y 


Bncloeed  herewith  is  new  page  521  and,  for  suhsti- 
tution,  Finder  Pages  1 to  6 to  be  inserted  immediately 
following  the  yellow  index  guide  card  marked  "Reg.  45, 
Rev.  - T.  D.  Finder"  in  place  of  the  similarly  numb 
pages  now  there. 


REVISBD  IHDEX. 


A reprint  of  the  index  to  the  Service,  revised  to 
include  all  matters  issued  up  to  tho  present  time  will 
be  sent  to  subscribers  next  week. 


Very  truly  yours, 


THE  COFiPORATIOH  TRUST  COHPAHY. 


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©orpnratiott  SInial  filnmpattg 

SERVICE  DEPARTMENT 

ST  ITAULi  »TRBET  NBVr  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  31- 
JUNE  15,  1920. 


Enclosed  herewith  are  pages  519-520  and,  for 


substitution.  Supplementary  Pages  107-108  and  113 

Very  truly  yours. 


,M\ 


THE  CORPORATION  TRUST  COMPANY. 


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®I|r  (Enrpnration  OIniHt  CHompang 

SERVICE  DEPARTMENT 

3T  rnTtUEMT  JfMW  TOUC 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  28- 
JUNE  7,  1920. 

Enclosed  herewith  are  pages  505-506,  for  suhsti-^ 
tution  for  page  505  now  in  your  hinder;  and  revised 
Supplementary  Page  111,  for  substitution. 

LEGISLATION. 

No  tills  amending  the  Revenue  Act  of  1918  or  im- 
posing new  taxes  were  passed  hy  Congress  during  the 
session  just  ended.  This  Congress  reconvenes  in 
regular  session  on  December  6,  for  the  short  session 
ending  March  4,  1921.  The  tax  measures  pending  at 
the  time  of  adjournment  on  Saturday  will  retain 
their  then  status  on  the  reassembling  of  the  Con- 
gress in  December. 

H.  J.  Resolution  373  fixing  the  date  of  the  end 
of  the  war  for  certain  purposes  failed  to  receive 
the  approval  of  the  President  and  so  did  not  become 

law . 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY 


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YKAIWOO  T3UaT  tlOITAHC'IHOO  ZST 


SItyp  Olorporatinn  ©mat  CJompattg 

SERVICE  DEPARTMENT 

ST  WAUL.  STIU5ET  NEW  TTOItK. 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  29- 

f 

JUNE  10,  1920. 

Enclosed  herewith  are  pages  505  to  517  of  the 
Service.  Pages  505-506  now  in  your  hinder  should  he 
removed. 

Also  eneiosed,  for  substitution,  are  Supplement 
tary  Pages  107-108  and  111-112. 

SUPREME  COURT. 

The  Supreme  Court  has  adjourned  for  the  summer, 
not  to  meet  again  until  October . 

BULLETINS  OF  BUREAU  RULINGS. 

We  urge  that  your  mail-assorting  clerk  he  im- 
pressed with  the  value  of  these  Bulletins  to  you,  in 
order  that  their  delivery  to  you  may  he  assured,  and 
we  further  urge  that  the  Bulletin  file  he  kept  in- 
tact, as  duplicate  copies  are  not  easily  obtained. 

Very  truly  yours. 


THE  CORPORATION  TRUST  COMPANY- 


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©nrporattott  f rttat  dorapattg 

SERVICE  DEPARTMENT 

3T  WAXJL  STRJEST  NKVT  ITORS 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  HO.  27- 
JUNE  4,  1920. 

Enclossd  herewith  are  page  505  and  Supplementary 
Page  111,  the  latter  for  euhstitution . 

SALARIES  OF  FEDERAL  JUDGES,  On  Tuesday,  June  1, 
the  United  States  Supreme  Court  held  the  income  Tax 
Law  unconstitutional  to  the  extent  that  it  provided 
that  the  salaries  of  judges  of  the  United  States 
Courts  (and  of  the  President)  shall  he  included  hy 
them  in  gross  taxable  income.  The  opinion  will  he 
reproduced  for  the  Service  as  soon  as  available. 


CONGRESS  TO  ADJOURN.  Congress  adjourns  Saturday, 
June  5,  at  4 P.  M. , not  to  meet  sgain  until  December 
next  for  the  short  session  to  March  4,  1921,  unless 
called  in  special  session  by  the  President , 'which 
is  unlikely. 

END  OF  WAR  FOR  CERTAIN  PURPOSES.  H.  J.  Resolution 
373  declaring  that  certain  Acts  of  Congress,  joint 
resolutions,  and  proclamations  are  to  be  construed 
as  if  the  war  had  ended  and  the  present  or  existing 
emergency  expired,  has  passed  the  House  and  will  no 
doubt  be  passed  by  the  Senate  either  to-day  or  to- 
morrow. It  is  believed  the  President  will  approve 
this  measure  which  has  bearing  on  several  provisions 
of  the  Income  Tax  Law,  the  regulations  based  there- 
on, and  the  exemption  provisions  of  Liberty  Bonds. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY 


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.anuox  xlnn^  xneV ; 

yMA3MOO  T3UHT  H0ITAfl03H00  SHT 


Sly?  (Eorporatfott  ©mat 

SERVICE  DEPARTMENT 

3T  AV.^t,L  STMJB.ET  XKW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  26- 


MAY  21,  1920. 


Enclosed'  herewith  are  pages  501  to  504  for  sub- 
stitution for  page  501  now  in  your  binder.  Also 
enclosed,  for  substitution,  are  Supplementary  Pages 
107-108  and  111  revised  to  date. 


BULLETINS  OF  BUREAU  RULINGS. 

Owing  to  its  inability  to  secure  paper  in  suffi- 
cient quantity,  the  printing  of  Bulletins  Nos. 17, 

18,  and  19,  of  the  1920  Series,  by  the  Government 
for  general  distribution,  has  been  delayed.  These 
issues  are  now  being  forwarded  from  Washington. 

EXCISE  TAX  WITH  RESPECT  TO  STOCK  DIVIDENDS. 

The  Ways  and  Means  Committee  has  voted  favorably 
for  a yearly  excise  tax  on  corporations  equivalent 
to  $10  per  $100  of  face  value  of  stock  dividends  de- 
clared and  paid  during  the  previous  year,  suoh  tax 
in  the  first  instance  to  be  retroactive  to  March  15, 
1920  and  to  cover  the  period  from  that  date  to  June 
30,  1920. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY 


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OInr|ioratimt  Wmst  Compattg 

SERVICE  DEPARTMENT 

3T  WAii,  STREET  NEW  TORE 

FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  30- 
JUNE  11,  1920. 

Enclosed  herewith  are  pages  517-518  for  sub- 
stitution for  the  similarly  numbered  pages  now  in 
your  binder. 

Also  enclosed  is  Supplementary  Page  113  for  i 
sertion. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


tsmU  iraltBtng'ralJ) 

TuaMTiRAq^a  aotvnae 

sisitrr  war?;  T^scsiTa  oJLAVir 


3DIVS132  XAT  3MODMI  JAS]3a33 

-Oe  .OK  THO^HH- 

»osei  ,LL  awuL  ; ,! 

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nx  won  aegaq  bQ-tedmn  x.L't&Lzmzs  ed^  tol  noicrij,fiJ-e 
, .lobnicf 

— ■ • .1  ,',’.^y  .f 

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fBlJJOX  X'IBV 

/YP1A'5MOO  TaUflT  HOITAHO^HOO  aHT 


Corttoration  Evnst  01om)iatt|| 

SERVICE  DEPARTMENT 

ST  "VrJLUL  STBJeKT  NEW  'TOlUt 

FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  25- 
MAY  6,  1920. 

Enclosed  herewith  are  pages  331-332  (reprinted 
to  change  the  word  ’’when”  in  the  tenth  line  from  the 
top  of  page  331  to  the  word  "which");  pages  501-502 
(for  substitution,  new  matter  being  shown  at  para- 
graph 2694);  and  Supplementary  Page  111  (revised  for 
substitution) . 

Very  truly  yours , 

THE  CORPORATION  TRUST  COMPANY 


■f 


' V' ' 


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TMaMTflAqna  30IV513?  ^ 
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. -as  .on  THO^H- 

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arl^  mo'll  anil  rfinai  erfj-  ni  ”nedw”  b'low  erfj:  ©gn^o 
SOa-Ioa  sag^q  ;("rfoir{w”  5'iow  erfi  oS  ICC  es^q  lo  qo^ 
-fiifiq  nworfa  gnxacf  nacr^^ni  wan  ,nox4‘i;;ixlacIr;a  'xol) 
Tol  bSexva'n)-ilI  \;n£ixtamalqqi;2.  bnjs  ; (J^edS  rfqaig 

. (nox^xfj’xJ'sdi/e 

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. : . ypiASMOO  T8UOT  nOTTA5!oqHOO 

■ * ;/ 


OItjf?  Oliiriiorattctt  5^r«a^  01om)iattg 

SERVICE  DEPARTMENT 

Sir  STKJEET  NKW  VORK 


FEDERAL  IMCOME  TAX  SERVICE 

-REPORT  NO.  24- 
APRIL  29,  1920. 


Enclosed  herewith  are  pages  501-502  of  the 
Service,  showing  new  matter  beginning  with  para- 
graph 2691.  Also  enclosed,  for  substitution,  is 
Supplementary  Page  111. 


* * * 

BULLETINS  OF  BUREAU  RULINGS. 

Bulletin  No.  15  of  the  1920  series  has  gone 
forward  to  subscribers  from  Washington  as  has 
also  a Digest  of  Income  Tax  Rulings  1 to  761, 
inclusive . 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY 


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; • lav  oJ  I asnilua  xbT  emoonl  lo  ^aegia  £ obXa 

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Si. 


©lye  dorporatiott  OIruBt  dnmpattg 

SERVICE  DEPARTMENT 

or  ^'XIJL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  23- 
APRIL  27,  1920. 

Enclosed  herewith  are  pages  493  to  501  of  the 
Service,  showing  new  matter.  Also  enclosed  are 
Supplementary  Pages  l-£,  Zl-ZZ,  67-68,  107-108,  and 
111,  revised  for  substitution. 

Very  truly  yours , 


THE  CORPORATION  TRUST  COMPANY- 


h'  : ') 


THSMTJ^A^’ia  3DIVfl3a 

:a:KO*r  vmy:  rasTfiTJ^  jLi^yr  tr  / 


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aijEi  bsaolona  osXA"  w$n  sniworfa  ,90XvTa2 

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ymMOO  T8UHT  HOITAHOanOD  SHT 


5[t|e  (Enrjjnrattott  Sruat  Company 

SERVICE  department 

3T  WALL.  STREKT  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  22- 
APRIL  19,  1920. 

Enclosed  herewith  are  pages  numhered  as 
follows ; 

469-470  (To  correct  transposition  of  figures 
in  citation  in  eleventh  line  on  page  469.) 
491-492  (Showing  new  matter  on  page  492.) 
Supplementary  Pages  107  to  111  (Revised  for 

substitution, ) 

* * * 

BULLETIN  NO.  14  - 1920  SERIES. 

This  number  of  the  Bulletins  of  Bureau 
Rulings  was  mailed  to  subscribers  from  Washing- 
ton last  week. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


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(.SQ^  aa^' no  nad’^Bin  wQff‘ saxwodS)  SG^-xe^^ 
'lol  beexvaH)^  XXX  VOX  \1&in3aleiqqu^ 

( .nox4‘Xfvi“iJ‘8cfxra 


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• jfesw  XasI  noX 


,aiuo'c  'iluti  'C~i_eV 
.yHAHMOD  T8UHr  HOITA510H5100  SHT 


Olflrpotratinn  ®t«at  dompang 

SERVICE  DEPARTMENT 

3r  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  21- 
APRIL  14,  1920. 

Enclosed  herewith  are  pages/491-492  and  Sup- 
plementary Pages  11-^12  and  111  of  the  Service. 
All  similarly  niimhered  pages  now  in  your  hinder 
should  he  removed. 


* * * 

SALE  OF  PERSONAL  PROPERTY  ON 
INSTALLMENT  PLAN. 

Attention  of  suhscrihers  is  called  to  the 
Bureau  Ruling  (13-20-806)  at  the  top  of  page  11 
of  Bulletin  No.  13-20,  recently  mailed  from 
Washington. 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


iV- 


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Cfltpntation  ©rust  Company 

SERVICE  DEPARTMENT 

3T  STREET  NEW  YORK 

FEDERAL  INCOME  TAX  SER¥!CE 
-REPORT  NO.  20- 
MARGH  27,  1920. 

Enclosed  herewith  are  pages  nurahersd 
as  follows: 

489-490  - (page  490  shows  new  matter), 

491  ' ~ (new) 

Supplementary  Pages  101  to  104  (revised), 
Supplementary  Pages  107-108  (revised), 

and  / 

Supplementary  Page  111  (revised). 

fours  very  truly, 

THE  CORPORATION  TRUST  C01.IPANY. 


TH3MTSlA'=^2a  33|.:Vf53;a 

EScia.'ca;  m 


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.OSOI  'riOEAM 

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:S7.’Oll0'l  SB 

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('f/en)  - 19^^ 

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Mb 

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Y.'J9V  artuoY 

.YilA'IMOO  TBUHT  I-lOI'l'/JiOlHOO  [iilT  . 


Olorporatinn  SruBt  CHamtiattg 

SERVICE  DEPARTMENT 

3T'  WALL  STREET  NEW  YORK 

FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  19- 
!1ARCH  23,  1920. 


489  an 

revise 

revise 

"ypogr 

i*irst 

I igure 

the  19 


closed  herewith  a<he  pages  229-230  and 
d Supplementary;^ages  29  to  34 
d Form  1116)  /Aid  Supplementar:^>-Fage  111 


d. 


'age 


23jF  is  reprinted  tpAcorrect  a 
iphical  en^r  ( important  hrmveyer ) in  th^ 
-ine  of  z^ragraph  1357^/changing  the ^ 

8 to  y [ \t  appeared  3,  properly  i. 

L9  ^«^ice ) . 


THE  STOCK  OIVIEENJJ  DECISIOH. 

nothing  ot*ficial  has  come  from  the  Treasury 
Department  bearing  on  the  effect  and  scope  of 
the  Macomber  vs.  Eisner  decision  since  the  an- 
nouncement printed  at  paragraph  2644. 


COLLECTION  DISTRICTS. 

Nevada  has  been  tiiade  a separate  district, 
iViliiam  A.  Kelly,  Collector,  the  t'wc  Virginia 
I i s 1 1* i c to  a r e s o o n t o b e c o n s o ].  i d a. t e d , and  a, 

V-, 1 i:-b’rict  is  to  be  organized  in  Texas, 
tohn  r.  Eitchel  is  now  Collector  of  the  Mass- 
achusetts District.  Reprinted  pages  showing 
these  and  other  changes  will  go  foi'waid  with 
our  next  report. 


Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


w 


I 


JCarpnratinn  ©rust  ©ompang 

SERVICE  DEPARTMENT 

3rl  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  18- 
MARCH  10,  1920.  - 

\/ 

Enclosed  herewith  are  pages  487-488  of  the 
Service  for  substitution  for  page  487  now  in 
your  binder. 

Also  enclosed  for  substitution  are  Supple- 

^ J 

mentary  Pages  27  to  30,  and  107-108, 

Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


3D!y«3a  XAT  3MODfe1l  JAfi3a3^ 


■Si  • .0^:  .THO^SH* 


uli|p  Olorpntatinn  Stuat  ffiompattg 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  17- 


MARCH  9,  1920. 


j 


Hnciosed  lierewith  are  pages  467  to  4o-7  or 
the  Service,  showing  beginning  at  paragraph 
2575  the  three  opinions  in  the  Maconiber  vs. 
Hisner  stock  dividend  decision  handed  down  by 
the  Supreme  Court  yesterday,  March  8.  Pages 
457-408  now  in  your  binder  should  be  removed. 


Also  enclosed  for  substitution  is  Supple 
mentary  Page  111,  revised. 


It  IS  believed  that  an  announcement  rela- 
tive to  the  Court’s  decision  will  be  issued  by 
the  Bureau  of  Internal  Revenue  tomorrow. 


Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


I 


TMHMTflAqsa  3DlViR33 

* iS^XViT  WfffVI  TiiailTH  TU 


3DlVfi3B  XAT  SMODMI  JA$13a3^ 


'JJx  i/i^J 


♦ 


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Xl3,U/iT  ‘';C'lEAilOn8.C:;'  EHT 


j 


®l|e  QJotporatian  Qltuat  Ol0mpattij 

SERVICE  DEPARTMENT 

3T  WALL  STRBBT  NEW  YORK 


INCOME  TAX  SERVICE 

-REPORT  No.  16- 

MARCH  5,  1920.  , 

V 

Enclosed  herewith  are  pages  467-468  of  the 
ServiC\^.  Also  ej/closed  are  Supplenientary  Pages 
101  to  106  and  111,  for  substitution  for  the  pages 
similarly  numbered  now  in  your  binder. 

EXTENSION  OF  TIME  TO  CORPORATIONS. 

Particular  attention  is  called  to  the  official 
announcement  beginning  on  Page  467. 

BULLETINS  OF  BUREAU  RULINGS. 

The  Cumulative-1919-Bulletin  has  not  yet 
been  released  by  the  Government  but  there 
is  every  expectation  that  it  will  be  tomorrow 
or  Monday.  No  later  issue  than  No.  6 of  the 
. 1920  weekly  series  has  appeared  from  the 

i Government  presses. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


TH3M T«A«^3a  3D!VP3e 

vIMOY-  V/'-^Vfv  %'H^HTei  .lvl,AW  tfe 

aoiviias  XAT  hmoovii 

-ei  .oM  THO'ISH- 
.OSGI  HOHAM 

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a03Bq  eriS  -lol  aox  j'iJj'xJ'acfBa  qiol  .1X1  bns  &0I  oX  lOI 
-'TObnXcf  'Xi/oY  ni  won  bonodmi/n  T^X/isIxfaia 

.ai^oiTi\HO’xaoo  ot  miT  lo  ixoiBP53Txa 


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' 04X  "io  0 -oPl  nsdX  oneex  neXBl  oPI  .yebnoM  no 
©dX  moil-  bonnsqqB  end  eoinsa  yXifaaw  OS^^J: 

.eeaeonq  Xnafprinavgg 


< enuo Y.  y Xi^'i  X yn  o ? 


.Yi5kW,00  TCUHT  WOITAHO^flOO  SHT 


®lje  OJnrporatiott  2Jru0t  QInmpang 

SERVICE  DEPARTMENT 

3r  WALL.  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  15- 
MARCH  3,  1920. 

Enclosed  herewith  are  pages  465  to  466  of 
the  Service,  for  substitution  for  page  465  yioym 
in  your  binder.  Also  enclcs^^^^,  for  substitu- 
tion, is  Supplementary  Page  111,  revised. 

* * * 

BULLETINS  OE  'BUREAU  RULINGS. 

As  stated  in  our  Report  Letter  No. 14,  Bul- 
letins 1 to  6 of  the  1920  Seiues  have  been  for 
warded  to  all  subscribers  direct  from  Washing- 
ton. Our  belief  now  is  that  the  Cumulat ive-1 
Bulletin  will  be  ready  for  mailing  to  subscri 
either  on  Saturday  of  this  week  or  next  Monday.. 

Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


IsuilD  nnitJsifjii3D4& 


TM3MTflAq3a  30iyf13S 

asioir  v/a>^  T5ia«Te  j^iaw  tb 


* 


r./ 


30IVa38  XAT  3M03t11  JAS13a33 

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^ .QSei  ■ HQHAM  ■ - . 


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. -'gnxABBW  moil  Xoe-irc  a-io cf  1 loa Jx/a  . IIb  o:X  teJ)iBW 
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isxiblo 


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ro  r/: 


oltlf  Olntpotation  Sruat  aiompang 

SERVICE  DEPARTMENT 

3T  WALX.  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  14- 
MARCH  1,  1920. 


Bnclcsed  herewith  are 

follows : 


J 


27-2^  ("Sec.  223" 
465  (New  matter. 
Supplement Page 
up  pie  rn  e n t a r y 
up  p -1  e rn  e n t a r y 


on 


9 - 1 

1 'I 


pages  nurnhered  as 


28  changed  from  "224" 


(Revised 

(Revised 


Poinij  46  . ) 

Pages  9-l*i  (Revised  Form  1000.) 
Pages  101^102  (Revised  to  cor- 
rect the  name  of  the  Collector 
of  the  doth  Ohio  District.) 
Supplementary  Page  lli  (Revised  to  date.; 


BULLETINS  ON  BUREAU  RULINGrS.  Tne  first  six 
iss.:.es  of  tns  1920  T^eexly  p.ulletins  are  off  the 
iG-e;rnn.ent  presses,  and  have  "been  sent  to  sub- 
ocrioers  direct  by  the  Super int endent  of. Public 
Documents  , 7i/ashingt on . Subsequent  weekly 
.‘ssues  will  follow  i-egularly,  we  believe.  "^he 
Cumulative  1919-Bulletin  will  be  i-eady  for 
',;aiimig  this  week,  we  are  given  to  understand. 

FLIPPERS.  Attention  is  called  to  the  printed 
wo/'d  herewith  relative  to  the  new  style  flippers. 


NO  STOCE  DIVIDEND  DECISION.  The  Suprerije  Ccu-rt 
a .1  a net  han  1 1 o 'rn  a . J e c i s i o n ixi  the  Ma c .o mb e i ' v s . 
Eisner  case  to-day-  The  next  decision  day  is 
Monday,  March  8. 

Y ours  V e r’  y t r u 1 y , 

THE  CORPORATION  TRUST  COMPANY. 


Ut,  f-f 


UrtKiimnlD  «oitB3U43aID 

''  TH3MT51ASaa  3DIVyj3a 

HHOY  wa'»<i  Taa>iTa  tg 


r3DIV$I3e  XAT  BMOOkll  JARBOBB 

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: --wollo'i 


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; .aetBj;  0..^  baa  /va'H,}  ;TiI  a.^B\  •^.,^.aBvtnei-naL:j 

K-IE  •j-R-i'T  ■jAJiaUa.  All  I UA 

lio  a-TB  ar;i-‘aX  .ri^T  7:Ixaa^;  '^a^I  G.;:f  r0.,3r; 

x's,  cA  -i^a  rxaea  RvbA  ghg  .aaaaa-:..  ‘r-a  ni^fca'-^cX 
lo  c: naGria Aril'iaqjc/A  aciG  -^  ■, ' ‘:,.3*.i'!  aGsoc^iL.^ 
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. <;sp:i 


S[I|e  Corporation  Cruot  Compant} 

SERVICE  DEPARTMENT 

3r  WALL  STRKET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  MO.  13- 
FEBRUARY  20,  1920. 

Enclosed  herewith  are  pages  457  to  464  of 
the  Service,  Page  457  now  in  your  binder  shoula 
be  removed, 

i^so  enclosed  are  Supplementary  Puges  1-2, 

81  to  83,  107-108,  109-110,  and  111,  all  re- 
vised, for  substitution,  except  Supplementary" 
Pages  82-83  on  wnich  new  Form  1126  is  repro- 
duced , 

^ THE  BULLETINS  OF  BUREAU  RULINGS. 

We  have  received  several  letters  stating 
that  tne  Bulletins  referred  to  in  our  Report 
No.  12  were  not  enclosed,  or  had  not  been  re- 
ceived. We  fear  that  in  these  cases  the  print- 
ed "Special  Report"  was  not  carefully  read. 

Tnese  Bulletins  are  not  yet  off  the  Government 
presses.  They  are  expected  in  a day  or  two. 

In  any  event  copies  will  go  forward  to  subscri- 
bers imimediately  upon  becoming  available.  These 
Bulletins  are  to  be  supplied  by  us,  without  add- 
itional charge,  as  a Supplement  to  the  Service. 

Yours  very  truly, 

THE  CORPORATION  TRUST  COMPANY, 


1 


t!/iB!v1THA'^3a  33!Vfi3e 

iiMO  < wax  TaaHT;^  4*1  tb 


3DIV?r3a  XAT  3MODHI  JA«3aa3 


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i 


■73  xr 


Olorpnratinn  2Jtuat  C|nmpang 

SERVICE  DEPARTMENT 

3T  WALL,  STREET  NEW  YORK 

federal  income  tax  service 

-REPORT  MO.  12- 
EEBRUARY  16,  1920. 

fono;'3?°“='  are  pages  m^bered  as 


. 30^57  _ matter  } 

S,w»/Pupplementary  Pao-eq  i -9  /-n, 

^/Supplementary  Page  79  to  ^ 

for  SrnS  ^ °r  "^tistitution 
pplementary  Page  79.) 

1126  - CERTIFICATE  OF  INVEMTORY. 

^ay  re^Poi^eel  fP 

^-^11  go  lorward  promptly.  Service,  and 

bulletins  of  income  tax  rulings. 

Special  att(=n  + i',e 

letins  ^0  the'official  Go  ^^^losec 

^tins  we  are  sending  to  subsSiSrS™”"”^ 

Yours  very  truly, 

the  corporation  trust  company. 


'r!.13iy;TH/\S^a  'iV:-;":? 


.^  --  -X..,  -r  -'-ocfU3  ' 'IGU  j ^ 

* ' ,-  a ' 

! O ''  V‘''.0  . x'-l^ 


^.-isj-i-sai  w9'A)  - '^55' 

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I 4. 


! 

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03  C\3 


OlDrpnrattnn  2[tu0t  OJumpang 

SERVICE  DEPARTMENT 

3r  WALL.  STREET  NEW  YORK 


FEDERAL  IMCOME  TAX  SERVICE 

-REPORT  RO.  11- 


.,LfpA 


FEBRUARY  13,  1920 


C 1 

e 

t 


Enclosed  herewitn  are  pages  453  to  456  shr 

ng  new  .attar  beginning  at  paragraph  2508. 

Al..,o  enclosed,  for  substitution,  is  Sup- 
lemerioary  Page  109  revised  to  date. 

FORMS  1125  AND  1126. 

Form  1125  - Schedule  of  Taxable  Interest 

t''nme^^Xr°'^^^’  issued  by  the  Gov- 

'ior  of’n?l  -p  February  14.  A reproduc- 

orward  with  tne  next  report.  ■ > ■ % 

Foi'm  1126  has  not  yet  ceen  issued. 


I 


Youi-s  very  truly, 

THE  CORPORATION  TRUST  COMPANY. 


} 


!afnp5  nrifiBitiuinD  ^ilIS 


TH3MTF!Aq;3a  3D!Vfl3a 

iiHoy  WMvi  THar:  {><  aviAV/  t>: 

3D1Y5I3S  XAT  3^001^1  JA513a33 

-11  ,;'H  THO^afl- 
.osei  ,si  Y>iAuaa;aa 

■ woria  as^Bq  -n£  n.ti'vsTari  l^aaoIonS  | 

.803S  xiqB'iBB'iBq  Jb  aniiuiisscf  -is^J-b..  wsn 

-au8  si  .noictwi’itadBa  .i'esplons  o-IA  j 

.aifii)  oi  tiaaivsT  901 

.dsii  awA  3SII  aMfloa 

JaeT^Jnl  sldsxBT  lo  glfA^^nloS  - 2SIi 
-?c8  9fld  vcl  fceuaai  iis's'l  -i'ii  .atno'i  ’iJ-isaiJ  .i 
-ouio'tq‘^'1  A .M  vn.irM.^.q  «:  •,  ,;0  ^ , J .smrrije 

o«  riiw  .siy.J'G  90CV-198  a:  aJ.u  lO  -lOX^ 

..i-ioqe'i  ix.9  : riJiw  b'lB'A’Ton 

.bajjaai  neea  /ex,  ioi;  sbX'  3SI1  ji’io'R  i 

XT9V  criJK'Y 

. YM^MOO  T3UH.T  WUlTAHOi/iUO  'AHT 


f 


t 


4 


CnrporattDtt  JEruat  Cnmiiang 

SERVICE  DEPARTMENT 

37  WAUL,  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  10- 
PEBRUARY  11,  1920. 


liiclo^ed  are  pages  as  follows: 
451  to  454 


uppi erne nt ary  i 


(Few  matter  beginning  at 
Paragraph  2504.  Remove  Page 
451  now  in  your  binder.) 

2 (Revised  to  date.-  For 


substitution . ) 


S 


J S 


r kj 

79 

101-102 


uppl  ementai*,y 
upp lament ary 
upplernentar-y 

to  the  note  at 
Page  lOi . The 
lisned  as  soon 
sources . ) 


o 78  ( 


PO  rTil 

Fo  rm 


Ills 


1040P. ) 

Q ) 

is  called 
the  top  of  Supplementary 
complete  list  will  be  pub- 
as  available  from  official 


( A itent ion 


FORMS  1125  and  1126  rave  not  yet  been 
issued  by  the  Governn.ent . 

Yours  very  truly, 


THE  CORPORATION  TRUST  COMPANY. 


TM2MTf1Aq3a  3D1VR32 

Afiar  w:-!/: 


't;-  >-  '<t 


:m^  jAHsaaf 


C;> 


Corporation  Croat  Company 

SERVICE  DEPARTMENT 

3T  WAUL.  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  9» 

FEBRUARY  7,  1920. 

EiiClosed  Herewith  are  pages  for  the  serx^ice, 
/ as  follows: 

449*450  (Reprinted  with  new  -.matter  beginning 
. at  paragraph  2501), 

wA/j.  451  (New  matter), 

Applementary  25-*26  (For  substitution.  - Only 

change  in  Form  1096A:  ^For  month 

of  19  ” ) , 

V^vippiementary  109  (For  substitution,  ) 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


t- 


3::?|Vv-3©  KAT  -lA¥l3a3^ 


4, 


4 


®I|e  Ofarporattntt  2[r«at  Cnmpattg 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  HO.  S - 

FEBRUARY  b,  1920.  . 

Enclosed  herewith  are  pages  for  the  Ser‘ 
ice,  follows;  . ; 

447-448  (Reprinted  with  added  paragraph 

2498.  ) , ■ /■,  . 

449-450  (New  matters.).  , ' , . 

FORitfS  1119,  1096A,  il2P  AND  1126. 

Forms  1119  and  1096A  in  revised  Jorm  haVe 

just  Been  issued  by  Qowernment  a;  e be-ing 

Reproduced  for  the  Service,  ana  f ' 

^ard  with  our  next  leport.  f i 
1126  tiave  not  yet  been  issued  by  the  (govern 

ment . ' ■ ^ • t 


IMPORTANT  NOTE 


oall- 


ThP  ?qttention  of  our  new  subscribei^iS  ^ 

- - “t  f 

Tr-eaSrrAcisions  (see  t>eginnih£_at 

2499  of  the  oew  b‘oU  face 

tpr  IS  shown  in  itctiics,  uiit^  i,^rY\es  i o 

brackets  is 

unchanged^^language.  owrl  intelpolated  - cross  ,.ref- 

JrLces  will  Veadily  be  recognized  as  being  m 
ordinary  fine  line  brackets. 

Very  truly  yours,  ■ 

THE  CORPORATION  TRUST  COMPANY. 


I 


taEllO  S/il)' 

E'SE'JV-m  A^53a  'iD!  ^'/"33 

Vr*-;:*;',  T^E'S  rE/?-  .T.l’AVtf  TU 

ii;i.;  :-•;  ':;  e v’  ve^v  \ ■,  • 


(& 


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■^r:-. fr";^  :.:o^::.:' 

-'tv..  ^'■-^;.■^^'  ■:■  -EH..- 

£.',  u _>  .. 

, e:ev- ; . 
^ ' .>^x'  ..i^  ...  , ■'  ; ;■■  • 

.•'•  E'  ^'•'  ■ v;I;  j , .rE;'.!':  ,'V 

E ..r  .;  • ^ 

^::.  :m;  '.■■  - 

..  :.z  7— 

^'--•l'-  >'\-;...:.-c  - ..v.' . 

^■:  ■^1.:^- :■:■■  •■  ^-  .; 

••  ■■  t e.^:  ■;  „,... 

' ^:S  O '•  7 .¥■;;'  ■ -v  ; ■■'■ZV./lt  .: : t 

^ ^ *in  ^ 

■ ■'•i'-.,  :..  ^ V:  ■;  • ; , r ■ 

: ..-■  ri' ...V  ■.■•3,:^  : :',v- 

'’  ',  ■ ■■•■-'--■'  ■■■'■?  A- u-V'T  j'  E ■; 

■ ■ , ■ , f^^.qw  ■■  77'>:'  ■ - ■ 


. ;■  j 


Corpnrattan  SFruat  Cnmpang 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 

FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO,  7- 
JANUARY  30,  1920. 

Enclosed  herewith  are  the  following: 

Pink  pag^  to  face  page  446.  v 
Page  447-448  (for  sub^-itution  for  page  447). 
Supplementary  Pages  1-2  (revised  for  substi- 
tution) . / 

Supplementary  Pages  67-74  (for  substitution 
for  Supplementary  Page  67). 

Supplementary  Page^OO  (revised  for  substi- 
tution) . 

\/  and 

Index  Pages  1 to  40  (for  substitution  for  the 
blue  sheet,  referring  to  the  Index,  at  the  back 
of  your  binder ) . 

It  will  be  noted  that  Form  1041,  Revised 
(Returns  by  Fiduciaries)  is  reproduced  on  Sup- 
plementary Pages  69  to  74. 

FORMS  1125  AND  1126. 

Form  1125  (see  Schedule  A4,  Note  C,  on  page 
4 of  Form  1120  and  Instructions  K(b}  on  Form 
1040)  and  Form  1126  (see  Schedule  A2  on  page  4 
of  Form  1120)  have  not  yet  been  issued  by  the 
Government . 

QUESTIONNAIRE,  FORM  819. 

This  questionnaire  (see  Question  14  on  page 
3 of  Form  1120)  is  ready,  and  may  be  secured 
from  Collectors,  when  required. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


‘V 

tanilS  jinitciotjinlD  *itIS 

TM3MTflAq3a  30ivq3a 

^ HjiOY'  wav:  Taaaxa  vI.iava  te 

3D!V«3a  XAT  3MODHI  JA^Saai 

‘J»  -V  ,011  THO^SH-  ■ 

■ __  .osei  ,0fi  YHAUPIAX 

:3niwoIJ’o'i:  9di  a/iB  x'lj  iv/s-ieri  DsaoIonS 

' . ,SAii  9gj3g  90£i,  oJ  . sgBq  Jinx? 
.(V^f-  saxjq-  -ioY  noxi-ncfi.lacf/ia  nol}  aga? 

'iJscfxra  nol  5s3xv9'i)  S-I  asga?  cnfi^namsXqq.uS 

- ,(ncxjy^ 

noxJnJ-xJ'sc^w?,  -iQl)  ^V-Va  893B?  ri^^nsraalgqxjS 

.(^S  93B?  ’n^jnenalqqxxS '’lo'i 
-x^-adna,  rLo-O  x)93xy9'i)  601 ' 33.3?  y-iBdnsaelqqi/g 
- . -■  ■ , . (notJxxd 

bn£  '■? 

and  no'i  nox  j/xo  Xo  adt^a  nol)  Oi-  o3  [ aasa?  xsMl 
ji':Bd  arf.-f  t?  ,'.:3£inl  sdd  od  /Joarfa  sxxld 

.(neBnirf  nt/ov;  Yo 

LecxvsH  ,Id'0I  ffl'xo?  d.arld  badon  ad  Ilnv  dl 
-gtrS  fio  baojxbo'iqan  ax  ( aainjsxox/bx'S  Y.d  amxidaH) 

;■  ;■••;*•,  ■ . bV  od  60  aa^B?  ^n^dnamalq 

A A . 

/\3Sif  am  a2ii  aMHO'5 

^1  . ' ' 

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J:''  egsq  no  3A  elifLoiloS  593'  33X1  mno'5  X):i£  (OAOI 
oxivt  Xd  bsjjaai:  nead  A3\;  ton  9vjsri  (C3II  mno'5  Ic 
. . , . tnammsvoO 

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benjLToaa  ad  y.jGri^  ,YX)B9n  3X  (OSII  mno'?  lo  8 

. ben  rr/psn  ned^’x  ,2noto9XIoO  nonl 

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.Y'lA4i.iOO  T8U4T  Y0T'Y\H09:H00  HHT 


Clntporatinn  SfrwHt  Olompattg 

SERVICE  DEPARTMENT 

3T  WALJ^  STREET,  NEW  YORK 

FEDERAL  INCOP^E  TAX  SERVICE 

-REPORT  NO.  6- 
TANUART  24,  1920. 

Enclosed  herewith  are  Pages  OTO-SSO.  for  suE- 
stitution  (forward  ref^ence  added  at  Paragraph 
2^5),  n^w  Pages  44b  to  447,  Suppl^entary  Pages 
1^,  9-10  (revised  Porm  1001),  17-^0  (new  Form 
1065  substituted  Form  1065A)  and  revised  Sup- 

plementary Page  109  for  substitution. 

FORMS  1041A,  1065A  AND  1120A.  - There  will  be 
no  such  numbered  forms  hereafter,  so  we  are  told. 
Forms  1041,  1065,  and  1120  will  serve  for  the 
purposes  of  both  calendar  year  and  fiscal  year- 
other  than  calendar.  Incidentally,  the  word  in 
regard  to  Form  1041  is  that  it  is  ’’about  ready.” 

EXTENSIONS  OF  TIME  FOR  FILINO  RETURNS.  - It  is 
entirely  unlikely",  unless  there  be  now  unforeseen 
level  oprnents , *that  there  will  be  a general  exten- 
tion  of  time,  or  that  the  general  use  of  tenta- 
tive return  form.s  will-  be  authorized  as  was  the 
case  last  year  because  of  the  peculiar  conditions 
then  existing.  The  statutory  provisions  for*  Ex- 
tensions (by  collector,  paragraph  1847;  by  the 
Commissioner,  paragraph  1848)  are  familiat'  to 
subscribers . 

THE  GENERAL  INDEX.  - 7/e  believe  that  we  shall 
be  able  to  mail  the  index  on  Wednesday,  January 

28. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


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Corporation  Olompang 

SERVICE  DEPARTMENT 

ST  WAI4L  STREET,  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  NO.  5- 


JANUARY  20,  1920. 

Enclosed  herewith  are  pages 
substitution  for  the  similarly 
now  in  your  binder,  to  correct 
of  Paragraph  1200. 


/ 

199-200,  for 
numbered  pages 
the  fourth  line 


Also  enclosed  are  Supplementary  Pages  1-2 
for  substitution  and  Supplementary  Pages  49  to 
67  for  insertion.  ✓ 


Form  1065-Annual  Return  by  Partnership  oh 
Personal  Service  Corporation  will,  we  under- 
stand, be  released  by  the  Q-overnment  January 
26,  1920.  As  in  the  cases  of  Forms  1040A, 
104C , and  1120  a full  size  copy  of  Form  1065 
will  be  mailed  to  each  Subscribe!-  to  reach 
him  on  release  date  if  possible,  tut  in  no 
event  before  such  date. 


Stock  Dividends. 

The  U.  S.  Supreme  Court  did  not  hand  down 
its  decision  in  the  case  of  Macomber  v.  Eisner 
on  January  19.  The  next  decision  day  will  be 
Monday,  January  26. 


Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


Corpjtraltnn  S’ntat  Olnmpang 

SERVICE  DEPARTMENT 

3T  WALL  STREET  NEW  YORK 


FEDERAL  INCOME  TAX  SERVICE 

-REPORT  i\lO.  4 - 1920  SEPVICE- 
JANUARY  14,  1920. 

Enclosed  herewith  are  Pages  443-444  {new 
matter  at  paragraph  2479 l , and  Supplementary 
Pages  47-48  and  109.  Similarly  numbered  pages 
now  in  your  binder  should  be  removed. 

Also  enclosed  is  a blank  page  tc  be  used 
at  your  discretion  for  purposes  of  memoranda. 
Similar  sheets  will  be  sent  from  time  to  time. 


Forms;-  1040A,  1040,  1120  and  1120S  are  sched- 
uled for  release  by  the  Government  January 
19.  1120S  is  a new  form  for  Government  Con- 

tracts Profits  Tax  Return  (Paragraph  517. 
1919  War  Tax  Service). 

Form  1098,  Revised  January  1920,  has 
beer,  released  and  is  reproduc-d  on  Supple- 
mentary Pago  48,  herewith. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


T1^3MT?1  A-- 3GI;  aai'WTHS. 


.>/fX/L  'r;tfyi>iT^:rU.r..-vK  .-t^ 


SDiVSIia  XAT  3MODKI  JAS3a3^ 

.-I  YRAUliA^:  ''■■: '■ 

z'rrr-*-  ^ :;■  ay’  £ ■ y'? y lir  [ .7e*i9;f  . ;■;  ^ 

-rnyIqq-/5  . 

f-O’-::. a'teiimia  ,901 

ad  ibia'C'^r*'  '\aj;-nic  "iul' 


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■•AR-IH: 


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©lyf  Olorimratiott  JJntHt  Com^iang 

SERVICE  DEPARTMENT 

8T  WAIJL,  street  NEW  YORK 


rSDERAL  INCOME  TAX  SERVICE 

-REPORT  HO.  3 1920  SERVICE- 

JAHUARY  13,  1920. 

Enclosed  are  Pages  435  to  444  and  Sup- 
plementary Page  109,  for  the  1920  Income  Tax - 
Servipe . 

Page  435  and  Supplementary  Page  109  now 
in  your  binder  should  be  removed. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANT. 


13IV^33  XAT  HMOOMi  JAf^aaS^ 

" ''1£S 

-soivHaa  02ei  - e .O’j  tho^sh- 

.0291  ,51  mUHAI 

-508  &n.s  0^  SSli  gage'J  s'ls  issoIonS 


xbT  Sfnoonl  0291  ssit  toO  ,90X  sgs'I  ^Tscfnsrnalq 

.aolvTsS 

won  901  osb9  'n^^namoXgqaS  Jbna  35^ 

.X!9voai9T  9d  bLuods  lebnld  twotj  ni 
, anno-ij  tX«id  '^ndV 
.'niA<?5iOD  T3UflT  HOITAHO^OD  SHT 


OJnrporatiott  a[r«0t  C^ompang 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 

FEDERAL  INCOME  TAX  SERVICE 

-REPjRT  2 - 1920  SERVICE- 

JAigUARY  12,  1920. 

•Enclosed  lierewith  are  p;iges  433  to  436  and 
S-j.pple.mentary^  Pages  107-108.  Sirpilarlj'  number- 
cd  pages  now  in  your  binder  should  be  removed. 

PCRl\iS.-  We  understand  that  Perms  1040A,  1040, 
and  1120  wilj.  be  off  the  Goveriimeiit  presses  and 
ready  for  release  about  -January  19. 

TREASURY  DECISIONS.-  T.D.  2961  and  T.D.  2962 
relative  to  the  furnishing  of  copies  of  taxpay- 
ers’ returns  and  the  inspection  of  r-eturns  have 
be^en  released  and  distribution  wil.l  be  made  to 
subscribers  tomorrow. 

INVENTORY  LOSSES . -Attent i on  is  called  t.- 
paragraph  1484. 

STOCK  DIVIDENDS.-  The  Supreme  Court  did  not 
hand  down  the  Macomber  vs.  Eisner  decision  to- 
day. The  next  decision  day  will  be  Januarj'  19. 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY.  ' 


IMPORTANT  NOTICE.-  Ample  time  having  been 
giver.^to  subscribei’s  to  indicate  their  wishes 
relative^tc  their-  subscriptions  to  the  Income 
Tax  Service  for  1920,  this  will  be  the  last 
report  to  ne  .ser.t  to  those  from  whom!  we  have  ri&t 
yet  heard. ^ It  is  gratifying  to  us  to  be  able 
to  state  that  of  these  ther-e  ai'e  but  very  few. 


THE  CORP'IRATION  TRUST  COMPANY. 


! 


i 

i 


i 

i 

i 


2[l|e  O^orpotation  2fr«at  dnmpang  ’ 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 

FEDEf^AL  INCOME  TAX  SERVICE 

-REPORT  EG.l  - 1920  SERVICE- 
JANUARY  8,  1920, 

THE  N'EW  SERVICE.  - The  di s t I'^lbution  of  the 
1920  Income  Tax  Oer-vice  binders,  containing 
the  new  compilat  i or. , all  revised  forms  is  sized 
to  this  time,  etc,,  etc.,  begun  on  December 
31,  1919,  has  been  completed.  A few  of  the 
subscrioei's  to  the  1919  Service  have  iiot  yet 
renewed  their  subscriptions.  We  mention  this 
as  the  matter  may  have  been  overlooked. 

TAX-RETURN  EORi/IS . - None  of  the  revised  tax- 
return  forms  has  yet  beei]  issued.  "i040A  is 
expected  in  a day  or  two;  1040  witiiin  a week; 
and  1120  within  a week  or  ten  days* 

ADDENDA  TO  RPiGULATIONS  4b.  - The  Governa^ent 
has  issued  an  "Addenda  to  Regulations  45" 
containing  all  T.  D’s.  issued  since  April.  17, 
1919,  amending  or  modifying  old  Articles  or 
adding  new  Articles  to  the  regulations.  All 
of  these  were  of  course  sent  to  subscribers 
during  the  year  as  issued  and  are  already  in  . 
subscribers’  hands  in  the  1920  Service  book, 
properly  placed  in  the'  compilation. 

STOCE  DIVIDENDS.  - There  was  no  decision  by 
the  Supreme  Court  on  Monday.  Tho  next  deci- 
sion day  is  Monday,  January  12. 

Very  truly  yours, 

THb  CORPORATION  TRUST  COMPANY. 

R.  3.  The  1920  War  Tax  Ser*vice  will  be 
dis  trhbvited  January  15,  1920. 


■S.  5-., 


■s 


; \ 


.'l. 


X *■ 

• > 


(f 


1920  INCOME  TAX  SERVICE 


January  1,  1920. 


This  ])inder  ('ontains  the  following: 


Yellow  Pag'e  (How  to  use  the  Service.) 

Pa^es  1-2  (Title  Page  and  Table  of  Contents.) 

Pages  3-4  (Calendar  and  Foreword.) 

The  Law  (Guide  Card) 

Pages  5 to  54 

The  Compilation  (Guide  Card) 

Pages  55  to  432 

Reg.  45,  Rev.— T.  D.  Finder  (Guide  Card) 

Finder  Pages  1 to  1 1 

1920  New  Matters  (Guide  Card) 

Page  433 

Supplementary  Matters  (Guide  Card) 
Supplementary  Pages  1 to  47* 

Supplementary  Pages  107-108t 
Supplementary  Page  109 
Blue  Index  Page  1 

*Supplementary  Pages  48  to  100  reserved  for  revised  and  new  forms. 

fSupplementary  Pages  101  to  106  reserved  for  revised  list  of  Internal 
Revenne  Districts  and  Collectors. 

Your  next  report  will  be  Report  No.  1. 


Yours  v(M-y  truly, 


..L  'i  ■ i V,.^  f X.K- 


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, f V'fftfr'-'li: 


: «?f;!V':^]ju'S  'k{I  .-:!iih ii?t>')  •it’):^f!i<f  >ii.fr?'- 


I,  o(ij  7/{ul-  vY  ■ 

C ruin’ );S:-  1 -roa.f!’^! 
( }:xr{^r/lcy:^  luu*  )') 

•j, 

(f>7;r;  7r;h7r)'^  I e'i^^ 

ir.  Ot  C '■ 

(F)t,-::“  ) o1>iiiO,i  xr'oictfeiigmoO  sriT 

oi  Ar.  > 

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If  Oi  1 '•■'••ni/f  -f-h )!£'•}  ' 

'if)ini))  ais.t;$4sM  "w^VI  0P(H 
il-l  ouu'l  • • . 


Yi^s-tiismalqquir  . ■ 

■ "'T^  oi  i --yiipiri  '^fHU!''fif‘iJ(iqiJ^ 

■!'..v)l--T0i  yininoui-n 

oiinH  7;uirn‘uiniqqir-^, 

. . i /o!  :il  '^;ua 

.'Uirfol  7UKI  iyy  o/ui  io> 'l»07'f')w  001  ol^i- 

•'■{i  'io  -JO’  u/>7l  >:^oi  f)OI  oj  I Of  >07^0  •rinOf'UfT'Jiuq.u^l 

.PUOt7^|[o\)  ^xTr  ■■  hiil>i(| 

y 

.1  .ol^  n J -‘iw  s^i}ij  nio'^ 


HOW  TO  USE  THE  INCOME  TAX  SERVICE. 


THE  LAW  is  printed  as  a unit  beginning  on  page  5,  and  each  para- 
graph of  the  law  is  repeated  in  its  proper  place  in  the  compilation. 

If  when  reading  the  law  as  a unit  it  is  desired  to  know  what  the 
Bureau  of  Internal  Revenue  has  said  relative  to  a particular  para- 
graph, turn  to  the  paragraph  in  the  compilation  indicated  at  the 
right  of  the  law  paragraph  you  are  reading.  For  instance,  if  you  are 
reading  Law  ^383  on  page  42,  and  wish  to  study  the  regulations  on 
that  provision  of  the  law,  turn  to  ^2073,  in  the  body  of  the  book. 
Conversely  if  you  are  reading  Law  1[383,  at  1[2073  in  the  body  of 
the  book,  and  desire  to  study  the  immediately  preceding  or  succeed- 
ing law  provisions  turn  back  to  Law  ^383  where  it  is  printed  in  the 
law  as  a unit.  If  when  reading  regulations,  it  is  desired  to  see  the 
law  provision  on  the  subject,  glance  back  to  the  immediately  pre- 
ceding Law  Each  Law  U is  doubly  indented,  is  designated  “Law 

T[ ,”  and  is  always  in  quotations.  Thus  if  reading  Art.  1013  of 

Reg.  45,  Rev.,  at  Tf2074,  the  law  provision  at  ^[2073  is  quickly  found. 

THE  REGULATIONS  are  exact  reprints  of  official  promulgations. 
For  instance,  at  ^2074  again:  this  is  Art.  1013  of  Reg.  45,  Rev., 
as  issued  by  the  Government  and  not  our  rehash  merely,  of  that 
Article,  with  a citation  to  it  as  the  source  of  our  wisdom. 

CROSS  REFERENCES  WITHIN  PARAGRAPHS.  For  example,  at 
^2074,  the  Government  says  “See  section  1320.”  We  add,  [for  United 
States  bonds  in  lieu  of  securities,  ^1500].  Thus  you  know  to  what 
the  Government  refers  when  it  suggests  “see  section  1320,”  and,  if 
you  are  interested,  you  know  exactly  where  to  go  for  the  information, 
i.  e.,  to  ^[1500. 

REGULATIONS  45  REVISED.  You  will  find  all  the  Articles  tab- 
ulated in  numerical  order  in  the  Finder  section,  immediately  follow- 
ing page  432. 

THE  FINDER.  This  is  a finder  of  old  matter,  that  is,  of  all  mat- 
ters in  the  compilation.  For  instance  if  you  are  seeking  a particular 
Article  of  Regulations  45  by  number,  or  a particular  T.  D.  by  num- 
ber, or  a letter  by  date,  (something  with  which  you  are  familiar  from 
use  last  year),  you  will  find  it  at  once  in  the  finder  if  it  is  in  this  book. 
All  of  Regulations  45,  as  Revised,  is  in  the  book. 

THE  FORMS  will  be  found  on  the  Supplementary  Pages  at  the 
back  of  the  book,  listed  on  Supplementary  Page  1. 

CASES.  All  court  opinions  reproduced  in  the  Service  are  listed 
in  the  Table  of  Cases  on  Supplementary  Page  107.  This  list  is 
always  up  to  date  so  far  as  the  Service  is  concerned. 

THE  RUNNING  TABLE  OF  CONTENTS  should  be  borne  in  mind. 
This  shows  matters  issued  since  December  22,  1919,  that  is,  since 
the  compilation  went  to  press,  and  is  always  up  to  date.  It  begins 
on  Supplementary  Page  109,  at  the  end  of  the  book,  immediately  in 
front  of  the  blue  index  pages. 


[Over.] 


THE  INDEX  on  the  blue  sheets  at  the  end  of  the  book  cannot 
be  kept  up-to-date.  It  can  be  and  will  be  revised  from  time  to  time. 
The  running  table  of  contents  shows  matters  unindexed  temporarily. 
The  pink  page  calls  your  attention  to  the  running  table  of  contents. 

THE  BACK  REFERENCES.  The  small  numbers  under  the  bold 
face  paragraph  numbers  on  the  new  current- 1920-matters  pages  refer 
back  to  paragraphs  treating  of  the  sarne  subject  as  the  new  regula- 
tion, or  a related  subject.  Now  assume  that  today  a regulation  is 
issued  on  the  subject  of  the  ‘‘declaration  of  termination  of  taxable 
period.”  We  print  this  as  paragraph  5000,  let  us  say.  We  show  in 
small  type  under  that  paragraph  number,  the  number  2074.  You 
will  find  that  1f2074  treats  of,  the  same  subject.  Paragraph  2074  is 
indexed.  When,  a month  from  now,  you  are  reading  1[2074,  which 
you  have  turned  to  by  means  of  the  index  or  by  means  of  the  law 
paragraph,  if  your  clerk  has  written  “^[5000”  in  the  margin  opposite 
^2074,  with  a catch  word  or  two  if  desired,  you  will  be  told  by  this 
marginal  entry  that  for  later  official  information  on  the  same  subject 
you  should  consult  ^5000.  Or,  glancing  down  the  entries  in  the 
running  table  of  contents  you  will  quickly  find  whether  or  not  there 
has  been  a recent  ruling,  postdating  the  index,  on  a subject  of  in- 
terest to  you  at  the  moment,  and  having  found  it,  say  at  1|5000,  you 
are  there  referred  back  to  the  earlier  discussion  at  ^[2074. 

MATTERS  IN  BRACKETS  [ ] are  ours,  but  are  to  be  read  as  a part 

of  the  text.  Otherwise  everything  is  official  as  cited. 

CITATIONS.  Except  in  the  case  of  Law  paragraphs  and  the 
Supreme  Court  Cases  the  citation  to  its  source  is  at  the  end  of  the  re- 
print of  thebfficial  regulation.  Treasury  Decision,  letter,  etc.  Usually 
there  is  a break  (a  blank  line)  following  each  cited  unit,  which  in  the 
majority  of  cases  consists  of  but  one  paragraph  but  may  be  several 
paragraphs  in  length. 

SUGGESTIONS  are  always  welcome. 

Olurpnrattun  Ermt  Olumpan^. 

December  29,  1919. 


It  is  suggested  that  this  sheet  be  preserved, — perhaps  at  the  back 

of  the  binder. 


Olorporattott  ®r«Bt 

1913-1920 

INCOME  TAX  SERVICE 

IN  THREE  PARTS 


PART  1.-1913-1919. 

The  Income  Tax  Law 
of 

The  Revenue  Act  of  1918 
{Public — No.  254 — 65th  Congress.) 

Approved  February  24,  1919 
Compiled  with 

Official  interpreting  and  Administrative  Regulations. 
PART  II.— 1920. 

Regulations  Issued  Since  December  22,  1919. 
PART  m. 

Supplementary  Matters  Including  a Table  of  Forms 

and 

A General  Index. 


COPYRIGHT  1920 


37  Wall  Street,  New  York 
AffiUated  with 


©Iff  Qlnrptiralton  ©rwat  Company  ^gatm 

15  Exchange  Place,  Jerse  City 
Organized  1892 


Boston,  53  State  Street 

(Corporation  Registration  Company) 
Chicago,  112  W.  Adams  Street 
Los  Angeles,  Title  Insurance  Bldg. 

(The  Corporation  Company) 
Pittsburgh,  1201  OUver  Bldg. 

In  Albany: 


Washington,  D.  C.,  501  Colorado  Bldg. 
Philadelphia,  1428  Land  Title  Bldg. 
Portland,  Me.,  281  St.  John  Street 
St.  Louis  Federal  Reserve  Bank  Bldg. 
Wilmington,  4108  duPont  Bldg. 
(Corporation  Trust  Co.  of  America) 
Frederic  J.  Knorr,  Agent 


TABLE  OF  CONTENTS. 
PART  1. 


The  Income  Tax  Law,  as  a unit 


Page 

5 


THE  COMPILATION.— 1913-1919. 


Income  tax  liability.  .1[470 
Normal  tax  and  surtax  on  indi- 
viduals . . 1f476 

Individuals  liable  to  tax . . Tf5 1 1 
Resident  and  non  - resident 
aliens  . .1[512 

Citizens  and  residents  of  Porto 
Rico  and  Philippine  Islands 

..1[531^ 

Partnerships  and  personal  ser- 
vice corporations . . 1[546 
Fiscal  years  embracing  parts  of 
calendar  years.  .11613 
Estates  and  trusts . . 1[636 
Tax  on  corporations.  .1f713 
Net  income.  .1[769 
Gross  income  . .1[802 
Dividends . .1[811 
Tax  on  insurance  companies.. 
1f983 

Tax  on  foreign  corporations . . 
1F1007 

Basis  for  determining  gain  or  loss 

. .111055 

Inventories.  .If  1090 
Net  losses.  .If  1097 
Exempt  income.  .If  1109 
Deductions  — Expenses.  .If  1180, 
1198 

Items  not  deductible.  .If  1184 
Deductions — Interest.  .If  1232 
Deductions — ^Taxes.  .If  1245 
Credit  for  taxes.  .If  1283 
Deductions — Losses . . If  1303 
Deductions — Bad  debts.  .1fl316 
Deductions — Dividends . . If  1325 


Deductions — Depreciation . . 
1fl328 

Deductions — Amortization . . 
1fl376 

Deductions — Depletion.  .If  1397 
Deductions' — Contributions. . 

If  1447 

Deductions  — Inventory  losses . . 

^ If  1467 

United  States  Bonds  as  security 
:.1fl500^  . 

Credits  to  individuals ..  If  15 13 
Credits  to  corporations . . If  1527 
Tax  on  non-resident  aliens.. 
1fl535 

Withholding  at  the  source . . 
If 1585  ^ 

Returns  of  information  at  source 
..1fl728 

Foreign  items.  .If  1749 
Returns.  .If  1766 
Consolidated  returns ..  If  1821 
Extensions  of  time.  .If  1847 
Returns  when  accounting  period 
changed.  .If  1855 

Penalties — Returns  1864:  Tax 
payments.  .1f2014 
Inspection  of  returns . . If  1955 
Payment  of  tax.  .1f2000 
Abatement  and  refund  claims.. 

. 1f2115 

Suits  for  recovery  of  taxes . . 
1f2177 

Committee  of  Review  and  Ap- 
peal.. 1f2211 

Supreme  Court  Decisions . . If 2240 


PART  n.— 1920. 

Regulations,  etc.,  officially  issued  since  December  22,  1919 1f2420 


PART  m.— MISCELLANY. 

See  Supplementary  Pages  at  the  back  of  the  book. 
INC.  2 


TAX 


Qlorporation  ®ruHt  (Sompang’si 

1913-1920 

INCOME  TAX  SERVICE 
PART  I. 

1913-1919 

The  Income  Tax  Law 
of 

The  Revenue  Act  of  1918 
Compiled  with 

Official  Interpreting  and  Administrative  Regulations. 


CALENDAR 

Annual  returns  by  taxpayers:  On  or  before  the  15th  day  of  the  3rd  month 
after  the  close  of  the  taxpayer’s  taxable  year. 

Calendar  year  basis — on  or  before  March  15. 

Tax:  One  (first)  quarter,  on  or  before  time  for  filing  return;  second  quarter, 
on  or  before  the  15th  day  of  the  3rd  month  after  the  due  date  of  the  re- 
turn; third  quarter,  on  or  before  the  15th  day  of  the  6th  month  after  the 
due  date  of  the  return;  fourth  quarter,  on  or  before  the  15th  day  of  the 
9th  month  after  the  due  date  of  the  return. 

Calendar  year  basis: 

1st  quarter,  on  or  before  March  15. 

2d  quarter,  on  or  before  June  15. 

3d  quarter,  on  or  before  Sept.  15. 

4th  quarter,  on  or  before  Dec.  15. 

All  of  the  tax  may  be  paid  on  or  before  the  due  date  for  filing  the  return, 

that  is,  if  on  a calendar  year  basis,  on  or  before  March  15  (no  discount). 

Annual  rc'turns  of  information  at  the  source:  On  or  before  March  15. 

Monthly  returns  of  information  at  the  source:  On  or  before  the  20th  day 
of  the  month  following  that  for  which  the  return  is  made.  Monthly  re- 
turns of  information  at  the  source  are  required  in  the  case  of  (1)  pay- 
ments of  interest  on  bonds  and  other  corporate  obligations  and  (2)  the 
collection  of  foreign  items,  only. 

Tax:  No  tax  to  be  paid. 

Annual  returns  of  amounts  withheld  at  the  source:  On  or  before  March  1. 

Tax:  Amounts  withheld  to  be  paid  to  Government  on  or  before  June  15. 

Monthly  returns  of  amounts  withheld  at  the  source:  On  or  before  the  20th 
day  of  the  month  following  that  for  which  the  return  is  made.  Monthly 
returns  of  amounts  withheld  at  the  source  are  required  in  the  case  of 
withholding  on  interest  on  bonds  and  other  corporate  obligations,  only. 

Tax:  No  tax  to  be  paid.  Amounts  withheld  are  paid  to  the  Government 
annually:  i.  e.,  on  or  before  June  15. 

Special. 

Returns  of  information  by  brokers  as  such:  When  called  for. 

Returns  of  dividend  payments:  When  called  for. 

Returns  in  connection  with  Government  contracts:  When  called  for. 


INC. 


3 


TAX 


COMMENT 


In  the  copy  of  the  law  printed  herein,  the  official  wording,  punc- 
tuation and  capitalization  have  been  carefully  followed.  However, 
it  has  been  considered  advisable  to  introduce  a scheme  of  spacing 
and  indentation,  numbering  the  arbitrary  paragraphs  consecutively, 
which  it  is  hoped  will  make  the  various  provisions  more  accessible. 

When  the  lav/  paragraphs  are  repeated  in  their  proper  places  among 
the  regulations,  they  are  given,  in  addition  to  the  Law-paragraph  num- 
bers which  they  bear,  bold  face  general  paragraph  numbers  to  fit  them 
in  properly  with  the  paragraphs  of  the  regulations  which  precede  and 
follow  them.  This  will  be  found  to  be  an  advantage  in  utilizing  the 
cross  references  and  the  general  index. 

The  date  and  designation  of  each  ruling  or  regulation  appearing 
in  the  compilation  are  given.  Some  of  the  old  regulations  have  been 
edited  by  cutting  out  matters  that  applied  solely  to  repealed  provi- 
sions of  prior  Acts  (shown  by  asterisks  ***),  or  by  inserting  in  brackets 
[ ] words  or  figures  to  be  read  in  making  the  particular  sentence 
applicable  to  the  new  law. 

These  regulations,  decisions,  special  letters,  etc.,  explaining,  enlarg- 
ing or  giving  specific  directions  for  the  enforcement  of  the  provisions 
of  the  law  in  a particular  paragraph  or  group  of  paragraphs’  of  the  law, 
are  printed  immediately  following  such  law  paragraph  or  group  of 
paragraphs.  Any  regulation,  part  of  a regulation,  letter  or  other  matter 
contained  in  our  1914,  1915,  1916,  1917,  1918  - and  1919  Services  not 
found^  in  this  compilation,  either  has  no  application  to  the  present 
provisions  or  was  repealed,  amended,  superseded,  or  otherwise  annulled, 
or  was  repeated  in  a subsequent  regulation  which  has  been  used  as 
being  the  latest  ruling. 


INC. 


4 


The  law 


( 

c 

( 


( 


( 

( 


THE  FEDERAL  INCOME  TAX  LAW, 

BEING  TITLE  II 
of  the 

REVENUE  ACT  OF  1918 

To  Which  Have  Been  Added 
Title  I — General  Definitions 
and  Parts  of 

Title  XIII — General  Administrative  Provisions 
and 

Title  XIV — General  Provisions 
of  the  Revenue  Act  of  1918 


The  arbitrary  paragraphs  are  numbered  consecutively  on  the  left. 
Each  paragraph  will  be  found  repeated,  followed  by  the  provisions 
of  the  regulations,  if  any,  relating  to  it,  in  the  body  of  the  book, 
beginning  on  page  55  at  the  running  paragraph  the  number  of  which 
has  been  placed  on  the  right  opposite  that  particular  paragraph  in 
the  reprint  below. 

The  headings  are  a part  of  the  Act  as  passed,  except  when  shown 
in  brackets. 

(See  Law  and  Regulations,  Page  55.) 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled. 


Law 

Paragraph 


11 

12 

13 

14 

15 

16 

17 

18 

19 


TITLE  I.— GENERAL  DEFINITIONS. 


Section  1.  That  when  used  in  this  Act — 


Repeated 
'at  iri 


The  term  “person”  includes  partnerships  and  corporations,  as  well  472 
as  individuals; 

The  term  “corporation”  includes  associations,  joint-stock  com-  728 
panics,  and  insurance  companies; 

The  term  “domestic”  when  applied  to  a corporation  or  partner-  1532 
ship  means  created  or  organized  in  the  United  States; 

The  term  “foreign”  when  applied  to  a corporation  or  partnership  1008 
means  created  or  organized  outside  the  United  States; 

The  term  “United  States”  when  used  in  a geographical  sense  in-  1009 
eludes  only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and 
the  District  of  Columbia; 

The  term  “Secretary”  means  the  Secretary  of  the  Treasury;  503 

The  term  “Commissioner”  means  the  Commissioner  of  Internal  504 
Revenue; 


The  term  “collector”  means  collector  of  internal  revenue; 

5 


505 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  If 

^10  The  term  “Revenue  Act  of  1916”  means  the  Act  entitled  “An  773 
Act  to  increase  the  revenue,  and  for  other  purposes,”  approved 
September  8,  1916; 

mi  The  term  “Revenue  Act  of  1917”  means  the  Act  entitled  “An  Act  775 
to  provide  revenue  to  defray  war  expenses,  and  for  other  purposes,” 
approved  October  3,  1917; 

1[12  The  term  “taxpayer”  includes  any  person,  trust  or  estate  subject  470 
to  a tax  imposed  by  this  Act; 

1[13  The  term  “Government  contract”  means  (a)  a contract  made  with  578 
the  United  States,  or  with  any  department,  bureau,  officer,  commission, 
board,  or  agency,  under  the  United  States  and  acting  in  its  behalf,  or 
with  any  agency  controlled  by  any  of  the  above  if  the  contract  is  for 
the  benefit  of  the  United  States,  or  (b)  a subcontract  made  with  a con- 
tractor performing  such  a contract  if  the  products  or  services  to  be 
furnished  under  the  subcontract  are  for  the  benefit  of  the  United  States. 

The  term  “Government  contract  or  contracts  made  between  April  6, 1917, 
and  November  11,  1918,  both  dates  inclusive”  when  applied  to  a contract 
of  the  kind  referred  to  in  clause  (a)  of  this  paragraph,  includes  all  such 
contracts  which,  although  entered  into  during  such  period,  were 
originally  not  enforceable,  but  which  have  been  or  may  become  enforce- 
able by  reason  of  subsequent  validation  in  pursuance  of  law; 

tl4  The  term  “military  or  naval  forces  of  the  United  States”  includes  1173 
the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  Female, 
and  the  Navy  Nurse  Corps,  Female,  but  this  shall  not  be  deemed  to 
exclude  other  units  otherwise  included  within  such  term; 

1fl5  The  term  “present  war”  means  the  war  in  which  the  United  States  1174 
is  now  engaged  against  the  German  Government. 

^16  For  the  purposes  of  this  Act  the  date  of  the  termination  of  the  1175 
present  war  shall  be  fixed  by  proclamation  of  the  President. 

TITLE  II.— INCOME  TAX. 

Part  I. — General  Provisions. 

Definitions. 

1117  Sec.  200.  That  when  used  in  this  title — 794 

If  18  The  term  “taxable  year”  means  the  calendar  year,  or  the  fiscal  795 

year  ending  during  such  calendar  year,  upon  the  basis  of  which  the 
net  income  is  computed  under  section  212  or  section  232. 

If  19  The  term  “fiscal  year”  means  an  accounting  period  of  twelve  797 
months  ending  on  the  last  day  of  any  month  other  than  December. 

1f20  The  first  taxable  year,  to  be  called  the  taxable  year  1918,  shall  be  798 
the  calendar  year  1918  or  any  fiscal  year  ending  during  the  calendar 
year  1918; 


6 


THE  INCOME  TAX  LAW. 


Repeated 

Paragraph  If 

1[21  The  term  ‘‘fiduciary”  means  a guardian,  trustee,  executor,  ad-  670 
ministrator,  receiver,  conservator,  or  any  person  acting  in  any 
fiduciary  capacity  for  any  person,  trust  or  estate; 

^22  The  term  “withholding  agent”  means  any  person  required  to  1622 
deduct  and  withhold  any  tax  under  the  provisions  of  section  221 
or  section  237; 

^23  The  term  “personal  service  corporation”  means  a corporation  573 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the 
principal  owners  or  stockholders  who  are  themselves  regularly  engaged 
in  the  active  conduct  of  the  affairs  of  the  corporation  and  in  which 
capital  (whether  invested  or  borrowed)  is  not  a material  income- 
producing  factor; 

If 24  but  does  not  include  any  foreign  corporation,  574 

^25  nor  any  corporation  50  per  centum  or  more  of  whose  gross  income  con-  575 
sists  either 

T[26  (1)  of  gains,  profits  or  income  derived  from  trading  as  a principal,  576 

or 

Tf27  (2)  of  gains,  profits,  commissions,  or  other  income,  derived  from  577 

a Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive; 

^28  The  term  “paid,”  for  the  purposes  of  the  deductions  and  credits  781 
under  this  title,  means  “paid  or  accrued”  or  “paid  or  incurred,”  and  the 
terms  “paid  or  incurred”  and  “paid  or  accrued”  shall  be  construed 
according  to  the  method  of  accounting  upon  the  basis  of  which  the 
net  income  is  computed  under  section  212. 


Dividends. 

1[29  Sec.  201.  (a)  That  the  term  “dividend”  when  used  in  this  title  811 

(except  in  paragraph  (10)  of  subdivision  (a)  of  section  234)  means 

1f30  (1)  any  distribution  made  by  a corporation,  other  than  a personal  812 

service  corporation,  to  its  shareholders  or  members,  whether  in  cash 
or  in  other  property  or  in  stock  of  the  corporation,  out  of  its  earnings 
or  profits  accumulated  since  February  28,  1913,  or 

T[31  (2)  any  such  distribution  made  by  a personal  service  corporation  out  813 

of  its  earnings  or  profits  accumulated  since  February  28,  1913,  and 
prior  to  January  1,  1918. 

If32  (b)  Any  distribution  shall  be  deemed  to  have  been  made  from  818 
earnings  or  profits  unless  all  earnings  and  profits  have  first  been 
distributed. 

If33  Any  distribution  made  in  the  year  1918  or  any  year  thereafter  shall  819 
be  deemed  to  have  been  made  from  earnings  or  profits  accumulated 
since  February  28,  1913,  or. 


7 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  ^ “ 

^34  in  the  case  of  a personal  service  corporation,  from  the  most  820 

recently  accumulated  earnings  or  profits; 

1[35  but  any  earnings  or  profits  accumulated  prior  to  March  1,  1913,  may  826 
be  distributed  in  stock  dividends  or  otherwise,  exempt  from  the  tax, 
after  the  earnings  and  profits  accumulated  since  February  28,  1913, 
have  been  distributed. 

1[36  (c)  A dividend  paid  in  stock  of  the  corporation  shall  be  consid-  848 

ered  income  to  the  amount  of  the  earnings  or  profits  distributed. 

1(37  Amounts  distributed  in  the  liquidation  of  a corporation  shall  be  866 
treated  as  payments  in  exchange  for  stock  or  shares,  and  any  gain  or 
profit  realized  thereby  shall  be  taxed  to  the  distributee  as  other  gains 
or  profits. 

1f38  (d)  If  any  stock  dividend  (1)  is  received  by  a taxpayer  between  856 

January  1 and  November  1,  1918,  both  dates  inclusive,  or 

^39  (2)  is  during  such  period  bona  fide  authorized^  or  declared,  and  857 
entered  on  the  books  of  the  corporation,  and  is  received  by  a taxpayer 
after  November  1,  1918,  and  before  the  expiration  of  thirty  days  after 
passage  of  this  Act, 

1f40  then  such  dividend  shall,  in  the  manner  provided  in  section  206,  be  858 
taxed  to  the  recipient  at  the  rates  prescribed  by  law  for  the  years  in 
which  the  corporation  accumulated  the  earnings  or- profits  from  which 
such  dividend  was  paid,  but  the  dividend  shall- be  deemed  to  have 
been  paid  from  the  most  recently  accumulated  earnings  , or  profits. 

1f41  (e)  Any  distribution  made  during  the  first  sixtyv  days  of- any  tax-  821 

able  year  shall  be  deemed  to  have  been  made  from  earnings  or  profits 
accumulated  during  preceding  taxable  years; 

1[42  but  any  distribution  made  during  the  remainder  of  the  taxable  year  822 
shall  be  deemed  to  have  been  made  from  earnings  or  profits  accumu- 
lated between  the  close  of  the  preceding  taxable  year  and  the  date  of 
distribution,  to  the  extent  of  such  earnings  or  profits,  and  if  the  books 
of  the  corporation  do  not  show  the  amount  of  such  earnings  or  profits, 
the  earnings  or  profits  for  the  accounting  period  within  which  the 
distribution  was  made  shall  be  deemed  to  have  been  accumulated 
ratably  during  such  period. 

Basis  for  Determining  Gain  or  Loss. 

K43  Sec.  202.  (a)  That  for  the  purpose  of  ascertaining  the  gain  1055 
derived  or  loss  sustained  from  the  sale  or  other  disposition  of  prop- 
erty, real,  personal,  or  mixed,  the  basis  shall  be — 

1[44  (1)  In  the  case  of  property  acquired  before  March  1,  1913,  the  1056 

fair  market  price  or  value  of  such  property  as  of  that  date;  and 

^45  (2)  In  the  case  of  property  acquired  on  or  after  that  date,  the  1057 

cost  thereof;  or  the  inventory  value,  if  the  inventory  is  made  in 
accordance  with  section  203. 


8 


THE  INCOME  TAX  LAW. 


T Repeated 

. at  If 

Paragraph  “ 

1(46  (b)  When  property  is  exchanged  for  other  property,  the  property  1076 

received  in  exchange  shaU  for  the  purpose  of  determining  gain  or 
loss  be  treated  as  the  equivalent  of  cash  to  the  amount  of  its  fair 


market  value,  if  any; 


1[47  but  when  in  connection  with  the  reorganization,  merger,  or  consolida-  1082 
tion  of  a corporation  a person  receives  in  place  of  stock  or  securities  j _ 4 
owned  by  him  new  stock  or  securities  of  no  greater  aggregate  par  or 
face  value, 


^48  no  gain  or  loss  shall  be  deemed  to  occur  from  the  exchange,  and  the  1083 
new  stock  or  securities  received  shall  be  treated  as  taking  the  place  of 
the  stock,  securities,  or  property  exchanged. 


When  in  the  case  of  any  such  reorganization,  merger  or  consolida-  1084 
tion  the  aggregate  par  or  face  value  of  the  new  stock  or  securities 
received  is  in  excess  of  the  aggregate  par  or  face  value  of  the  stock  or 
securities  exchanged,  a like  am.ount  in  par  or  face  value  of  the  new 
stock  or  securities  received  shall  be  treated  as  taking  the  place  of  the 
stock  or  securities  exchanged,  and  the  amount  of  the  excess  in  par  or 
face  value  shall  be  treated  as  a gain  to  the  extent  that  the  fair  niarket 
value  of  the  new  stock  or  securities  is  greater  than  the  cost  (or  if  ac- 
quired prior  to  March  1,  1913,  the  fair  market  value  as  of  that  date) 
of  the  stock  or  securities  exchanged. 


Inventories. 

If 50  Sec.  203.  That  w'henever  in  the  opinion  of  the  Commissioner  1090 
the  use  of  inventories  is  necessary  in  order  clearly  to  determine  the 
income  of  any  taxpayer,  inventories  shall  be  taken  by  such  taxpayer 
upon  such  basis  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  prescribe  as  conforming  as  nearly  as  may  be  to  the 
best  accounting  practice  in  the  trade  or  business  and  as  most  clearly 
reflecting  the  income. 


Net  Losses. 

^51  Sec.  204.  (a)  That  as  used  in  this  section  the  term  “net  loss”  1097 
refers  only  to  net  losses  resulting  from  either 

1[52  (1)  the  operation  of  any  business  regularly  carried  on  by  the  1098 

taxpayer,  or 

^53  (2)  the  bona  fide  sale  by  the  taxpayer  of  plant,  buildings,  1099 

machinery,  equipment  or  other  facilities,  constructed,  in- 
stalled or  acquired  by  the  taxpayer  on  or  after  April  6,  1917, 
for  the  production  of  articles  contributing  to  the  prosecution 
of  the  present  war; 

^54  and  when  so  resulting  means  the  excess  of  the  deductions  allowed  1100 
by  law  (excluding  in  the  case  of  corporations  amounts  allowed  as  a 
deduction  under  paragraph  (6)  of  subdivision  (a)  of  section  234)  over 
the  sum  of  the  gross  income  plus  any  interest  received  free  from 
taxation  both  under  this  title  and  under  Title  III. 

9 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 


Repeated 
at  If 


1f55  (b)  If  for  any  taxable  year  beginning  after  October  31,  1918,  and  1101 

ending  prior  to  January  Ij  1920,  it  appears  upon  the  production  of  evi- 
dence satisfactory  to  the  Commissioner  that  any  taxpayer  has  sustained 
a net  loss,  the  amount  of  such  net  loss  shall  under  regulations  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary  be  deducted 
from  the  net  income  of  the  taxpayer  for  the  preceding  taxable  year; 


T[56  and  the  taxes  imposed  by  this  title  and  by  Title  III  for  such  pre-  1102 
ceding  taxable  year  shall  be  redetermined  accordingly. 


1[57  Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis  of  such  1103 
redetermination  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252. 


^58  If  such  net  loss  is  in  excess  of  the  net  income  for  such  preceding  tax-  HOI 
able  year,  the  amount  of  such  excess  shall  under  regulations  pre- 
scribed by  the  Commissioner  with  the  approval  of  the  Secretary  be 
allowed  as  a deduction  in  computing  the  net  income  for  the  suc- 
ceeding taxable  year. 

^59  (c)  The  benefit  of  this  section  shall  be  allowed  to  the  members  1105 

of  a partnership  and  the  beneficiaries  of  an  estate  or  trust  under  regu- 
lations prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary. 


Fiscal  Year  with  Different  Rates. 

^60  Sec.  205.  (a)  That  if  a taxpayer  makes  return  for  a fiscal  year  613 

beginning  in  1917  and  ending  in  1918,  his  tax  under  this  title  for  the 
first  taxable  year  shall  be  the  sum  of: 

1f61  (1)  the  same  proportion  of  a tax  for  the  entire  period  computed  614 

under  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the 
Revenue  Act  of  1917  and  under  Title  I of  the  Revenue  Act  of 
1917,  which  the  portion  of  such  period  falling  within  the  calen- 
dar year  1917  is  of  the  entire  period,  and 

Tf62  (2)  the  same  proportion  of  a tax  for  the  entire  period  com-  615 

puted  under  this  title  at  the  rates  for  the  calendar  year  1918 
which  the  portion  of  such  period  falling  within  the  calendar 
year  1918  is  of  the  entire  period: 

Tf63  Provided,  That  in  the  case  of  a personal  service  corporation  the  amount  616 
to  be  paid  shall  be  only  that  specified  in  clause  (1). 

Tf64  Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  617 
imposed  for  such  fiscal  year  by  Title  I of  the  Revenue  Act  of  1916  as 
amended  by  the  Revenue  Act  of  1917,  and  by  Title  I of  the  Revenue 
Act  of  1917,  shall  be  credited  towards  the  payment  of  the  tax  imposed 
for  such  fiscal  year  by  this  act,  and  if  the  amount  so  paid  exceeds  the 
amount  of  such  tax  imposed  by  this  act,  or,  in  the  case  of  a personal 
service  corporation,  the  amount  specified  in  clause  (1),  the  excess  shall 
be  credited  or  refunded  in  accordance  with  the  provisions  of  section  252. 


10 


THE  INCOME  TAX  LAW. 


' Law  Repeated 

Paragraph  at  ^ 

^65  (b)  If  a taxpayer  makes  a return  for  a fiscal  year  beginning  in  1918  618 

and  ending  in  1919,  the  tax  under  this  title  for  such  fiscal  year  shall  be 
the  sum  of: 

1f66  (1)  the  same  proportion  of  a tax  for  the  entire  period  com-  619 

puted  under  this  title  at  the  rates  specified  for  the  calendar 
year  1918  which  the  portion  of  such  period  falling  within  the 
calendar  year  1918  is  of  the  entire  period,  and 

^67  (2)  the  same  proportion  of  a tax  for  the  entire  period  com-  620 

puted  under  this  title  at  the  rates  specified  for  the  calendar 
year  1919  which  the  portion  of  such  period  falling  within  the 
calendar  year  1919  is  of  the  entire  period. 

1f68  (c)  If  a fiscal  year  of  a partnership  begins  in  1917  and  ends  in  1918  605 

or  begins  in  1918  and  ends  in  1919,  then  notwithstanding  the  pro- 
visions of  subdivision  (b)  of  section  218, 

1f69  (1)  the  rates  for  the  calendar  year  during  which  such  fiscal  606 

year  begins  shall  apply  to  an  amount  of  each  partner’s  share 
of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  year)  equal  to  the  proportion  which  the  part 
of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the 
full  fiscal  year,  and 

1f70  (2)  the  rates  for  the  calendar  year  during  which  such  fiscal  607 

year  ends  shall  apply  to  an  amount  of  each  partner’s  share 
of  such  partnership  net  income  (determined  under  the  law 
applicable  to  such  calendar  year)  equal  to  the  proportion  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year 
bears  to  the  full  fiscal  year: 

1[71  Provided,  That  in  the  case  of  a personal  service  corporation  with  608 
respect  to  a fiscal  year  beginning  in  1917  and  ending  in  1918,  the  amount 
specified  in  clause  (1)  shall  not  be  subject  to  normal  tax. 


Parts  of  Income  Subject  to  Rates  for  Different  Years. 

^72  Sec.  206.  That  whenever  parts  of  a taxpayer’s  income  are  628 
subject  to  rates  for  different  calendar  years,  the  part  subject  to  the 
rates  for  the  most  recent  calendar  year  shall  be  placed  in  the  lower 
brackets  of  the  rate  schedule  provided  in  this  title,  the  part  subject 
to  the  rates  for  the  next  preceding  calendar  year  shall  be  placed  in 
the  next  higher  brackets  of  the  rate  schedule  applicable  to  that  year, 
and  so  on  until  the  entire  net  income  has  been  accounted  for. 

1(73  In  determining  the  income,  any  deductions,  exemptions  or  credits  629 
of  a kind  not  plainly  and  properly  chargeable  against  the  income 
taxable  at  rates  for  a preceding  year  shall  first  be  applied  against  the 
income  subject  to  rates  for  the  most  recent  calendar  year; 

1(74  but  any  balance  thereof  shall  be  applied  against  the  income  subject  630 
to  the  rates  of  the  next  preceding  year  or  years  until  fully  allowed. 

11 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


Part  II. — Individuals. 

Normal  Tax. 

^75  Sec.  210.  That,  in  lieu  of  the  taxes  imposed  by  subdivision  (a)  476 

of  section  1 of  the  Revenue  Act  of  1916  and  by  section  1 of  the  Revenue  1536 
Act  of  1917,  there  shall  be  levied,  collected,  and  paid  for  each  taxable 
year  upon  the  net  income  of  every  individual  a normal  tax  at  the 
following  rates: 

1[76  (a)  For  the  calendar  year  1918,  12  per  centum  of  the  amount  477 

of  the  net  income  in  excess  of  the  credits  provided  in  section  216:  1537 

^77  Provided,  That  in  the  case  of  a citizen  or  resident  of  the  United  478 

States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall 
be  6 per  centum; 

1178  (b)  For  each  calendar  year  thereafter,  8 per  centum  of  the  479 

amount  of  the  net  income  in  excess  of  the  credits  provided  in  section  1538 
216: 

1[79  Provided,  That  in  the  case  of  a citizen  or  resident  of  the  United  480 

States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall 
be  4 per  centum. 

Surtax. 

K80  Sec.  211.  (a)  That,  in  lieu  of  the  taxes  imposed  by  sub-  482 

division  (b)  of  section  1 of  the  Revenue  Act  of  1916  and  by  section  1539 
2 of  the  Revenue  Act  of  1917,  but  in  addition  to  the  normal  tax 
imposed  by  section  210  of  this  Act,  there  shall  be  levied,  collected, 
and  paid  for  each  taxable  year  upon  the  net  income  of  every  in- 
dividual, a surtax  equal  to  the  sum  of  the  following: 

1[81  1 per  centum  of  the  amount  by  which  the  net  income  exceeds  485 

$5,000  and  does  not  exceed  $6,000; 

2 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$6,000  and  does  not  exceed  $8,000; 

3 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$8,000  and  does  not  exceed  $10,000; 

4 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$10,000  and  does  not  exceed  $12,000; 

5 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$12,000  and  does  not  exceed  $14,000; 

6 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$14,000  and  does  not  exceed  $16,000; 

7 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$16,000  and  does  not  exceed  $18,000; 

8 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$18,000  and  does  not  exceed  $20,000; 

9 per  centum  of  the  amount  by  which  the  net  income  exceeds 
$20,000  and  does  not  exceed  $22,000;^ 

10  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $22,000  and  does  not  exceed  $24,000; 

11  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $24,000  and  does  not  exceed  $26,000; 

12 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

(USD 


12  per  centum  of  the  amount  by  which  the 
ceeds  $26,000  and  does  not  exceed  $28,000; 

13  per  centum  of  the  amount  by  which  the 
ceeds  $28,000  and  does  not  exceed  $30,000; 

14  per  centum  of  the  amount  by  which  the 
ceeds  $30,000  and  does  not  exceed  $32,000; 

15  per  centum  of  the  amount  by  which  the 
ceeds  $32,000  and  does  not  exceed  $34,000; 

16  per  centum  of  the  amount  by  which  the 
ceeds  $34,000  and  does  not  exceed  $36,000; 

17  per  centum  of  the  amount  by  which  the 
ceeds  $36,000  and  does  not  exceed  $38,000; 

18  per  centum  of  the  amount  by  which  the 
ceeds  $38,000  and  does  not  exceed  $40,000; 

19  per  centum  of  the  amount  by  which  the 
ceeds  $40,000  and  does  not  exceed  $42,000; 

20  per  centum  of  the  amount  by  which  the 
ceeds  $42,000  and  does  not  exceed  $44,000; 

21  per  centum  of  the  amount  by  which  the 
ceeds  $44,000  and  does  not  exceed  $46,000;  . 

22  per  centum  of  the  amount  by  which  the 
ceeds  $46,000  and  does  not  exceed  $48,000; 

23  per  centum  of  the  amount  by  which  the 
ceeds  $48,000  and  does  not  exceed  $50,000; 

24  per  centum  of  the  amount  by  which  the 
ceeds  $50,000  and  does  not  exceed  $52,000; 

25  per  centum  of  the  am.ount  by  which  the 
ceeds  $52,000  and  does  not  exceed  $54,000; 

26  per  centum  of  the  amount  by  which  the 
ceeds  $54,000  and  does  not  exceed  $56,000; 

27  per  centum  of  the  amount  by  which  the 
ceeds  $56,000  and  does  not  exceed  $58,000; 

28  per  centum  of  the  amount  by  which  the 
ceeds  $58,000  and  does  not  exceed  $60,000; 

29  per  centum  of  the  amount  by  which  the 
ceeds  $60,000  and  does  not  exceed  $62,000; 

30  per  centum  of  the  amount  by  which  the 
ceeds  $62,000  and  does  not  exceed  $64,000; 

31  per  centum  of  the  amount  by  which  the 
ceeds  $64,000  and  does  not  exceed  $66,000; 

32  per  centum  of  the  amount  by  which  the 
ceeds  $66,000  and  does  not  exceed  $68,000; 

33  per  centum  of  the  amount  by  which  the 
ceeds  $68,000  and  does  not  exceed  $70,000; 

34  per  centum  of  the  amount  by  which  the 
ceeds  $70,000  and  does  not  exceed  $72,000; 

35  per  centum  of  the  amount  by  which  the 
ceeds  $72,000  and  does  not  exceed  $74,000; 

36  per  centum  of  the  amount  by  which  the 
ceeds  $74,000  and  does  not  exceed  $76,000; 

37  per  centum  of  the  amount  by  which  the 
ceeds  $76,000  and  does  not  exceed  $78,000; 

38  per  centum  of  the  amount  by  which  the 
ceeds  $78,000  and  does  not  exceed  $80,000; 


net 

income 

ex- 

Repeated 
at  H 

(485) 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

net 

income 

ex- 

13 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

(1181) 


1182 


39  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $80,000  and  does  not  exceed  $82,000; 

40  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $82,000  and  does  not  exceed  $84,000; 

41  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $84,000  and  does  not  exceed  $86,000; 

42  per  centum  of  the  amount  by  which  the  net 
ceeds  $86,000  and  does  not  exceed  $88,000; 

43  per  centum  of  the  amount  by  which  the  net 
ceeds  $88,000  and  does  not  exceed  $90,000; 

44  per  centum  of  the  am.ount  by  which  the  net 
ceeds  $90,000  and  does  not  exceed  $92,000; 

45  per  centum  of  the  amount  by  which  the  net 
ceeds  $92,000  and  does  not  exceed  $94,000; 

46  per  centum  of  the  amount  by  which  the  net 
ceeds  $94,000  and  does  not  exceed  $96,000; 

47  per  centum  of  the  amount  by  which  the  net 
ceeds  $96,000  and  does  not  exceed  $98,000; 

48  per  centum  of  the  amount  by  which  the  net 
ceeds  $98,000  and  does  not  exceed  $100,000; 

52  per  centum  of  the  amount  by  which  the  net 
ceeds  $100,000  and  does  not  exceed  $150,000; 

56  per  centum  of  the  amount  by  which  the  net 
ceeds  $150,000  and  does  not  exceed  $200,000; 

60  per  centum  of  the  amount  by  which  the  net 
ceeds  $200,000  and  does  not  exceed  $300,000; 

63  per  centum  of  the  amount  by  which  the  net 
ceeds  $300,000  and  does  not  exceed  $500,000; 

64  per  centum  of  the  amount  by  which  the  net 
ceeds  $500,000  and  does  not  exceed  $1,000,000; 

65  per  centum  of  the  amount  by  which  the  net  income  ex- 
ceeds $1,000,000. 

(b)  In  the  case  of  a bona  fide  sale  of  mines,  oil  or  gas  wells,  or  any 
interest  therein,  where  the  principal  value  of  the  property  has  been 
demonstrated  by  prospecting  or  exploration  and  discovery  work 
done  by  the  taxpayer,  the  portion  of  the  tax  imposed  by  this  section 
attributable  to  such  sale  shall  not  exceed  20  per  centum  of  the  selling 
price  of  such  property  or  interest. 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


ncome  ex- 


income  ex- 


Repeated 

at 

(485) 


487 


Net  Income  Defined 

^83  Sec.  212.  (a)  That  in  the  case  of  an  individual  the  term  “net  769 

income”  means  the  gross  income  as  defined  in  section  213,  less  the  1540 
deductions  allowed  by  section  214. 

1[84  (b)  The  net  income  shall  be  computed  upon  the  basis  of  the  tax-  778 

payer’s  annual  accounting  period  (fiscal  year  or  calendar  year,  as 
the  case  may  be)  in  accordance  with  the  method  of  accounting 
regularly  employed  in  keeping  the  books  of  such  taxpayer; 

1[S5  but  if  no  such  method  of  accounting  has  been  so  employed,  779 

or  if  the  method  employed  does  not  clearly  reflect  the  in- 
come, the  computation  shall  be  made  upon  such  basis  and 
in  such  manner  as  in  the  opinion  of  the  Commissioner  does 
clearly  reflect  the  income. 


14 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  i 

1f86  If  the  taxpayer’s  annual  accounting  period  is  other  than  a fiscal  year  793 
as  defined  in  section  200  or  if  the  taxpayer  has  no  annual  accounting 
period  or  does  not  keep  books,  the  net  income  shall  be  computed  on 
the  basis  of  the  calendar  year. 

1187  If  a taxpayer  changes  his  accounting  period  from  fiscal  year  to  800 
calendar  year,  from  calendar  year  to  fiscal  year,  or  from  one  fiscal 
year  to  another,  the  net  income  shall,  with  the  approval  of  the 
Commissioner,  be  computed  on  the  basis  of  such  new  accounting 
period,  subject  to  the  provisions  of  section  226. 


Gross  Income  Defined. 

1[88  Sec.  213.  That  for  the  purposes  of  this  title  (except  as  other-  802 
wise  provided  in  section  233)  the  term  “gross  income” — 

1f89  (a)  Includes  gains,  profits,  and  income  derived  from  salaries, \ 803 

wages,  or  compensation  for  personal  service  (including  in  the  case  of  the 
President  of  the  Ihiited  States,  the  judges  of  the  Supreme  and  inferior 
courts  of  the  United  States,  and  all  other  officers  and  employees,  whether 
elected  or  appointed,  of  the  United  States,  Alaska,  Hawaii,  or  any 
political  subdivision  thereof,  or  the  District  of  Columbia,  the  com- 
pensation received  as  such),  of  whatever  kind  and  in  vrhatever  form 
paid,  or 

1(90  from  professions,  vocations,  trades,  businesses,  commerce,  or  sales,  804 
or  dealings  in  property,  whether  real  or  personal,  growing  out  of  the 
ownership  or  use  of  or  interest  in  such  property; 

1i91  also  from  interest,  rent,  dividends,  securities,  or  the  transaction  805 
of  any  business  carried  on  for  gain  or  profit,  or 

1[92  gains  or  profits  and  Income  derived  from  any  source  whatever.  806 

1[93  I'he  amount  of  all  such  items  shall  be  Included  In  the  gross  Income  807 
for  the  taxable  year  in  which  received  by  the  taxpayer,  unless,  under 
methods  of  accounting  permitted  under  subdivision  (b)  of  section  212, 
any  such  amounts  are  to  be  properly  accounted  for  as  of  a different 
period;  but 

1[94  (b)  Does  not  include  the  following  items,  which  shall  be  exempt  1109 

from  taxation  under  this  title: 

1f95  (1)  The  proceeds  of  life  insurance  policies  paid  upon  the  death  1112 

of  the  insured  to  individual  beneficiaries  or  to  the  estate  of  the  Insured; 

1(96  (2)  The  amount  received  by  the  Insured  as  a return  of  premium  1113 

or  premiums  paid  by  him  under  life  insurance,  endowment,  or  an- 
nuity contracts,  either  during  the  term  or  at  the  maturity  of  the 
term  mentioned  in  the  contract  or  upon  surrender  of  the  contract; 

1[97  (3)  The  value  of  property  acquired  by  gift,  bequest,  devise,  or  1128 

descent  (but  the  income  from  such  property  shall  be  included  in 
gross  income); 


15 


THE  INCOME  TAX  LAW. 


' ""  Repeated 

Law  at  f 

1198  (4)  Interest  upon  (a)  the  obligations  of  a State,  Territory,  or  1130 
any  political  subdivision  thereof,  or  the  District  of  Columbia;  or 

1199  (b)  securities  issued  under  the  provisions  of  the  Federal  1131 

Farm  Loan  Act  of  July  17,  1916;  or 

UlOO  (c)  the  obligations  of_  the^^^United  States  or  its  possessions;  or  1132 

1[101  (d)  bonds^  issued  by  the^  War^  Finance;j^Corporation.  1133 

11102  Provided,  That  every  person  owning  any  of  the  obligations,  securities  or  1134 
bonds  enumerated  in  clauses  {a),{b),  (c)  and  {d)  shall,  in  the  return  re- 
quired by  this  title,  submit  a statement  showing  the  number  and  amount 
of  such  obligations,  securities  and  bonds  owned  by  him  and  the  incorne 
received  therefrom,  in  such  form  and  with  such  information  as  the  Commis- 
sioner may  require. 

^103  In  the  case  of  obligations  of  the  United  States  issued  after  September  1138 
1 1917  and  in  the  case  of  bonds  issued  by  the  \\  ar  Finance  Corpora- 
tion, the  interest  shall  be  exempt  only  if  and  to  the  extent  P/ovided 
in  the  respective  Acts  authorizing  the  issue  thereof  as  amended  and 
supplemented,  and  shall  be  excluded  from  gross  income  only  if  and 
to  the  extent  it  is  wholly  exempt  from  taxation  to  the  taxpayer  both 
under  this  title  and  under  Title  III; 

1T104  (5)  The  income  of  foreign  governments  received  from  invest-  1162 

merits  in  the  United  States  in  stocks,  bonds,  or  other  domestic 
securities,  owned  by  such  foreign  governments,  or  from  interest  on 
deposits  in  banks  in  the  United  States  of  moneys  belonging  to  such 
foreign  governments,  or  from  any  other  source  within  the  United 

States; 

11105  (6)  Amounts  received,  through  accident  or  health  insurance  1111 

or  under  workmen’s  compensation  acts,  as  compensation  for  personal 
injuries  or  sickness,  plus  the  amount  of  any  damages  received  whether 
by  suit  or  agreement  on  account  of  such  injuries  or  sickness, 

1^106  (7)  Income  derived  from  any  public  utility  or  the  exerc^e  of  any  1164 

essential  governmental  function  and  accruing  to  any  State,  Territory, 
or  the  District  of  Columbia,  or  any  political  subdivision  of  a State 
or  Territory,  or  income  accruing  to  the  government  of  any  possession 
of  the  United  States,  or  any  political  subdivision  thereof. 

11107  Whenever  any  State,  Territory,  or  the  district  of  Columbia,  or  any  1 165 
political  subdivision  of  a State  or  Territory,  prior  to  September  8, 

1916  entered  in  good  faith  into  a contract  with  any  person,  the 
object  and  purpose  of  which  is  to  acquire,  construct,  operate,  or 
maintain  a public  utility,  no  tax  shall  be  levied  under  the  provisions 
of  this  title  upon  the  income  derived  from  the  operation  of  such 
public  utility,  so  far  as  the  payment  thereof  will  impose  a loss  or 
burden  upon  such  State,  Territory,  District  of  Columbia,  or  political 
subdivision;  but  this  provision  is  not  intended  to  confer  upon  such 
person  any  financial  gain  or  exempton  or  to  re  leve  such  person 
from  the  payment  of  a tax  as  provided  for  in  this  title  upon  the  part  or 

16 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

portion  of  such  income 
contract; 


Repeated 
at  H 

to  which  such  person  is  entitled  under  such 


^108  (8)  So  much  of  the  amount  received  during  the  present  war  by  a person  1172 

in  the  military  or  naval  forces  of  the  United  States  as  salary  or  com- 
pensation in  any  form  from  the  United  States  for  active  services  in  such 
forces,  as  does  not  exceed  $3,500 

1(109  (c)  In  the  case  of  nonresident  alien  individuals,  gross  income  1542 

includes  only  the  gross  income  from  sources  within  the  United  States, 


1(110  including  interest  on  bonds,  notes,  or  other  interest-bearing  obliga-  1543 
tions  of  residents,  corporate  or  otherwise,  dividends  from  resident 
corporations,  and 

^111  including  all  amounts  received  (although  paid  under  a contract  for  1544 
the  sale  of  goods  or  otherwise)  representing  profits  on  the  manu- 
facture and  disposition  of  goods  within  the  United  States. 

Deductions  Allowed. 


K112  Sec.  214.  (a)  That  in  computing  net  income  there  shall  be  allowed  1179 
as  deductions: 

K113  (1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  1182 

during  the  taxable  year  in  carrying  on  any  trade  or  business, 

^114  including  a reasonable  allowance  for  salaries  or  other  compensation  1208 
for  personal  services  actually  rendered,  and 

1(115  including  rentals  or  other  payments  required  to  be  made  as  a con-  1229 
- dition  to  the  continued  use  or  possession,  for  purposes  of  the  trade 
or  business,  of  property  to  which  the  taxpayer  has  not  taken  or  is  not 
taking  title  or  in  which  he'  has  no  equity; 

K116  (2)  All  interest  paid  or  accrued  within  the  taxable  year  on  in-  1232 

debtedness, 

1233 


K117 


except  on  indebtedness  incurred  or  continued  to  purchase  or 
carry  obligations  or  securities  (other  than  obligations  of  the 
United  States  issued  after  September  24,  1917),  the  interest 
upon  which  is  wholly  exempt  from  taxation  under  this  title 
as  income  to  the  taxpayer,  or. 


Kll8  in  the  case  of  a nonresident  alien  individual,  the  proportion  of  such  1563 
interest  which  the  amount  of  his  gross  income  from^  sources  within 
the  United  States  bears  to  the  amount  of  his  gross  income  from  all 
sources  within  and  without  the  United  States; 

1(119  (3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed  1245 

K120  (a)  by  the  authority  of  the  United  States,  except  income,  war-  1246 
profits  and  excess-profits  taxes;  or 

1(121  (b)  by  the  authority  of  any  of  its  possessions,  except  the  aniount  of  1247 
income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under 
section  222;  or 


17 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at 

1[122  (c)  by  the  authority  of  any  State  or  Territory,  or  any  county,  1248 
school  district,  municipality,  or  other  taxing  subdivision  of  any 
State  or  Territory, 

^123  not  including  those  assessed  against  local  benefits  of  a kind  tending  1260 
to  increase  the  value  of  the  property  assessed;  or 

^124  (d)  in  the  case  of  a citizen  or  resident  of  the  United  States,  by  1281 
the  authority  of  any  foreign  country,  except  the  amount  of  income, 
war-profits  and  excess-profits  taxes  allowed  as  a credit  under  section 
222;  or 

^[125  (e)  in  the  case  of  a nonresident  alien  individual,  by  the  authority  of  1564 
any  foreign  country  (except  income,  war-profits  and  excess-profits 
taxes,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to 
increase  the  value  of  the  property  assessed),  upon  property  or  busi- 
ness; 

^126  (4)  Losses  sustained  during  the  taxable  year  and  not  compen-  1303 

sated  for  by  insurance  or  otherwise,  if  incurred  in  trade  or  business; 

^[127  (5)  Losses  sustained  during  the  taxable  year  and  not  compensated  1310 

for  by  insurance  or  otherwise,  if  incurred  in  any  transaction  entered 
into  for  profit,  though  not  connected  with  the  trade  or  business; 

^[128  but  in  the  case  of  a nonresident  alien  individual  only  as  to  1565 

such  transactions  within  the  United  States; 

1[129  (6)  Losses  sustained  during  the  taxable  year  of  property  not  1311 

connected  with  the  trade  or  business 

^130  (but  in  the  case  of  a nonresident  alien  individual  only  prop-  1566 

erty  within  the  United  States) 

1il31  if  arising  from  fires,  stornrs,  shipwreck,  or  other  casualty,  or  from  1312 
theft,  and  if  not  compensated  for  by  insurance  or  otherwise; 

1[132  (7)  Debts  ascertained  to  be  worthless  and  charged  off  within  1316 

the  taxable  year; 

1(133  (8)  A reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  1328 

property  used  in  the  trade  or  business,  including  a reasonable  allowance 
for  obsolescence; 

1(134  (9)  In  the  case  of  buildings,  machinery,  equipment,  or  other  1376 

facilities,  constructed,  erected,  installed,  or  acquired,  on  or  after 
April  6,  1917,  for  the  production  of  articles  contributing  to  the 
prosecution  of  the  present  war,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  contributing  to  the  prosecution  of  the  present  war,  there  shall 
be  allowed  a reasonable  deduction  for  the  amortization  of  such  part 
of  the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the  tax- 
payer, but  not  again  including  any  amount  otherwise  allowed  under 
this  title  or  previous  Acts  of  Congress  as  a deduction  in  computing 
net  income. 


18 


THE  INCOME  TAX  LAW. 


Law  _ 

Paragraph  ^ ^ 

•*il35  At  any  time  within  three  years  after  the  termination  of  the  present  1377 
war,  the  Commissioner  may,  and  at  the  request  of  the  taxpayer  shall, 
reexamine  the  return,  and  if  he  then  finds  as  a result  of  an  appraisal 
or  from  other  evidence  that  the  deduction  originally  allowed  was  in- 
correct, the  taxes  imposed  by  this  title  and  by  Title  III  for  the  year 
or  years  affected  shall  be  redetermined;  and 

^136  the  am^ount  of  tax  due  upon  such  redetermination,  if  any,  shall  be  1378 
paid  upon  notice  and  demand  by  the  collector,  or  the  amount  of  tax 
overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252; 

^137  (10)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  de-  1397 

posits,  and  timber,  a reasonable  allowance  for  depletion  and  for 
depreciation  of  improvements,  according  to  the  peculiar  conditions 
in  each  case,  based  upon  cost  including  cost  of  development  not 
otherwise  deducted: 

Provided,  That  in  the  case  of  such  properties  acquired  prior  13*^8 
to  March  1,  1913,  the  fair  market  value  of  the  property  (or  the 
taxpayer's  interest  therein)  on  that  date  shall  be  taken  in  lieu 
\ ■ of  cost  up  to  that  date: 

Vl39  Provided  further,  That  in  the  case  of  mines,  oil  and  gas  wells,  1399 
discovered  by  the  taxpayer , on  or  after  March  1,  1918,  and  not 

’ ■ - acquired  as  the  result  of  purchase  of  a proven  tract  or  lease, 
where  the  fair  market  value  of  the  property  is  materially  dis- 
proportionate to  the  cost,  the  depletion  allowance  shall  be 
based  upon  the  fair  market  value  of  the  property  at  the  date  of 
■ the- discovery,  or  within  thirty  days  thereafter; 

^140  such  reasonable  allowance  in  all  the  above  cases  to_  be  made  under  1400 
rules  and  regulations  to  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary. 

IfUl  In.  the  case  of  leases  the  deductions  allowed  by  this  paragraph  shall  be  1401 
equitably  apportioned  between  the  lessor  and  lessee 

^142  (11)  Contributions  or  gifts  made  within  the  taxable  year  to  1447 

corporations  organized  and  operated  exclusively  for  religious,  charit- 
able, scientific,  or  educational  purposes,  or  for  the  prevention  of 
cruelty  to  children  or  animals,  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual,  or  to  the 
special  fund  for  vocational  rehabilitation  authorized  by  section  7 of 
the  Vocational  Rehabilitation  Act,  to  an  amount  not  in  excess  of 
15  per  centum  of  the  taxpayer’s  net  income  as  computed  without  the 
benefit  of  this  paragraph.  Such  contributions  or  gifts  shall^  be 
allowable  as  deductions  only  if  verified  under  rules  and  regulations 

T 1 1 prescribed  by  the  Commissioner,  with  the  approval  of  the  Secretary. 

^,|143  In  the  case  of  a nonresident  alien  individual  this  deduction  1567 

i shall  be  allowed  only  as  to  contributions  or  gifts  rnade^  to 

domestic  corporations,  or  to  such  vocational  rehabilitation 
i ; dund; 


19^ 


THE  INCOME  TAX  LAW. 


Law 
Paragraph 

1[144  (12)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a 

taxpayer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has 
sustained  a substantial  loss  (whether  or  not  actually  realized  by  sale 
or  other  disposition)  resulting  from  any  material  reduction  (not  due 
to  temporary  fluctuation)  of  the  value  of  the  inventory  for  such  taxable 
year, 


Repeated 

1467 


1[145  or  from  the  actual  payment  after  the  close  of  such  taxable  year  of  re-  1468 
bates  in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year. 

^146  In  such  case  payment  of  the  amount  of  the  tax  covered  by  such  claim  1469 
shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer  shall 
accompany  his  claim  with  a bond  in  double  the  amount  of  the  tax 
covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner, 
conditioned  for  the  payment  of  any  part  of  such  tax  found  to  be  due, 
with  interest.  If  any  part  of  such  claim  is  disallowed  then  the  remain- 
der of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid 
by  the  taxpayer  with  interest  at  the  rate  of  1 per  centuni  per  month  from 
the  time  the  tax  would  have  been  due  had  no  such  claim  been  filed. 

1[147  If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub-  1470 
stantial  loss  has  been  sustained,  then  in  computing  the  tax  imposed  by 
this  title  the  amount  of  such  loss  shall  be  deducted  from  the  net  income. 

^148  (b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the  1471 
Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has 
sustained  a substantial  loss  of  the  character  above  described  then  the 
amount  of  such  loss  shall  be  deducted  from  the  net  income  for  the 
taxable  year  1918  and  the  tax  imposed  by  this  title  for  such  year  shall 
be  redetermined  accordingly.  Any  amount  found  to  be  due  to  the 
taxpayer  upon  the  basis  of  such  redetermination  shall  be  credited^  or 
refunded  to  the  taxpayer  in  accordance  with  the  provisions  of  section 
252. 


If  149  (b)  In  the  case  of  a nonresident  alien  individual  the  deductions  1561 

allowed  in  paragraphs  (1),  (4),  (7),  (8),  (9),  (10),  (12), and  clause  (e) 
of  paragraph  (3),  of  subdivision  (a)  shall  be  allowed  only  if  and  to  the 
extent  that  they  are  connected  with  income  arising  from  a source 
within  the  United  States; 

^150  and  the  proper  apportionment  and  allocation  of  the  deductions  with  1562 
respect  to  sources  of  income  within  and  without  the  United  States 
shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner^with  the  approval  of  the  Secretary. 

Items  Not  Deductible. 

1fl51  Sec.  215.  That  in  computing  net  income  no  deduction  shall  in  1184 
any  case  be  allowed  in  respect  of — 

1(152  (a)  Personal,  living,  orTamily  expenses;  1185 

K153  (b)  Any  amount  paid  out  for  new  buildings  or  for  permanent  1188 

improvements  or  betterments  made  to  increase  the  value  of  any 
property  or  estate; 


20 


THE  INCOME  TAX  LAW. 


- „ Repeated 

at  IT 

Paragraph  , ' 

11154  (c)  Any  amount  expended  in  restoring  property  or  in  making  1189 

good  the  exhaustion  thereof  for  which  an  allowance  is  or  has  been 
made;  or 


11155  : (d)  Premiums  paid  on  any  life  insurance  policy  covering  the  life  of  1 196 

“^any  officer  or  employee,  or  of  any  person  financially  interested  in 
any  trade  or  business  carried  on  by  the  taxpayer,  when  the  taxpayer 
is  directly  or  indirectly  a beneficiary  under  such  policy. 


Credits  Allowed. 

1[156  Sec.  216.  That  for  the  purpose  of  the  normal  tax  only  there  1513 
shall  be  allowed  the  following  credits: 

11157  (a)  The  amount  received  as  dividends  from  a corporation  which  1514 

is  taxable  under  this  title  upon  its  net  income,  and  amounts  received 
as  dividends  from  a personal  service  corporation  out  of  earnings  or 
profits  upon  which  income  tax  has  been  imposed  by  Act  of  Congress; 

1fl58  (b)  The  amount  received  as  interest  upon  obligations  of  the  1515 

United  States  and  bonds  issued  by  the  War  Finance  Corporation, 
which  is  included  in  gross  income  under  section  213; 

1[159  (c)  In  the  case  of  a single  person,  a personal  exemption  of  1518 

$1,000,  or 


11160  in  the  case  of  the  head  of  a family  or  a married  person  living  with  1519 
husband  or  wife,  a personal  exemption  of  $2,000. 

1[161  A husband  and  wife  living  together  shall  receive  but  one  personal  1520 
exemption  of  $2,000  against  their  aggregate  net  income; 

11162  and  in  case  they  make  separate  returns,  the  personal  exemption  of  1521 
$2,000  may  be  taken  by  either  or  divided  between  them; 

1[163  (d)  $200  for  each  person  (other  than  husband  or  wife)  dependent  1524 

upon  and  receiving  his  chief  support  from  the  taxpayer,  if  such  de- 
pendent person  is  under  eighteen  years  of  age  or  is  incapable  of  self- 
support  because  mentally  or  physically  defective. 

11164  (e)  In  the  case  of  a nonresident  alien  individual  who  is  a citizen  1570 

or  subject  of  a country  which  imposes  an  income  tax,  the  credits 
allowed  in  subdivisions  (c)  and  (d)  shall  be  allowed  only  if  such 
country  allows  a similar  credit  to  citizens  of  the  United  States  not 
residing  in  such  country. 

Nonresident  Aliens — Allowance  of  Deductions  and  Credits. 

1fl65  Sec.  217.  That  a nonresident  alien  individual  shall  receive  the  1574 
benefit  of  the  deductions  and  credits  allowed  in  this  title  only  by  filing 
or  causing  to  be  filed  with  the  cc^llcctor  a true  and  accurate  return  of 
his  total  income  received  from  all  sources  corporate  or  otherwise  in 
the  United  States,  in  the  manner  prescribed  by  this  title,  including 
therein  all  the  information  which  the  Commissioner  may  deem 
necessary  for  the  calculation  of  such  deductions  and  credits: 

21 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

^[166  Provided^  That  the  benefit  of  the  credits  allowed  in  subdivisions 
(c)  and  {(T)  of  section  216  may,  in  the  discretion  of ^ the  Com- 
missioner, and  except  as  otherwise  provided  in  subdivision  ^{e) 
of  that  section,  be  received  by  fling  a claim  therefor  with  the 
withholding  agent. 


Repeated 
at  % 

1576 


^167  In  case  of  failure  to  file  a return,  the  collector  shall  collect  the  tax  1582 
on  such  income,  and  all  property  belonging  to  such  nonresident  alien 
individual  shall  be  liable  to  distraint  for  the  tax. 


Partnerships  and  Personal  Service  Corporations. 

^168  Sec.  218.  (a)  That  individuals  carrying  on  business  in  partner-  546 

ship  shall  be  liable  for  income  tax  only  in  their  individual  capacity. 

^169  There  shall  be  included  in  computing  the  net  income  of  each  partner  564 
his  distributive  share,  whether  distributed  or  not,  of  the  net  income 
of  the  partnership  for  the  taxable  year,  or, 

^170  if  his  net  income  for  such  taxable  year  is  computed  upon  the  basis  565 
of  a period  different  from  that  upon  the  basis  of  which  the  net  income 
of  the  partnership  is  computed,  then  his  distributive  share  of  the  net 
income  of  the  partnership  for  any  accounting  period  of  the  partner- 
ship ending  within  the  fiscal  or  calendar  year  upon  the  basis  of  which 
the  partner’s  net  income  is  computed. 

1[171  The  partner  shall,  for  the  purpose  of  the  normal  tax,  be  allowed  571 
as  credits,  in  addition  to  the  credits  allowed  to  him  under  section  216, 
his  proportionate  share  of  such  amounts  specified  in  subdivisions  (a) 
and  (b)  of  section  216  as  are  received  by  the  partnership.  , 

11172  (b)  If  a fiscal  year  of  a partnership  ends  during  a calendar  year  601 
for  which  the  rates  of  tax  differ  from  those  for  the  preceding  calendar 
year,  then 

11173  (1)  the  rates  for  such  preceding  calendar  year  shall  apply  602 

to  an  amount  of  each  partner’s  share  of  such  partnership  net 
income  equal  to  the  proportion  which  the  part  of  such  fiscal 

year  falling  within  such  calendar  year  bears  to  the  full  fiscal 
year,  and 

Hi 74  (2)  the  rates  for  the  calendar  year  during  which  such  fiscal  603 

year  ends  shall  apply  to  the  remainder. 

Hi 75  (c)  In  the  case  of  an  individual  member  of  a partnership  which  604 

makes  return  for  a fiscal  year  beginning  in  1917  and  ending  in  1918, 
his  proportionate  share  of  any  excess-profits  tax  imposed  upon  the  part- 
nership under  the  Revenue  Act  of  1917  with  respect  to  that  part  of 
such  fiscal  year  falling  in  1917,  shall,  for  the  purpose  of  determining 
the  tax  imposed  by  this  title,  be  credited  against  that  portion  of 

the  net  income  embraced  in  his  personal  return  for  the  taxable 

year  1918  to  which  the  rates  for  1917  apply. 

H176  (d)  The  net  income  of  the  partnership  shall  be  computed  in  the  552 

same  manner  and  on  the  same  basis  as  provided  in  ^section  212  except 

22 


THE  INCOME  TAX  LAW. 


Repeated 
at  11 


Law 

p.rafraph^^  the  deduction  provided  in  paragraph  (11)  of  subdivision  (a)  of 
section  214  shall  not  be  allowed. 

‘,177  (e)  Personal  service  corporations  shall  not  be  subject  to  taxation  593 

under  this  title,  but  the  individual  stockholders  thereof  shall  be 
taxed  in  the  same  manner  as  the  members  of  partnerships. 

1178  All  the  provisions  of  this  title  relating  to  partnerships  and  the  mem-  594 
' bers  thereof  shall  so  far  as  practicable  apply  to  personal  service  cor- 
porations and  the  stockholders  thereof; 

1179  Provided,  That  for  the  purpose  of  thu  subdivision  amounts  dis-  595 

* tribute d by  a personal  service  corporation  during  its  taxable  year 

shall  be  accounted  for  by  the  distributees;  and  any  portion  of  the 
net  income  remaining  undistributed  at  the  close  of  its  taxable  ^ 
year  shall  be  accounted  for  by  the  stockholders  of  such  corpora- 
tion at  the  close  of  its  taxable  year  in  proportion  to  their  re- 
spective shares. 

Estates  and  Trusts. 

1180  Sec.  219.  (a)  That  the  tax  imposed  by  sections  210  and  211  636 

shall  apply  to  the  income  of  estates  or  of  any  kind  of  property  held 

in  trust,  including— 

1181  (1)  Income  received  by  estates  of  deceased  persons  during  the  637 
period  of  administration  or  settlement  of  the  estate; 

1182  (2)  Income  accumulated  in  trust  for  the  benefit  of  unborn  or  639 
' unascertained  persons  or  persons  with  contingent  interests; 

1183  (3)  Income  held  for  future  distribution  under  the  terms  of  the  640 
will  or  trust;  and 

1184  (4)  Income  which  is  to  be  distributed  to  the  beneficiaries  period-  644 
ically,  whether  or  not  at  regular  intervals,  and  the  income  collected 

by  a guardian  of  an  infant  to  be  held  or  distributed  as  the  court  may 

direct. 

1185  (b)  The  fiduciary  shall  be  responsible  for  making  the  return  of  678 
income  for  the  estate  or  trust  for  which  he  acts. 

1186  The  net  income  of  the  estate  or  trust  shall  be  computed  m the  same  651 
manner  and  on  the  same  basis  as  provided  in  section  212, 

1187  except  that  there  shall  also  be  allowed  as  a deduction  (in  lieu  652 

of  the  deduction  authorized  by  paragraph  (11)  of  subdivision 

(a)  of  section  214)  any  part  of  the  gross  income  which,  pur- 
suant to  the  terms  of  the  will  or  deed  creating  the  trust,  is 
during  the  taxable  year  paid  to  or  permanently  set  aside  tor  the 
United  States,  any  State,  Territory,  or  any  political  subdivi- 
sion thereof,  or  the  District  of  Columbia,  or  any  corporation  or- 
ganized and  operated  exclusively  for  religious,  charitable,  scien- 
tific, or  educational  purposes,  or  for  the  prevention  of  cruelty 
to  children  or  animals,  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual; 

23 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 


Repeated 


11188  andjn  cases  under  paragraph  (4)  of  subdivision  (a)  of  this  section  683 
the  fiduciary  shall  include  in  the  return  a statement  of  each  bene- 
ficiary’s distributive  share  of  such  net  income,  whether  or  not 
distributed  before  the  close  of  the  taxable  year  for  which  the  return 
is  made. 


%189  (c)  In  cases  under  paragraph  (1),  (2),  or  (3)  of  subdivision  (a)  641 

the  tax  shall  be  imposed  upon  the  net  income  of  the  estate  or  trust 
and  shall  be  paid  by  the  fiduciary, 


11190  except  that  in  determining  the  net  income  of  the  estate  of  653 
any  deceased  person  during  the  period  of  administration 

or  settlement  there  may  be  deducted  the  amount  of  any 
income  properly  paid  or  credited  to  any  legatee,  heir  or  other 
beneficiary, 

11191  In  such  cases  the  estate  or  trust  shall,  for  the  purpose  of  the  nor-  667 
mal  tax,  be  allowed  the  same  credits  as  are  allowed  to  single  per- 
sons under  section  216, 


1(192  (d)  In  cases  under  paragraph^ (4) ^of^subdivision  (a),  645 

1(193  and  in  the  case  of  any  income  of  an  estate  during  the  period  of  ad-  646 
ministration  or  settlement  permitted  by  subdivision  (c)  to  be  de- 
ducted from  the  net  income  upon  which  tax  is  to  be  paid  by  the 
fiduciary, 


1(194  the  tax  shall  not  be  paid  by  the  fiduciary,  but  there  shall  be  included  647 
in  computing  the  net  income  of  each  beneficiary  his  distributive  share, 
whether  distributed  or  not,  of  the  net  income  of  the  estate  or  trust 
for  the  taxable  year,  or, 

11195  if  his  net  income  for  such  taxable  year  is  computed  upon  the  basis  648 
of  a period  different  from  that  upon  the  basis  of  which  the  net 
income  of  the  estate  or  trust  is  computed,  then  his  distributive  share  of 
the  net  income  of  the  estate  or  trust  for  any  accounting  period  of  such 
estate  or  trust  ending  within  the  fiscal  or  calendar  year  upon  the 
basis  of  which  such  beneficiary’s  net  income  is  computed. 

K196  In  such  cases  the  beneficiary  shall,  for  the  purpose  of  the  normal  665 
tax,  be  allowed  as  credits  in  addition  to  the  credits  allowed  to  him 
under  section  216,  his  proportionate  share  of  such  amounts  specified 
in  subdivisions  (a)  and  (b)  of  section  216  as  are  received  by  the 
estate  or  trust. 

Profits  of  Corporations  Taxable  to  Stockholders, 

1(197  Sec,  220,  That  if  any  corporation,  however  created  or  organ-  497 
ized,  is  formed  or  availed  of  for  the  purpose  of  preventing  the  im- 
position of  the  surtax  upon  its  stockholders  or  members  through  the 
medium  of  permitting  its  gains  and  profits  to  accumulate  instead  of 
being  divided  or  distributed,  such  corporation  shall  not  be  subject 
to  the  tax  imposed  by  section  230,  but  the  stockholders  or  members 
thereof  shall  be  subject  to  taxation  under  this  title  in  the  same  manner 
as  provided  in  subdivision  (e)  of  section  218  in  the  case  of  stockholders 

24 


THE  INCOME  TAX  LAW. 


Law 

Paracraph  . j i rp*  i 

of  a personal  service  corporation,  except  that  the  tax  imposed  by  Title 
III  shall  be  deducted  from  the  net  income  of  the  corporation  before 
the  computation  of  the  proportionate  share  of  each  stockholder  or 
member. 


Repeated 

at.H 


1[198  The  fact  that  any  corporation  is  a mere  holding  company,  or  that  498 
the  gains  and  profits  are  permitted  to  accumulate  beyond  the  reas- 
onable needs  of  the  business,  shall  be  prima  facie  evidence  of  a pur- 
pose to  escape  the  surtax; 


^199  but  the  fact  that  the  gains  and  profits  are  in  any  case  permitted  to  499 
accumulate  and  become  surplus  shall  not  be  construed  as  evidence  of 
a purpose  to  escape  the  tax  in  such  case  unless  the  Commissioner  certifies 
that  in  his  opinion  such  accumulation  is  unreasonable  for  the  pur- 
poses of  the  business. 

11200  When  requested  by  the  Commissioner,  or  any  collector,  every  cor-  500 
poration  shall  forward  to  him  a correct  statement^  of  such  gains  and 
profits  and  the  names  and  addresses  of  the  individuals  or  share- 
holders who  would  be  entitled  to  the  same  if  divided  or  distributed, 
and  of  the  amounts  that  would  be  payable  to  each. 


Pa3rment  of  Tax  at  Source. 

H201  Sec.  221.  (a)  That  all  individuals,  corporations  and  partner-  1585 

ships,  in  whatever  capacity  acting,  including  lessees  or  mortgagors 
of  real  or  personal  property,  fiduciaries,  employers,  and  all  officers 
and  employees  of  the  United  States, 

1[202  having  the  control,  receipt,  custody,  disposal,  or  payment,  of  interest,  1586 
rent,  salaries,  wages,  premiums,  annuities,  compensations,  remuner- 
ations, emoluments,  or  other  fixed  or  determinable  annua  or  period- 
ical gains,  profits,  and  income, 

1[203  of  any  nonresident  alien  individual  1587 

1[204  (other  than  income  received  as  dividends  from  a corporation  which  1588 
taxable  under  this  title  upon  its  net  income) 

T[205  shall  (except  in  the  cases  provided  for  in  subdivision  (b)  and  except  1589 
as  otherwise  provided  in  regulations  prescribed  by  the  Commissioner 
under  section  217) 

K206  deduct  and  withhold  from  such  annual  or  periodical  gains,  profits,  1590 
and  income 

^207  a tax  equal  to  8 per  centum  thereof:  1591 

T[208  Provided,  That  the  Commissioner  may  authorize  such  tax  1627 
to  be  deducted  and  withheld  from  the  interest  upon  any  securi- 
ties the  owners  of  which  are  not  known  to  the  withholding  agent. 

1(209  (b)  In  any  case  where  bonds,  mortgages,  or  deeds  of  trust,  or  1636 

other  similar  obligations  of  a corporation  contain  a contract  or  pro- 
vision by  which  the  obligor  agrees 

25 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^210  to  pay  any  portion  of  the  tax  imposed  by  this  title  upon  the  obligee,  1637 

or 

^211  to  reimburse  the  obligee  for  any  portion  of  the  tax,  or  1638 

lf212  to  pay  the  interest  without  deduction  for  any  tax  which  the  obligor  1639 
may  be  required  or  permitted  to  pay  thereon  or  to  retain  therefrom 
under  any  law  of  the  United  States, 

11213  the  obligor  shall  deduct  and  withhold  a tax  equal  to  2 per  centum  1640 
of  the  interest  upon  such  bonds,  mortgages,  deeds  of  trust,  or  other 
obligations,  whether  such  interest  is  payable  annually  or  at  shorter 
or  longer  periods  and 

1[214  whether  payable  to  a nonresident  alien  individual  or  to  an  individual  1641 
citizen  or  resident  of  the  United  States  or  to  a partnership: 

%215  Provided,  That  the  Commissioner  may  authorize  such  tax  to  1644 
be  deducted  and  withheld  in  the  case  of  interest  upon  any  such 
bonds,  mortgages,  deeds  of  trust  or  other  obligations,  the  owners 
of  which  are  not  known  to  the  withholding  agent. 

If216  Such  deduction  and  withholding  shall  not  be  required  in  the  case  1646 
of  a citizen  or  resident  entitled  to  receive  such  interest,  if  he  files 
with  the  withholding  agent  on  or  before  February  1,  a signed  notice 
in  writing  claiming  the  benefit  of  the  credits  provided  in  subdivisions 
(c)  and  (d)  of  section  216; 

1[217  nor  in  the  case  of  a nonresident  alien  individual  if  so  provided  for  1649 
in  regulations  prescribed  by  the  Commissioner  under  section  217. 

^218  (c)  Every  individual,  corporation,  or  partnership  required  .to  1707 

deduct  and  withhold  any  tax  under  this  section  shall  make  return 
thereof  on  or  before  March  first  of  each  year 

i?  . .-j 

\2\9  and  shall  on  or  before  June  fifteenth  pay  the  tax  to  the  official  of  the  1708 
United  States  Government  authorized  to  receive  it. 

^220  Every  such  individual,  corporation,  or  partnership  is  hereby  made  1716 
liable  for  such  tax  and 

j ■ 

%22\  is  hereby  indemnified  against  the  claims  and  demands  or  any  in-  1717 
dividual,  corporation,  or  partnership  for  the  amount  of  any  pay- 
ments made  in  accordance  with  the  provisions  of  this  section. 

1(222  (d)  Income  upon  which  any  tax  is  required  to-be  withheld  at  the  1718 

source  under  this  section  shall  be  included  in  the  return  of'the  recipient 
of  such  income. 

K223  but  any  amount  of  tax  so  withheld  shall  be  credited  against  the  1719 
amount  of  income  tax  as  computed  in  such  return. 

K224  (e)  If  any  tax  required  under  this  section  to  be  deducted  and  with-  1720 

held  is  paid  by  the  recipient  of  the  income,  it  shall  not  be  re-collected 
from  the  withholding  agent; 


26 


8-1-20. 


THE  INCOME  TAX  LAW. 


Paragraph  . . , ^ 

V225  nor  in  cases  in  which  the  tax  is  so  paid  shall  any  penalty  be  imposed  1721 
upon  or  collected  from  the  recipient  of  the  income  or  the  withholding 
agent  for  failure  to  return  or  pay  the  same,  unless  such  failure  was 
fraudulent  and  for  the  purpose  of  evading  payment. 


Credit  for  Taxes. 

1f226  Sec.  222.  (a)  That  the  tax  computed  under  Part  II  of  this  title  1283 
shall  be  credited  with: 

^227  (1)  In  the  case  of  a citizen  of  the  United  States,  the  amounUl284 

of  any  income,  war-profits  and  excess-profits  taxes  paid  during  the^ 
taxable  year  to  any  foreign  country,  upon  income  derived  from 
sources  therein,  or  to  any  possession^of  the  United  States;  and 

lf228  (2)  In  the  case  of  a resident  of  the  United  States,  the  amount  1285 

of  any  such  taxes  paid  during  the  taxable  year  to  any  possession  of  the 
United  States;  and 

TI229  ^ ^ (3)  In  the  case  of  an  alien  resident  of  the  United  States  who  is  a 1286 
citizen  or  subject  of  a foreign  country,  the  amount  of  any  such  taxes 
paid  during  the  taxable  year  to  such  country,  upon  income  derived 
from  sources  therein,  if  such  country,  in  imposing  such  taxes,  allows 
a similar  credit  to  citizens  of  the  United  States  residing  in  such 
country;  and 

1f230  (4)  In  the  case  of  any  such  individual  who  is  a member  of  a part-  1287 

nership  or  a beneficiary  of  an  estate  or  trust,  his  proportionate  share  of 
such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the 
taxable  year  to  a foreign  country  or  to  any  possession  of  the  United 
States,  as  the  case  may  be. 

1f231  (b)  If  accrued  taxes  when'^paid^differ  from'^thejamounts"  claimed  1288 

as  credits  by  the  taxpayer,  or  if  any  tax  paid  is  refunded  in  whole  or  in 
part,  the  taxpayer  shall  notify  the  Commissioner  who  shall  redetermine 
the  amount  of  the  tax  due  under  Part  II  of  this  title  for  the  year  or  years 
affected,  and  the  amount  of  tax  due  upon  such  redetermination,  if  any, 
shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded 
to  the  taxpayer  in  accordance  with  the  provisions  of  section  252.  In 
the  case  of  such  a tax  accrued  but  not  paid,  the  Commissioner  as  a 
condition  precedent  to  the  allowance  of  this  credit  may  require  the  tax- 
payer to  give  a bond  with  sureties  satisfactory  to  and  to  be  approved 
by  the  Commissioner  in  such  penal  sum  as  the  Commissioner  may 
require,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount 
of  tax  found  due  upon  any  such  redetermination;  and  the  bond  herein 
prescribed  shall  contain  such  further  conditions* as  the  Commissioner 
may  require. 

1f232  (c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  1289 

evidence  satisfactory  to  the  Commissioner  showing  the  amount  of 
income^  derived  from  sources  within  such  foreign  country  or  such 
possession  of  the  United  States,  and  all  other  information  necessary 
for  the  computation  of  such  credits. 

27 


Law 

Pvagrapli 


THE  INCOME  TAX  LAW. 


Repeated 

at  T 


Individual  Returns. 

f233  Sec.  223.  That  every  individual  having  a net  income  for  the  1766 
taxable  year  of  $1 ,000  or  over  if  single  or  if  married  and  not  living  with 
husband  or  wife, 

^234  or  of  $2,000  or  over  if  married~and  living  with  husband  or  wife,  1767 

1f235  shall  make  under  oath  a return  stating  specifically  the  item^s  of  his  1768 
gross  income  and  the  deductions  and  credits  allowed  by  this  title. 

1f236  If  a husband  and  wife  living  together  have  an  aggregate  net  income  1769 
of  $2,000  or  over,  each  shall  make  such  a return  unless  the  income 
of  each  is  included  in  a single  joint  return. 

T[237  If  the  taxpayer  is  unable  to  make  his  own  return,  the  return  673 
shall  be  miade  by  a duly  authorized  agent  or  by  the  guardian  or  other 
person  charged  with  the  care  of  the  person  or  property  of  such  tax- 
payer. 

Partnership  Returns. 

1[238  Sec.  224.  That  every  partnership  shall  make  a return  for  each  555 
taxable  year,  stating  specifically^  the  items  of  its  gross^  income  and  to 
the  deductions  allowed  by  this  title,  and  shall  include  in  the  return  559 
the  names  and  addresses  of  the  individuals  who  would  be  entitled 
to  share  in  the  net  income  if  distributed  and  the  amount  of  the  dis- 
tributive share  of  each  individual.  The  return  shall  be  sworn  to  by 
any  one  of  the  partners. 

Fiduciary  Returns. 

1[239  Sec.  225.  That  every  fiduciary  (except  receivers  appointed  by  669 
authority  of  law  in  possession  of  part  only  of  the  property  of  an 
individual) 

^240  shall  make  under  oath  a return  for  the  individual,  estate  or  trust  for  676 
which  he  acts 

1(241  (1)  if  the  net  income  of  such  individual  is  $1,000  or  over  if  single  or  679 
if  married  and  not  living  with  husband  or  wife,  or  $2,000  or  over  if  mar- 
ried and  living  with  husband  or  wife,  or 

^242  (2)  if  the  net  income  of  such  estate  or  trust  is  $1,000  or  over  or  if  any  680 
beneficiary  of  such  estate  or  trust  is  a nonresident  alien, 

K243  stating  specifically  the  items  of  the  gross  income  and  the  deductions  682 
and  credits  allowed  by  this  title. 

K244  Under  such  regulations  as  the  Commissioner  with  the  approval  of  the  681 
Secretary  may  prescribe,  a return  made  by  one  of  two  or  rnore  joint 
fiduciaries  and  filed  in  the  office  of  the  collector  of  the  district  where 
such  fiduciar]^  resides  shall  be  a sufficient  compliance  with  the  above 
requirement. 

K245  The  fiduciary  shall  make  oath  that  he  has  sufficient  knowledge  of  the 
affairs  of  such  individual,  estate  or  trust  to  enable  him  to  make  the 

28 


677 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  H 

return,  and  that  the  same  is,  to  the  best  of  his  knowledge  and  belief, 
true  and  correct.  ^ 

1[246  Fiduciaries  required  to  make  returns  under  this  Act  shall  be  711 
subject  to  all  the  provisions  of  this  Act  which  applies  [apply]  to 
individuals. 

Returns  When  Accounting  Period  Changed. 

^[247  Sec.  226.  That  if  a taxpayer,  with  the  approval  of  the  Com-  1855 
missioner,  changes  the  basis  of  computing  net  income  from  fiscal  year 
to  calendar  year  a separate  return  shall  be  made  for  the  period  between 
the  close  of  the  last  fiscal  year  for  which  return  was  made  and  the 
following  December  thirty-first. 

^248  If  the  change  is  from  calendar  year  to  fiscal  year,  a separate  return  1856 
shall  be  made  for  the  period  between  the  close  of  the  last  calendar  year 
for  which  return  was  made  and  the  date  designated  as  the  close  of 
the  fiscal  year. 

^249  If  the  change  is  from  one  fiscal  year  to  another  fiscal  year  a separate^l857 
return  shall  be  made  for  the  period  between  the  close  of  the  former 
fiscal  year  and  the  date  designated  as  the  close  of  the  new  fiscal  year. 

1(250  If  a taxpayer  making  his  first  return  for  income  tax  keeps  his  accounts  1858 
on  the  basis  of  a fiscal  year  he  shall  make  a separate  return  for  the 
period  between  the  beginning  of  the  calendar  year  in  which  such 
fiscal  year  ends  and  the  end  of  such  fiscal  year. 

K251  In  all  of  the  above  cases  the  net  income  shall  be  computed  on  the  1859 
basis  of  such  period  for  which  separate  return  is  made,  and  the  tax 
shall  be  paid  thereon  at  the  rate  for  the  calendar  year  in  which  such 
period  is  included; 

1(252  and  the  credits  provided  in  subdivisions  (c)  and  (d)  of  section  216  1860 
shall  be  reduced  respectively  to  amounts  which  bear  the  same  ratio 
to  the  full  credits  provided  in  such  subdivisions  as  the  number  of 
months  in  such  period  bears  to  twelve  months. 


Time  and  Place  for  Filing  Returns. 

K253  Sec.  227.  (a)  That  returns  shall  be  made  on  or  before  the  1808 

fifteenth  day  of  the  third  month  following  the  close  of  the  fiscal 
year,  or, 

K254  if  the  return  is  made  on  the  basis  of  the  calendar  year,  then  the  re-  1809 
turn  shall  be  made  on  or  before  the  fifteenth  day  of  March. 

K255  The  Commissioner  may  grant  a reasonable  extension  of  time  for  1848 
filing  returns  whenever  in  his  judgment  good  cause  exists  and  shall 
keep  a record  of  every  such  extension  and  the  reason  therefor.  Except 
in  the  case  of  taxpayers  who  are  abroad,  no  such  extension  shall  be  for 
more  than  six  months. 


29 


THE  INCOME  TAX  LAW. 


Repeated 

Law  at  % 

Parag/aph  , . • 

^256  (b)  Returns  shall  be  made  to  the  collector  for  the  district  in  1811 

which  is  located  the  legal  residence  or  principal  place  of  business 
of  the  person  making  the  return,  or, 

^257  if  he  has  no  legal  residence  or  principal  place  of  business  in  the  United  1812 
States,  then  to  the  collector  at  Baltimore,  Maryland. 


Understatement  in  Returns. 

11258  Sec.  228.  That  if  the  collector  or  deputy  collector  has  reason  to  1864 
believe  that  the  amount  of  any  income  returned  is  understated,  he 
shall  give  due  notice  to  the  taxpayer  making  the  return  to  show 
cause  why  the  amount  of  the  return  should  not  be  increased,  and 
upon  proof  of  the  amount  understated,  may  increase  the  same  ac- 
cordingly. 

1|259  Such  taxpayer  may  furnish  sworn  testimony  to  prove  any  relevant  18o5 
facts  and  if  dissatisfied  with  the  decision  of  the  collector  may  appeal 
to  the  Commissioner  for  his  decision,  under  such  rules  of  procedure 
as  may  be  prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary. 

PART  III. — Corporations. 

T t 

Tax  On  Corporations.  > 

11260  Sec.  230.  (a)  That,  in  lieu  of  the  taxes  imposed  by  section  10  713 

of  the  Revenue  Act  of  1916,  as  amended  by  the  Revenue  Act  of 
1917,  and  by  section  4 of  the  Revenue  Act  of  1917,  there  shall  be 
levied,  collected,  and  paid  for  each  taxable  year  upon  the  net  in- 
come of  every  corporation 

11261  a tax  at  the  following  rates:  * 

11262  (1)  For  the  calendar  year  1918,  12  per  centum  of  the  amount  of  715 
the  net  income  in  excess  of  the  credits  provided  in  section  236;  and 

11263  (2)  For  each  calendar  year  thereafter,  10  per  centum  of  such  716 
excess  amount. 

11264  (b)  For  the  purposes  of  the  Act  approved  March  21,  1918,  en-  737 
titled  “An  Act  to  provide  for  the  operation  of  transportation  systems 
while  under  Federal  control,  ,^for  the  just  compensation  of  their 
owners,  and  for  other  purposes,'”  five-sixths  of  the  tax  imposed  by 
paragraph  (1)  of  subdivision  (a)  and  four-fifths  of  the  tax  imposed  by 
paragraph  (2)  of  subdivision  (a)  shall  be  treated  as  levied  by  an  Act 

,,in  amendment  of  Title  I of  the  Revenue  Act  of  1917. 


Conditional  and  Other  Exemptions. 


11265  Sec.  231.  That  the  following 
from  taxation  under  this  title — 


organizations  shall  be  exempt 


11266  (1)  Labor,  agricultural,  or  horticultural  organizations; 

30 


739 

740 


THE  INCOME  TAX  LAW. 


Law 

Paragraph  ^ " 

%261  (2)  Mutual  savings  banks  not  having  a capital  stock  represented  741 

by  shares; 

^268  (3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  742 

operating  under  the  lodge  system  or  for  the  exclusive  benefit  of  the 
members  of  a fraternity  itself  operating  under  the  lodge  system,  and 
(b)  providing  for  the  payment  of  life,  sick,  accide  nt,  or  other  benefits 
to  the  m-embers  of  such  society,  order,  or  association  or  their,  de- 
pendents; 

^269  (4)  Domestic  building  and  loan  associations  and  cooperative  743 

banks  without  capital  stock  organized  and  operated  for  mutual 
purposes  and  without  profit; 

11270  (5)  Cemetery  companies  owned  and  operated  exclusively  for  the  744 

benefit  of  their  miembers; 

11271  (6)  Corporations  organized  and  operated  exclusively  for  re-  745 

ligious,  charitable,  scientific,  or  educational  purposes,  or  for  the 
prevention  of  cruelty  to  children  or  anim.als,  no  part  of  the  net  earn- 
ings of  which  inures  to  the  benefit  of  any  private  stockholder  or 
mdividual; 

11272  (7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  746 
not  organized  for  profit  and  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual; 

1[273  (8)  Civic  leagues  or  organizations  not  organized  for  profit  but  747 

operated  exclusively  for  the  promotion  of  social  welfare; 

11274  (9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recrea-  748 
tion,  and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  miember; 

11275  (10)  Farmers’  or  other  m.utual  hail,  cyclone,  or  fire  insurance  749 
companies,  mutual  ditch  or  irrigation  companies,  miutual  or  co- 
operative telephone  com.panies,  or  like  organizations  of  a purely 
local  character,  the  incomie  of  which  consists  solely  of  assessments, 
dues,  and  fees  collected  from  members  for  the  sole  purpose  of  meeting 
expenses; 

11276  (11)  Farmers’,  fruit  growers’,  or  like  associations,  organized  and  750 
operated  as  sales  agents  for  the  purpose  of  marketing  the  products  of 
members  and  turning  back  to  them  the  proceeds  of  sales,  less  the 
necessary  selling  expenses,  on  the  basis  of  the  quantity  of  produce  fur- 
nished by  them; 

11'277  (12)  Corporations  organized  for  the  exclusive  purpose  of  holding  751 

title  to  property,  collecting  income  therefrom,  and  turning  over  the 
entire  am.ount  thereof,  less  expenses,  to  an  organization  which  itself 
is  exempt  from  the  tax  imiposed  by  this  title; 

11278  (13)  Federal  land  banks  and  national  farm-loan  associations  as  752 

• , provided  in  section  26  of  the  act  approved  July  17,  1916,  entitled  • 

“An  Act  to  provide  capital  for  agricultural  development,  to  create 

31. 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  » 

Standard  forms  of  investment  based  upon  farm  mortgage,  to  equalize 
rates  of  interest  upon  farm  loans,  to  furnish  a market  for  United 
States  bonds,  to  create  Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes”; 

^279  (14)  Personal  service  corporations.  753 

Net  Income  Defined. 

11280  Sec.  232.  That  in  the  case  of  a corporation  subject  to  the  tax  770 
imposed  by  section  230  the  term  “net  income”  means  the  gross  1015 
income  as  defined  in  section  233  less  the  deductions  allowed  by  sec- 
tion 234,  and  the  net  income  shall  be  computed  on  the  same  basis  as 
is  provided  in  subdivision  (b)  of  section  212  or  in  section  226. 


Gross  Income  Defined. 

11281  Sec.  233.  (a)  That  in  the  case  of  a corporation  subject  to  the  808 

tax  imposed  by  section  230  the  term  “gross  income”  means  the  gross  1016 
income  as  defined  in  section  213,  except  that: 

11282  (1)  In  the  case  of  life  insurance  companies  there  shall  not  be  986 
included  in  gross  income  such  portion  of  any  actual  premium  re- 
ceived from  any  individual  policyholder  as  is  paid  back  or  credited  to 

or  treated  as  an  abatement  of  premium  of  such  policyholder  within  the 
taxable  year. 

11283  (2)  Mutual  marine  insurance  companies  shall  include  in  gross  996 
income  the  gross  premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance. 

11284  (b)  In  the  case  of  a foreign  corporation  gross  income  includes  1017 
only  the  gross  income  from  sources  within  the  United  States, 

11285  including  the  interest  on  bonds,  notes,  or  other  interest-  1025 

bearing  obligations  of  residents,  corporate  or  otherwise, 
dividends  from  resident  corporations,  and 

1[286  including  all  amounts  received  (although  paid  under  a 1027 

contract  for  the  sale  of  goods  or  otherwise)  representing 
profits  on  the  manufacture  and  disposition  of  goods  within 
the  United  States. 

Deductions  Allowed. 

11287  Sec.  234.  (a)  That  in  computing  the  net  income  of  a corpora-  1029 

tion  subject  to  the  tax  imposed  by  section  230  there  shall  be  allowed  1180 
as  deductions: 

11288  (1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  1183 
during  the  taxable  year  in  carrying  on  any  trade  or  business, 

11289  including  a reasonable  allowance  for  salaries  or  other  compensation  1209 
for  personal  services  actually  rendered,  and 

32 


THE  INCOME  TAX  LAW. 


Law  1 Repeated 

Paragraph  at  ^ 

^290  including  rentals  or  other  payments  required  to  be  made  as  a con-  1230 
dition  to  the  continued  use  or  possession  of  property  to  which  the  cor- 
poration has  not  taken  or  is  not  taking  title,  or  in  which  it  has  no  equity; 

1[291  (2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  1234 

indebtedness, 

If 292  except  on  indebtedness  incurred  or  continued  to  purchase  1235 

or  carry  obligations  or  securities  (other  than  obligations  of 
the  United  States  issued  after  September  24,  1917)  the 
interest  upon  which  is  wholly  exempt  from  taxation  under 
this  title  as  income  to  the  taxpayer,  or, 

Tf293  in  the  case  of  a foreign  corporation,  the  proportion  of  such  interest  1031 
which  the  amount  of  its  gross  income  from  sources  within  the  United 
States  bears  to  the  amount  of  its  gross  income  from  all  sources  within 
and  without  the  United  States; 

^294  (3)  Taxes  paid  or  accrued  within  the  taxable  year  imposed  1249 

lf295  (a)  by  the  authority  of  the  United  States,  except  income,  war-profits  1250 
and  excess-profits  taxes;  or 

T[296  (b)  by  the  authority  of  any  of  its  possessions,  except  the  amount  of  1251 
income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under 
section  238;  or 

1f297  (c)  by  the  authority  of  any  State  or  Territory,  or  any  county,  school  1252 
district,  municipality,  or  other  taxing  subdivision  of  any  State  or 
Territory, 

11298  not  including  those  assessed  against  local  benefits  of  a kind  1261 

tending  to  increase  the  value  of  the  property  assessed;  or 

1f299  (d)  in  the  case  of  a domestic  corporation,  by  the  authority  of  any  1282 
foreign  country,  except  the  amount  of  income,  war-profits  and 
excess-profits  taxes  allowed  as  a credit  under  section  238;  or 

1f300  (e)  in  the  case  of  a foreign  corporation,  by  the  authority  of  any  1032 
foreign  country  (except  income,  war-profits  and  excess-profits  taxes, 
and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase 
the  value  of  the  property  assessed),  upon  the  property  or  business: 

1[301  Provided,  That  in  the  case  of  obligors  specified  in  subdivision  {b)  1279 

of  section  221  no  deduction  for  the  payment  of  the  tax  imposed 
by  this  title  or  any  other  tax  paid  pursuant  to  the  contract  or 
provision  referred  to  in  that  subdivision,  shall  be  allowed; 

1[302  (4)  Losses  sustained  during  the  taxable  year  and  not  compen-  1304 

sated  for  by  insurance  or  otherwise, 

1f303  (5)  Debts  ascertained  to  be  worthless  and  charged  off  within  the  1317 

taxable  year; 


33 


THE  INCOME  TAX  -LAW. 


Law 

Paragraph 


Repeated 
at  t 


<1304  (6)  Amounts  received  as  dividends  from  a corporation,  which  is -1320 

taxable  under  this  title  upon  its  net  income,  and 

«-30.=i  amounts  received  as  dividends  from_  a personal  service  corporation  1326 

" out  of  earnings  or  profits  upon  which  income  tax  has  been  imposed  by 
Act  of  Congress; 

11306  (7)  A reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  1329 

^ property  used  in  the  trade  or  business,  including  a reasonable  allow- 
ance  for  obsolescence;  , 

•1307  (8)  In  the  case  of  buildings,  machinery,  equipment,  or  other  1379 

facilities,  constructed,  erected,  installed,  or  acquired,  on  or  after 
Anril  6 1917  for  the  production  of  articles  contributing  to  the 

prosecution  of ’the  present  war,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  contributing  to  the  prosecution  of  the  present  war,  there  shall  be 
allowed  a reasonable  deduction  for  the  amortization  of  such  part  of 
the  cost  of  such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer, 
but  not  ac^ain  including  any  amount  otherwise  allowed  under  this 
title  or  previous  Acts  oi  Congress  as  a deduction  in  computing  net 

income. 

•^308  At  any  time  within  three  years  after  the  termination  of  the  present  1380 
wlr  the  Commissioner  may,  and  at  the  request  of  the  taxpayer  shal 
reexamine  the  return,  and  if  he  then  finds  as  a result  of  an  appraisal 
or  from  other  evidence  that  the  deduction  original  y allowed  was  in- 
correct, the  taxes  imposed  by  this  title  and  by  Title  III  for  the  year 
or  years  affected  shall  be  redetermined  and  ^ , 

1t309  the  amount  cf  tax  due  upon  such  redetermination,  if  any,  shall  be  1381 
' paid  upon  notice  and  demand  by  the  collector,  or  the  amount  of  t_ 
overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252;  ' . r 

(9)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits,  1402 
" and  tim.ber,  a reasonable  allowance  for  depletion  and  for  depreciation 
of  improvements,  according  to  the  peculiar  conditions  in  each  case, 
based  upon  cost  including  cost  of  development  not  otherwise  de- 
ducted: 

•1311  Provided,  That  inihe  case  of  such  properties  acquired  prior  to  , 1403 

March  1 1913,  fair  market  value  of  the  property  {or  the 

taxpayer'^  interest  therein)  on  that  date  shall  he  taken  in  lieu 
of  cost  up  to  that  date: 

^312  Provided  further,  That  in  the  case  of  tnines,oil  ‘!^fsasjtMs 
discovered  hy  the  taxpayer,  on  or  after  March  1,  1913,  and  not 
acquired  as  the  result  of  purchase  of  a proven  tract  or  lease, 
where  the  fair  market  value  of  the  property  is  ^ 

proportionate  to  the  cost,  the  depletion  allowance  shall  he  based 
upon  the  fair  market  value  of  the  property  at  the  date  of  the 
discovery,  or  within  thirty  days  thereafter; 

such  reasonable  allowance  in  all  the  above  cases  to  be  made  under  1405 
' .rules  and  regulations  to  be  prescribed  by  the 'CQmmissioner  w^th  the  . ' 
approval  of  the  Secretary.  ^ 

34- 


1404 


THE  INCOME  TAX  LAW. 


■ Repeated 

Law  at  H 

the  case  of  leases  the  deductions  allowed  by  this  paragraph  shall  1406 
be  equitably  apportioned  between  the  lessor  and  lessee; 

11315  (10)  In  the  case  of  insurance  companies,  in  addition  to  the  above:  991 

(a)  The  net  addition  required  by  law  to  be  made  within  the  taxable 
year  to  reserve  funds  (including  in  the  case  of  assessment  insurance 
companies  the  actual  deposit  of  sums  with  State  or  Territorial  officers 
pursuant  to  law  as  additions  to  guarantee  or  reserve  funds);  and 

(b)  the  sums  other  than  dividends  paid*  within  the  taxable  year  on 
policy  and  annuity  contracts; 

U316  (11)  In  the  case  of  corporations  issuing  policies  covering  life,  994 

health,  and  accident  insurance  combined  in  one  policy  issued  on  the 
weekly  premium  payment  plan  continuing  for  life  and  not  subject 
to  cancellation,  in  addition  to  the  above,  such  portion  of  the  net 
addition  (not  required  by  law)  made  within  the  taxable  year  to  reserve 
funds  as  the  Commissioner  finds  to  be  required  for  the  protection  of 
the  holders  of  such  policies  only; 

1[317  (12)  In  the  case  of  mutual  marine  insurance  companies,  there  997 

shall  be  allowed,  in  addition  to  the  deductions  allowed  in  paragraphs 
(1)  to  (10),  inclusive,  amounts  repaid  to  policyholders  on  account  of 
premiums  previously  paid  by  them,  and  interest  paid  upon  such 
amounts  between  the  ascertainment  and  the  payment  thereof; 

11318  (13)  In  the  case  of  mutual  insurance  companies  (other  than  999 
mutual  life  or  mutual  marine  insurance  companies)  requiring  their 
members  to  make  premium  deposits  to  provide  for  losses  and  expenses, 
there  shall  be  allowed,  in  addition  to  the  deductions  allowed  in 
paragraphs  (1)  to  (10),  inclusive,  (unless  otherwise  allowed  under 
such  paragraphs)  the  amount  of  premium  deposits  returned  to  their 
policyholders  and  the  amount  of  premium  deposits  retained  for  the 
payment  of  losses,  expenses,  and  reinsurance  reserves; 

11319  (14)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a tax-  1472 
payer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sus- 
tained a substantial  loss  (whether  or  not  actually  realized  by  sale  or 
other  disposition)  resulting  from  any  material  reduction  (not  due  to 
temporary  fluctuation)  of  the  value  of  the  inventory  for  such  taxable 
year, 

11320  or  from  the  actual  payment  after  the  close  of  such  taxable  year  of  1473 
rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year. 

11321  In  such  case  payment  of  the  amount  of  the^  tax  covered  by  such  1474 
claim  shall  not  be  required  until  the  claim  is  decided,  but  the  taxpayer 
shall  accompany  his  claim  with  a bond  in  double  the  amount  of  the 

tax  covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner, 
conditioned  for  the  payment  of  any  part  of  such  tax  found  to  be  due, 
with  interest.  If  any  part  of  such  claim  is  disallowed  then  the  remainder 
of  the  tax  due  shall  on  notice  and  demand  by  the  collector  be  paid  by 
the  taxpayer  with  interest  at  the  rate  of  1 per  centum  per  month  from 
the  time  the  tax  would  have  been  due  had  no  such  claim  been  filed. 

35 


THE  INCOME  TAX  LAW. 


_ Repeated 

Law  & 

Paragraph 

%322  If  it  is  shown  to  the  satisfaction  of  the  Commissioner  that  such  sub-  1475 
stantial  loss  has  been  sustained,  then  in  computing  the  taxes  imposed 
by  this  title  and  by  Title  III  the  amount  of  such  loss  shall  be  deducted 
from  the  net  income. 


f323  (b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the  1476 
Commissioner  that  during  the  taxable  year  1919  the  taxpayer  has  sus- 
tained a substantial  loss  of  the  character  above  described  then  the 
amount  of  such  loss  shall  be  deducted  from  the  net  income  for  the  tax- 
able year  1918  and  the  taxes  imposed  by  this  title  and  by  Title  III  for 
such  year  shall  be  redetermined  accordingly.  Any  amount  found  to  be 
due  to  the  taxpayer  upon  the  basis  of  such  redetermination  shall  be 
credited  or  refunded  to  the  taxpayer  in  accordance  with  the  provisions 
of  section  252. 

1[324  (b)  In  the  case  of  a foreign  corporation  the  deductions  allowed  1033 

in  subdivision  (a),  except  those  allowed  in  paragraph  (2)  and  in 
clauses  (a),  (b),  and  (c)  of  paragraph  (3),  shall  be  allowed  only  if  and 
to  the  extent  that  they  are  connected  with  income  arising  from  a 
source  within  the  United  States; 


T[325  and  the  proper  apportionment  and  allocation  of  the  deductions  with  1034 
respect  to  sources  of  income  within  and  without  the  United  States 
shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 


Items  Not  Deductible. 

1[326  Sec.  235.  That  in  computing  net  income  no  deduction  shall  in  1184 
any  case  be  allowed  in  respect  of  any  of  the  items  specified  in  section 
215. 

Credits  Allowed. 

^327  Sec.  236.  That  for  the  purpose  only  of  the  tax  imposed  by  section  1527 
230  there  shall  be  allowed  the  following  credits: 

^328  (a)  The  amount  received  as  interest  upon  obligations  of  the  1528 

United  States  and  bonds  issued  by  the  War  Finance  Corporation, 
which  is  included  in  gross  income  under  section  233; 

^329  (b)  The  amount  of  any  taxes  imposed  by  Title  III  for  the  same  1529 

taxable  year: 

^330  Provided,  That  in  the  case  of  a corporation  which  makes^  return 
for  a fiscal  year  beginning  in  1917  and  ending  in  1918,  in  coni’- 
puting  the  tax  as  provided  in  subdivision  (a)  of  section  205,  the 
tax  computed  for  the  entire  period  under  Title  II  of  the  Revenue 
Act  0/1917  shall  be  credited  against  the  net  income  computed 
for  the  entire  period  under  Title  I of  the  Revenue  Act  of  1916  ar 
amended  by  the  Revenue  Act  of  1917  and  under  Title  I of  the 
Revenue  Act  of  1917,  and  the  tax  computed  for  the  entire  period 
under  Title  III  of  this  Act  at  the  rates  prescribed  for  the  calendar 
year  1918  shall  be  credited  against  the  net  income  computed  for  the 
entire  period  under  this  title;  and 

(c)  In  the  case  of  a domestic  corporation,  $2,000. 

36 


11331 


1531 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 

at  H 


Payment  of  Tax  at  Source. 

1[332  Sec.  237.  That  in  the  case  of  foreign  corporations  subject  to  1614 
taxation  under  this  title  not  engaged  in  trade  or  business  within 
the  United  States  and  not  having  any  office  or  place  of  business 
therein, 

1[333  there  shall  be  deducted  and  withheld  at  the^  source  in  the  same  1615 
manner  and  upon  the  same  items  of  income  as  is  provided  in  section 
221 

1[334  a tax  equal  to  10  per  centum  thereof,  1616 

^335  and  such  tax  shall  be  returned  and  paid  in  the  same  manner  and  1617 

subject  to. the  same  conditions  as  provided  in  that  section: 

1[336  Provided,  That  in  the  case  of  interest  described  in  subdivision  1642 

{b)  of  that  section  the  deduction  and  withholding  shall  be  at  the 

rate  of  2 per  centum. 

Credit  for  Taxes. 

^337  Sec.  238.  (a)  That  in  the  case  of  a domestic  corporation  the  total  1295 
taxes  imposed  for  the  taxable  year  by  this  title  and  by  Title  III  shall 
be  credited  with  the  amount  of  any  income,  war-profits  and  excess- 
profits  taxes  paid  during  the  taxable  year 

1[338  to  any  foreign  country,  upon  income  derived  from  sources  therein,  or  1296 

^339  to  any  possession  of  the  United  States.  1297 

If 340  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  1298 
credits  by  the  corporation,  or  if  any  tax  paid  is  refunded  in  whole  or  in 
part,  the  corporation  shall  at  once  notify  the  Commissioner  who  shall 
redetermine  the  amount  of  the  taxes  due  under  this  title  and  under 
Title  III  for  the  year  or  years  affected,  and  the  amount  of  taxes  due 
upon  such  redetermination,  if  any,  shall  be  paid  by  the  corporation 
upon  notice  and  demand  by  the  collector,  or  the  amount  of  taxes  over- 
paid, if  any,  shall  be  credited  or  refunded  to  the  corporation  in  accord- 
ance with  the  provisions  of  section  252.  In  the  case  of  such  a tax 
accrued  but  not  paid,  the  Commissioner  as  a condition  precedent  to  the 
allowance  of  this  credit  may  require  the  corporation  to  give  a bond  with 
sureties  satisfactory  to  and  to  be  approved  by  him  in  such  penal  sum 
as  he  may  require,  conditioned  for  the  payment  by  the  taxpayer  of  any 
amount  of  taxes  found  due  upon  any  such  redetermination;  and  the 
bond  herein  prescribed  shall  contain  such  further  conditions  as  the 
Commissioner  may  require. 

^341  (b)This  credit  shallbeallowedonlyifthe  taxpayer  furnishes  evidence  1299 
satisfactory  to  the  Commissioner  showing  the  amount  of  income 
derived  from  sources  within  such  foreign  country  or  such  possession 
of  the  United  States,  as  the  case  may  be,  and  all  other  information 
necessary  for  the  computation  of  such  credit. 

If342  (c)  If  a domestic  corporation  makes  a return  for  a fiscal  year  begin-  1300 

ning  in  1917  and  ending  in  1918,  only  that  proportion  of  this  credit  shall 
be  allowed  which  the  part  of  such  period  within  the  calendar  year  1918 
bears  to  the  entire  period. 


37 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  If 


Corporation  Returns. 

^343  Sec.  239.  That  every  corporation  subject  to  taxation  under  this  1778 
title  and  every  personal  service  corporation  shall  make  a return,  stat- 
ing specifically  the  items  of  its  gross  income  and  the  deductions  and 
credits  allowed  by  this  title. 

^344  The  return  shall  be  sworn  to  by  the  president,  vice  president,  or  1788 
other  principal  officer  and  by  the  treasurer  or  assistant  treasurer. 

^345  If  any  foreign  corporation  has  no  office  or  place  of  business  in  the  1046 
United  States  but  has  an  agent  in  the  United  States,  the  return  shall 
be  made  by  the  agent. 

^346  In  cases  where  receivers,  trustees  in  bankruptcy,  or  assignees  are  1785 
operating  the  property  or  business  of  corporations,  such  receivers, 
trustees,  or  assignees  shall  make  returns  for  such  corporations  in  the 
same  manner  and  form  as  corporations  are  required  to  make  returns. 

Any  tax  due  on  the  basis  of  such  returns  made  by  receivers,  trustees, 
or  assignees  shall  be  collected  in  the  same  manner  as  if  collected 
from  the  corporations  of  whose  business  or  property  they  have 
custody  and  control. 

^347  Returns  made  under  this  section  shall  be  subject  to  the  provisions  1779 
of  sections  226  and  228. 

1|348  When  return  is  made  under  section  226  the  credit  provided  in  sub-  1861 
division  (c)  of  section  236  shall  be  reduced  to  an  amount  which  bears 
the  same  ratio  to  the  full  credit  therein  provided  as  the  number  of 
months  in  the  period  for  which  such  return  is  made  bears  to  twelve 
months. 

Consolidated  Returns. 

^1349  Sec.  240.  (a)  That  corporations  which  are  affiliated  within  1821 

the  meaning  of  this  section  shall,  under  regulations  to  be  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  make  a 
consolidated  return  of  net  income  and  invested  capital  for  the  pur- 
poses of  this  title  and  Title  III,  and  the  taxes  thereunder  shall  be 
computed  and  determined  upon  the  basis  of  such  return: 

^350  Provided^  That  therf  shall  be  taken  out  of  such  consolidated  net  1822 
income  and  invested  capital^  the  net  income  and  invested  capital 
of  any  such  affiliated  corporation  organized  after  August  1,  1914, 
and  not  successor  to  a then  existing  business^  50  per  centum  or 
more  of  whose  gross  income  consists  of  gains,  profits,  commis- 
sions,  or  other  income,  derived  from  a Government  contract  or 
contracts  made  between  April  6,  1917,  and  November  11,  1918, 
both  dates  inclusive.  In  such  case  the  corporation  so  taken  out 
shall  be  separately  assessed  on  the  basis  of  its  own  invested  capital 
and  net  income  and  the  remctinder  of  such  affiliated  group  shall  be 
assessed  on  the  basis  of  the  remaining  consolidated  invested  capi- 
tal and  net  income. 

*1351  In  any  case  in  which  a tax  is  assessed  upon  the  basis  of  a con-  1824 
sglidated  return,  the  total  tax  shall  be  computed  in  the  first  instance 

38 


THB  mCOME  TAX  LAW 


L»w 

Paragraph 


Repeated 
at  ^ 


as  a unit  and  shall  then  be  assessed  upon  the  respective  affiliated 
corporations  in  such  proportions  as  may  be  agreed  upon  among 
them,  or,  in  the  absence  of  any  such  agreement,  then  on  the  basis  of 
the  net  income  properly  assignable  to  each. 


11352  There  shall  be  allowed  in  computing  the  income  tax  only  one  specific  1825 
credit  of  $2,000  (as  provided  in  section  236);  in  computing  the  war- 
profits  credit  (as  provided  in  section  311)  only  one  specific  exemption 
of  $3,000;  and  in  computing  the  excess-profits  credit  (as  provided  in 
section  312)  only  one  specific  exemption  of  $3,000. 


11353  (b)  For  the  purpose  of  this  section  two  or  more  domestic  corpora-  1835 

tions  shall  be  deemed  to  be  affiliated 


11354  (1)  if  one*  corporation  owns  directl>  or  controls  through  closely  1836 
. affiliated  interests  or  by  a nominee  or  nominees  substantially  all  the 

stock  of  the  other  or  others,  or 

11355  (2)  if  substantially  all  the  stock  of  two  or  more  corporations  is  1837 
owned  or  controlled  by  the  same  interests. 

11356  (c)  For  the  purposes  of  section  238  a domestic  corporation  which  1843 
owns  a majority  of  the  voting  stock  of  a foreign  corporation  shall  be 
deemed  to  have  paid  the  same  proportion  of  any  income,  war-profits 

and  excess-profits  taxes  paid  (but  not  including  taxes  accrued)  by  such 
foreign  corporation  during  the  taxable  year  to  any  foreign  country  or  to 
any  possession  of  the  United  States  upon  income  derived  from  sources 
without  the  United  States,  which  the  amount  of  any  dividends  (not 
deductible  under  section  234)  received  by  such  domestic  corporation 
from  such  foreign  corporation  during  the  taxable  year  bears  to  the  total 
taxable  income  of  such  foreign  corporation  upon  or  with  respect  to 
which  such  taxes  were  paid: 

11357  Provided,  That  in  no  such  case  shall  the  amount  of  the  credit  for  ■ 1844 

such  taxes  exceed  the  amount  of  such  dividends  {not  deductible 

under  section  234)  received  by  such  domestic  corporation  during 
the  taxable  year. 


Time  and  Place  for  Filing  Returns, 


11358  Sec.  241.  (a)  That  returns  of  corporations  shall  be  made  at  the  1807 

same  time  as  is  provided  in  subdivision  (a)  of  section  227. 

11359  (b)  Returns  shall  be  made  to  the  collector  of  the  district  in  which  1045 
is  located  the  principal  place  of  business  or  principal  office  or  agency  1813 
of  the  corporation,  or, 

11360  if  it  has  no  principal  place  of  business  or  principal  office  or  agency  in  1047 
the  United  States,  then  to  the  collector  at  Baltimore,  Maryland.  1814 


39 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 

at^ 


PART  IV. — ^Administrative  Provisions. 

Payment  of  Taxes. 

11361  Sec.  250.  (a)  That  except  as  otherwise  provided  in  this  section  2000 

and  sections  221  and  237  the  tax  shall  be  paid  in  four  installments, 
each  consisting  of  one-fourth  of  the  total  amount  of  the  tax. 

1[362  The  first  installment  shall  be  paid  at  the  time  fixed  by  law  for  filing  2001 
the  return,  and 

1f363  the  second  installment  shall  be  paid  on  the  fifteenth  day  of  the  third  2002 
month, 

1[364  the  third  installment  on  the  fifteenth  day  of  the  sixth  month,  and  2003 

1[365  the  fourth  installment  on  the  fifteenth  day  of  the  ninth  month,  2004 

1[366  after  the  time  fixed  by  law  for  filing  the  return.  2005 

1[367  Where  an  extension  of  time  for  filing  a return  is  granted  the  time  for  2008 
payment  of  the  first  installment  shall  be  postponed  until  the  date  of 
the  expiration  of  the  period  of  the  extension,  but  the  time  for  payment 
of  the  other  installments  shall  not  be  postponed  unless  the  Commis- 
sioner so  provides  in  granting  the  extension. 

U368  In  any  case  in  which  the  time  for  the  payment  of  any  installment  is  2010 
at  the  request  of  the  taxpayer  thus  postponed,  there  shall  be  added  as 
part  of  such  installment  interest  thereon  at  the  rate  of  of  1 per 
centum  per  month  from  the  time  it  would  have  been  due  if  no  extension 
had  been  granted  until  paid. 

K369  If  any  installment  is  not  paid  when  due,  the  whole  amount  of  the  tax  2017 
unpaid  shall  become  due  and  payable  upon  notice  and  demand  by  the 
Collector. 

1[370  The  tax  may  at  the  option  of  the  taxpayer  be  paid  in  a single  pay-  2006 
ment  instead  of  in  installments,  in  which  case  the  total  amount  shall 
be  paid  on  or  before  the  time  fixed  by  law  for  filing  the  return,  or,  where 
an  extension  of  time  for  filing  the  return  has  been  granted,  on  or  before 
the  expiration  of  the  period  of  such  extension. 

1[371]  [ (b)]As  soon  as  practicable  after  the  return  is  filed,  the  Commissioner  1880 
shall  examine  it.  If  it  then  appears  that  the  correct  amount  of  the 
tax  is  greater  or  less  than  that  shown  in  the  return,  the  installments 
shall  be  recomputed. 

1[372  If  the  amount  already  paid  exceeds  that  which  should  have  been  paid  1881 
on  the  basis  of  the  installments  as  recomputed,  the  excess  so  paid 
shall  be  credited  against  the  subsequent  installments;  and  if  the 
amount  already  paid  exceeds  the  correct  amount  of  the  tax,  the 
excess  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance 
with  the  provisions  of  section  252. 

1[373  If  the  amount  already  paid  is  less  than  that  which  should  have  1882 
been  paid,  the  difference  shall,  to  the  extent  not  covered  by  any 

40 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  IF 

credits  then  due  to  the  taxpayer  under  section  252,  be  paid  upon 
notice  and  demand  by  the  collector. 

K374  In  such  case  if  the  return  is  made  in  good  faith  and  the  understate-  1884 
ment  of  the  amount  in  the  return  is  not  due  to  any  fault  of  the  tax- 
payer, there  shall  be  no  penalty  because  of  such  understatement. 

^375  If  the  understatement  is  due  to  negligence  on  the  part  of  the  tax-  1885 
payer,  but  without  intent  to  defraud,  there  shall  be  added  as  part 
of  the  tax  5 per  centum  of  the  total  amount  of  the  deficiency,  plus 
interest  at  the  rate  of  1 per  centum  per  month  on  the  amount  of  the 
deficiency  of  each  installment  from  the  time  the  installment  was  due. 

1[376  If  the  understatement  is  false  or  fraudulent  with  intent  to  evade  1886 
the  tax,  then,  in  lieu  of  the  penalty  provided  by  section  3176  of  the 
Revised  Statutes,  as  amended,  for  false  or  fraudulent  returns  will- 
fully made,  but  in  addition  to  other  penalties  provided  by  law  for 
false  or  fraudulent  returns,  there  shall  be  added  as  part  of  the  tax 
50  per  centum  of  the  amount  of  the  deficiency. 

1[377  (c)  If  the  return  is  made  pursuant  to  section  3176  of  the  Revised  1899 

Statutes  as  amended,  the  amount  of  tax  determined  to  be  due  under 
such  return  shall  be  paid  upon  notice  and  demand  by  the  collector. 

1[378  (d)  Except  in  the  case  of  false  or  fraudulent  returns  with  intent  to  2029 

evade  the  tax,  the  amount  of  tax  due  under  any  return  shall  be  de- 
termined and  assessed  by  the  Commissioner  within  five  years  after 
the  return  was  due  or  was  made,  and  no  suit  or  proceeding  for  the 
collection  of  any  tax  shall  be  begun  after  the  expiration  of  five  years 
after  the  date  when  the  return  was  due  or  was  made.  In  the  case  of 
such  false  or  fraudulent  returns,  the  amount  of  tax  due  may  be  deter- 
mined at  any  time  after  the  return  is  filed,  and  the  tax  may  be  col- 
. lected  at  any  time  after  it  becomes  due. 

1[379  (e)  If  any  tax  remains  unpaid  after  the  date  when  it  is  due,  and  for  2011 

ten  days  after  notice  and  demand  by  the  collector,  then,  except  in 
the  case  of  estates  of  insane,  deceased,  or  insolvent  persons,  there 
shall  be  added  as  part  of  the  tax  the  sum  of  5 per  centum  on  the 
amount  due  but  unpaid,  plus  interest  at  the  rate  of  1 per  centum  per 
month  upon  such  amount  from  the  time  it  became  due: 

^380  Provided,  That  as  to  any  such  amount  which  is  the  subject  of  a 2012 
bona  fide  claim  for  abatement  such  sum  of  5 per  centum  shall 
not  be  added  and  the  interest  from  the  time  the  amount  was  due 
until  the  claim  is  decided  shall  be  at  the  rate  of  of  \ per 
centum  per  month. 

11381  In  the  case  of  the  first  installment  provided  for  in  subdivision  (a)  the  2013 
instructions  printed  on  the  return  shall  be  deemed  sufficient  notice 
of  the  date  when  the  tax  is  due  and  sufficient  demand,  and  the  tax- 
payer’s computation  of  the  tax  on  the  return  shall  be  deemed  suffi- 
cient notice  of  the  amount  due. 

1[382  (f)  In  any  case  in  which  in  order  to  enforce  payment  of  a tax  it  is  2016 

necessary  for  a collector  to  cause  a warrant  of  distraint  to  be  served, 
there  shall  also  be  added  as  part  of  the  tax  the  sum  of  $5. 

41 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  at  ^ 

^383  (g)  If  the  Commissioner  finds  that  a taxpayer  designs  quickly  to  2073 

depart  from  the  United  States  or  to  remove  his  property  therefrom, 
or  to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act 
tending  to  prejudice  or  to  render  wholly  or  partly  ineffectual  pro- 
ceedings to  collect  the  tax  for  the  taxable  year  then  last  past  or  the 
taxable  year  then  current  unless  such  proceedings  be  brought  without 
delay,  the  Commissioner  shall  declare  the  taxable  period  for  such 
taxpayer  terminated  at  the  end  of  the  calendar  month  then  last  past 
and  shall  cause  notice  of  such  finding  and  declaration  to  be  given 
the  taxpayer,  together  with  a demand  for  immediate  payment  of  the 
tax  for  the  taxable  period  so  declared  terminated  and  of  the  tax  for 
the  preceding  taxable  year  or  so  much  of  said  tax  as  is  unpaid,  whether 
or  not  the  time  otherwise  allowed  by  law  for  filing  return  and  paying 
the  tax  has  expired;  and  such  taxes  shall  thereupon  become  im- 
mediately due  and  payable.  In  any  action  or  suit  brought  to  enforce 
payment  of  taxes  made  due  and  payable  by  virtue  of  the  provisions  of 
this  subdivision  the  finding  of  the  Commissioner,  made  as  herein 
provided,  whether  made  after  notice  to  the  taxpayer  or  not,  shall  be 
for  all  purposes  presumptive  evidence  of  the  taxpayer’s  design.  A 
taxpayer  who  is  not  in  default  in  making  any  return  or  paying  in- 
come, war-profits,  or  excess-profits  tax  under  any  Act  of  Congress 
may  furnish  to  the  United  States,  under  regulations  to  be  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  security 
approved  by  the  Commissioner  that  he  will  duly  make  the  return 
next  thereafter  required  to  be  filed  and  pay  the  tax  next  thereafter 
required  to  be  paid.  The  Commissioner  may  approve  and  accept 
in  like  manner  security  for  return  and  payment  of  taxes  made  due 
and  payable  by  virtue  of  the  provisions  of  this  subdivision,  provided 
the  taxpayer  has  paid  in  full  all  other  income,  war-profits,  or  excess- 
profits  taxes  due  from  him  under  any  Act  of  Congress.  ^ If  security  is 
approved  and  accepted  pursuant  to  the  provisions  of  this  subdivision 
and  such  further  or  other  security  with  respect  to  the  tax  or  taxes 
covered  thereby  is  given  as  the  Commissioner  shall  from  time  to  time 
find  necessary  and  require,  payment  of  such  taxes  shall  not  be  en- 
forced by  any  proceedings  under  the  provisions  of  this  subdivision 
prior  to  the  expiration  of  the  time  otherwise  allowed  for  paying  such 
respective  taxes. 

Receipts  for  Taxes. 

1(384  Sec.  251.  That  every  collector  to  whom  any  payment  of  any  2102 
tax  is  made  under  the  provisions  of  this  title  shall  upon  request  give 
to  the  person  making  such  payment  a full  written  or  printed^  receipt, 
stating  the  amount  paid  and  the  particular  account  for  which  such 
payment  was  made; 

K385  and  whenever  any  debtor  pays  taxes  on  account  of  payments  made  2114 
or  to  be  made  by  him  to  separate  creditors  the  collector  shall,  if  re- 
quested by  such  debtor,  give  a separate  receipt  for  the  tax  paid  on 
account  of  each  creditor  in  such  form  that  the  debtor  can  conveniently 
produce  such  receipts  separately  to  his  several  creditors  in  satisfaction 
of  their  respective  demands  up  to  the  amounts  stated  in  the  receipts; 
and  such  receipt  shall  be  sufficient  evidence  in  favor  of  such  debtor 
to  justify  him  in  withholding  from  his  next  payment  to  his  creditor 
the  amount  therein  stated;  but  the  creditor  may,  upon  giving  to 

42 


THE  INCOME  TAX  LAW. 


Law 
Paragraph 

his  debtor  a full  written  receipt  acknowledging  the  payment  to  him 
of  any  sum  actually  paid  and  accepting  the  amount  of  tax  paid  as 
aforesaid  (specifying  the  same)  as  a further  satisfaction  of  the  debt 
to  that  amount,  require  the  surrender  to  him  of  such  collector’s 


Repeated 
at  ^ 


receipt. 


Refunds. 


Sec.  252.  That  if,  upon  examination  of  any  return  of  income  2121 
made  pursuant  to  this  Act,  the  Act  of  August  5,  1909,  entitled  “An 
Act  to  provide  revenue,  equalize  duties,  and  encourage  the  industries 
of  the  United  States,  and  for  other  purposes,”  the  Act  of  October  3, 

1913,  entitled  “An  Act  to  reduce  tariff  duties  and  to  provide  revenue 
for  the  Government,  and  for  other  purposes,”  the  Revenue  Act  of 
1916,  as  amended,  or  the  Revenue  Act  of  1917,  it  appears  that  an 
amount  of  income,  war-profits  or  excess-profits  tax  has  been  paid  in  ex- 
cess of  that  properly  due,  then,  notwithstanding  the  provisions  of 
section  3228  of  the  Revised  Statutes,  the  amount  of  the  excess  shall 
be  credited  against  any  income,  war-profits  or  excess-profits  taxes, 
or  installment  thereof,  then  due  from  the  taxpayer  under  any  other 
return,  and  any  balance  of  such  excess  shall  be  immediately  refunded 
to  the  taxpayer: 


^387  Provided,  That  no  such  credit  or  refund  shall  be  allowed  or  2122 
made  after  five  years  from  the  date  when  the  return  was  due, 
unless  before  the  expiration  of  such  five  years  a claim  therefor  is 
filed  by  the  taxpayer. 


Penalties. 

^388  Sec.  253.  That  "any  individual,  corporation,  or  partnership  re-  1902 
quired  under  this  title  to  pay  or  collect  any  tax,  to  make  a return  or 
to  supply  information, 

who  fails  to  pay  or  collect  such  tax,  to  make  such  return,  or  to 
supply  such  information  at  the  time  or  times  required  under  this 
title, 

shall  be  liable  to  a penalty  of  not  more  than  $1,000. 

Any  individual,  corporation,  or  partnership,  or  any  officer  or  employee 
of  any  corporation  or  member  or  employee  of  a partnership, 
who  willfully  refuses  to  pay  or  collect  such  tax,  to  make  such  return, 
or  to  supply  such  information  at  the  time  or  times  required  under  this 

title,  or  11- 

who  willfully  attempts  in  any  manner  to  defeat  or  evade  the  tax  im- 
posed by  this  title, 

shall  be  guilty  of  a misdemeanor  and  shall  be  fined  not  more  than 
$10,000  or  imprisoned  for  not  more  than  one  year,  or  both,  together 
with  the  costs  of  prosecution. 


Returns  of  Payments  of  Dividends. 

1[389  Sec.  254.  That  every  corporation  subject  to  the  tax  imposed  1762 
by  this  title  and  every  personal  service  corporation  shall,  when  re- 
quired by  the  Commissioner,  render  a correct  return  duly  verified 
under  oath,  of  its  payments  of  dividends,  stating  the  name  and 
address  of  each  stockholder,  the  number  of  shares  owned  by  him, 
and  the  amount  of  dividends  paid  to  him. 

43 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


Law 

Paragraph 

Returns  of  Brokers. 

^390  Sec.  255.  That  every  individual,  corporation,  or  partnership  doing  1764 
business  as  a broker  shall,  when  required  by  the  Commissioner,  render 
a correct  return  duly  verified  under  oath,  under  such  rules  and  regula- 
tions as  the  Commissioner,  with  the  approval  of  the  Secretary,  may 
prescribe,  showing  the  names  of  customers  for  whom  such  individual, 
corporation,  or  partnership  has  transacted  any  business,  with  such 
details  as  to  the  profits,  losses,  or  other  information  which  the  Com- 
missioner may  require,  as  to  each  of  such  customers,  as  will  enable 
the  Commissioner  to  determine  whether  all  income  tax  due  on  profits 
or  gains  of  such  customers  has  •been  paid. 


Information  at  Source. 

11391  Sec.  256.  That  all  individuals,  corporations,  and  partnerships,  in  1728 
whatever  capacity  acting,  including  lessees  or  mortgagors  of  real  or 
personal  property,  fiduciaries,  and  employers, 

11392  making  payment  to  another  individual,  corporation,  or  partnership,  1729 

1[3Q3  of  interest,  rent,  salaries,  wages,  premiums,  annuities,  compensations,  1730 
remunerations,  emoluments,  or  other  fixed,  or  determinable  gams, 
profits,  and  income 

11394  (other  than  payments  described  in  sections  254  and  255),  1731 

1[395  of  $1,000  or  more  in  any  taxable  year,  1732 

lf396  or  in  the  case  of  such  payments  made  by  the  United  States,  the  1733 
officers  or  employees  of  the  United  States  having  information  as  to 
such  payments  and  required  to  make  returns  in  regard  thereto  by  the 
regulations  hereinafter  provided  for, 

11397  shall  render  a true  and  accurate  return  to  the  Commissioner,  under  1734 
such  regulations  and  in  such  form  and  manner  and  to  such  extent  as 
may  be  prescribed  by  him  with  the  approval  of  the  Secretary,  setting 
forth  the  amount  of  such  gains,  profits,  and  income,  and  the  name 

and  address  of  the  recipient  of  such  payment. 

11398  Such  returns  may  be  required,  regardless  of  amounts,  (1)  in  the  1747 
case  of  payments  of  interest  upon  bonds,  mortgages,  deeds  of  trust,  or 
other  similar  obligations  of  corporations,  and 

11399  (2)  in  the  case  of  collections  of  items  (not  payable  in  the  United  1749 
States)  of  interest  upon  the  bonds  of  foreign  countries  and  interpt 
upon  the  bonds  of  and  dividends  from  foreign  corporations  by  in- 
dividuals, corporations,  or  partnerships,  undertaking  as  a matter 

of  business  or  for  profit  the  collection  of  foreign  payments  ot  such 
interest  or  dividends  by  means  of  coupons,  checks,  or  bills  of  exchange. 

11400  When  necessary  to  make  effective  the  provisions  of  this  section  the  1753 
name  and  address  of  the  recipient  of  income  shall  be  furnished  upon 
demand  of  the  individual,  corporation,  or  partnership  paying  the 
income. 


44 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragraph  “ 

1[401  The  provisions  of  this  section  shall  apply  to  the  calendar  year  1735 
1918  and  each  calendar  year  thereafter, 

1[402  but  shall  not  apply  to  the  payment  of  interest  on  obligations  of  the  1745 
United  States. 

Returns  to  be  Public  Records. 

^403  Sec.  257.  That  returns  upon  which  the  tax  has  been  determined  1955 
by  the  Commissioner  shall  constitute  public  records; 

1[404  but  they  shall  be  open  to  inspection  only  upon  order  of  the  President  1956 
and  under  rules  and  regulations  prescribed  by  the  Secretary  and 
approved  by  the  President: 

^405  Provided^  That  the  proper  officers  of  any  State  imposing  an  1970 

income  tax  may,  upon  the  request  of  the  governor  thereof,  have 
access  to  the  returns  of  any  corporation,  or  to  an  abstract  thereof 
showing  the  name  and  income  of  the  corporation,  at  such  times  and 
in  such  manner  as  the  Secretary  may  prescribe: 

lf406  Provided  further.  That  all  bona  fide  stockholders  of  record  1972 

owning  1 per  centum  or  more  of  the  outstanding  stock  of  any 
corporation  shall,  upon  making  request  of  the  Commissioner,  be 
allowed  to  examine  the  annual  income  returns  of  such  corpora- 
tion and  of  its  subsidiaries . 

]f407  Any  stockholder  who  pursuant  to  the  provisions  of  this  section  1973 

is  allowed  to  examine  the  return  of  any  corporation,  and  who 
makes  known  in  any  manner  whatever  not  provided  by  law  the 
amount  or  source  of  income,  profits,  losses,  expenditures,  or  any 
particular  thereof,  set  forth  or  disclosed  in  any  such  return,  shall 
be  guilty  of  a misdemeanor  and  be  punished  by  a fine  not  exceeding 
$1,000,  or  by  imprisonment  not  exceeding  one  year,  or  both. 

11408  The  Commissioner  shall  as  soon  as  practicable  in  each  year  1986 
cause  to  be  prepared  and  made  available  to  public  inspection  in  such 
manner  as  he  may  determine,  in  the  office  of  the  collector  in  each 
internal-revenue  district  and  in  such  other  places  as  he  may  determine, 
lists  containing  the  names  and  the  post-office  addresses  of  all  individuals 
making  income-tax  returns  in  such  district. 

Publication  of  Statistics. 

1[409  Sec.  258.  That  the  Commissioner,  with  the  approval  of  the  1987 
Secretary,  shall  prepare  and  publish  annually  statistics  reasonably 
available  with  respect  to  the  operation  of  the  income,  war-profits  and 
excess-profits-tax  laws,  including  classifications  of  taxpayers  and  of 
income,  the  amounts  allowed  as  deductions,  exemptions,  and  credits, 
and  any  other  facts  deemed  pertinent  and  valuable. 

Collection  of  Foreign  Items. 

1[410  Sec.  259.  That  all  individuals,  corporations,  or  partnerships  under-  1755 
taking  as  a matter  of  business  or  for  profit  the  collection  of  foreign 
payments  of  interest  or  dividends  by  means  of  coupons,  checks,  or 
bills  of  exchange  shall  obtain  a license  from  the  Commissioner  and 

45 


THE  INCOME  TAX  LAW. 


Law  Repeats 

Paragraph  ^ 

^411  shall  be  subject  to  such  regulations  enabling  the  Government  to  1756 
obtain  the  information  required  under  this  title  as  the  Commissioner, 
with  the  approval  of  the  Secretary,  shall  prescribe; 

^412  and  whoever  knowingly  undertakes  to  collect  such  payments  without  1757 
having  obtained  a license  therefor,  or  without  complying  with  such 
regulations,  shall  be  guilty  of  a misdemeanor  and  shall  be  fined  not 
more  than  $5,000,  or  imprisoned  for  not  more  than  one  year,  or  both. 

Citizens  of  United  States  Possessions. 

^413  Sec.  260.  That  any  individual  who  is  a citizen  of  any  possession  531 
of  the  United  States  (but  not  otherwise  a citizen  of  the  United  States) 
and  who  is  not  a resident  of  the  United  States,  shall  be  subject  to 
taxation  under  this  title  only  as  to  income  derived  from  sources  within 
the  United  States, 

^414  and  in  such  case  the  tax  shall  be  computed  and  paid  in  the  same  532 
manner  and  subject  to  the  same  conditions  as  in  the  case  of  other 
persons  who  are  taxable  only  as  to  income  derived  from  such  sources. 

Porto  Rico  and  Philippine  Islands. 

^415  Sec.  261.  That  in  Porto  Rico  and  the  Philippine  Islands  the  534 
income  tax  shall  be  levied,  assessed,  collected,  and  paid  in  accord- 
ance with  the  provisions  of  the  Revenue  Act  of  1916  as  amended. 

^416  Returns  shall  be  made  and  taxes  shall  be  paid  under  Title  I of  535 
such  Act  in  Porto  Rico  or  the  Philippine  Islands,  as  the  case  may  be, 

by 

^417  (1)  every  individual  who  is  a citizen  or  resident  of  Porto  Rico  or  the  536 
Philippine  Islands  or  derives  income  from  sources  therein,  and 

^418  (2)  every  corporation  created  or  organized  in  Porto  Rico  or  the  537 
Philippine  Islands  or  deriving  income  from  sources  therein. 

^[419  An  individual  who  is  neither  a citizen  nor  a resident  of  Porto  Rico  or  538 
the  Philippine  Islands  but  derives  income  from  sources  therein,  shall 
be  taxed  in  Porto  Rico  or  the  Philippine  Islands  as  a nonresident 
alien  individual,  and 

^420  a corporation  created  or  organized  outside  Porto  Rico  or  the  Philippine  539 
Islands  and  deriving  income  from  sources  therein  shall  be  taxed  in 
Porto  Rico  or  the  Philippine  Islands  as  a foreign  corporation. 

11421  For  the  purposes  of  section  216  and  of  paragraph  (6)  of  subdivision  540 
(a)  of  section  234  a tax  imposed  in  Porto  Rico  or  the  Philippine  Islands 
upon  the  net  income  of  a corporation  shall  not  be  deemed  to  be  a tax 
under  this  title. 

11422  The  Porto  Rican  or  Philippine  Legislature  shall  have  power  by  due  541 
enactment  to  amend,  alter,  modify,  or  repeal  the  income  tax  laws  in 
force  in  Porto  Rico  or  the  Philippine  Islands,  respectively. 

46 


Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


TITLE  XIII. — General  Administrative  Provisions. 

(Of  the  Revenue  Act  of  1918.) 

[Advisory  Tax  Board.] 

1[423  Sec.  1301.  (Revenue  Act  of  1918.)  (a)  . (b)  . (c)  . 2211 

(d)  (1)  There  is  hereby  created  a board  to  be  known  as  the  “Advisory 
Tax  Board,”  hereinafter  called  the  Board,  and  to  be  composed  of  not 
to  exceed  six  members  to  be  appointed  by  the  Commissioner  with  the 
approval  of  the  Secretary.  The  Board  shall  cease  to  exist  at  the  expira- 
tion of  two  years  after  the  passage  of  this  Act,  or  at  such  earlier  time 
as  the  Commissioner  with  the  approval  of  the  Secretary  may  designate. 

1[424  Vacancies  in  the  membership  of  the  Board  shall  be  filled  in  the  2212 
same  manner  as  an  original  appointment.  Any  member  shall  be 
subject  to  removal  by  the  Commissioner  with  the  approval  of  the 
Secretary.  The  Commissioner  with  the  approval  of  the  Secretary 
shall  designate  the  chairman  of  the  Board.  Each  member  shall  re- 
ceive an  annual  salary  of  $9,000,  payable  monthly,  together  with 
actual  necessary  expenses  when  absent  from  the  District  of  Columbia 
on  official  business. 

1f425  (2)  The  Commissioner  may,  and  on  the  request  of  any  taxpayer  2213 

directly  interested  shall,  submit  to  the  Board  any  question  relating 
to  the  interpretation  or  administration  of  the  income^  war-profits 
or  excess-profits  tax  laws,  and  the  Board  shall  report  its  findings 
and  recommendations  to  the  Commissioner. 

^{426  (3)  The  Board  shall  have  its  office  in  the  Bureau  of  Internal  Revenue  2214 

in  the  District  of  Columbia.  The  expenses  and  salaries  of  members 
of  the  Board  shall  be  audited,  allowed,  and  paid  out  of  appropriations 
for  collecting  internal  revenue,  in  the  same  manner  as  expenses  and 
salaries  of  employees  of  the  Bureau  of  Internal  Revenue  are  audited, 
allowed,  and  paid. 

1(427  (4)  The  Board  shall  have  the  power  to  summon  witnesses,  take  2215 

testimony,  administer  oaths,  and  to  require  any  person  to  produce 
books,  papers,  documents,  or  other  data  relating  to  any  matter  under 
investigation  by  the  Board.  Any  member  of  the  Board  may  sign 
subpoenas  and  members  and  employees  of  the  Bureau  of  Internal 
Revenue  designated  to  assist  the  Board,  when  authorized  by  the 
Board,  may  administer  oaths,  examine  witnesses,  take  testimony 
and  receive  evidence. 


[Leaves  of  Absence  to  Internal-Revenue  Men.] 

1(428  Sec.  1302.  (Revenue  Act  of  1918.)  That  all  internal-revenue  2239 
agents  and  inspectors  shall  be  granted  leave  of  absence  with  pay, 
which  shall  not  be  cumulative,  not  to  exceed  thirty  days  in  any 
calendar  year,  under  such  regulations  as  the  Commissioner,  with  the 
approval  of  the  Secretary,  may  prescribe. 


47 


THE  INCOME  TAX  LAW. 


Repeated 

atH 


I.aw 

""TrECORDS  to  be  kept:  returns  to  be  MADE;  BOOKS  TO  BE  OPEN  TO 
INSPECTION  BY  GOVERNMENT  OFFICERS.] 

•’429  Sec.  1305.  (Revenue  Act  of  1918.)  That  all  administrative,  1998 

" special,  or  stamp  provisions  of  law,  including  the  law  relating  to  the 
aLessment  of  taxes,  so  far  as  applicable,  are  hereby  extended  to  and 
made  a part  of  this  Act,  and  every  person  liable  to  any  tax  imposed 
bv  this  Act,  or  for  the  collection  thereof,  shall  keep  such  records  and 
render,  under  oath,  such  statements  and  returns,  and  shall  compy 
with  such  regulations  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  from  time  to  time  prescribe. 

11430  Whenever  in  the  judgment  of  the  Commissioner  necessary  he  may  1876 
require  any  person,  by  notice  served  upon  him,  to  make  a return  or 
such  statements  as  he  deems  sufficient  to  show  whether  or  not  such 
person  is  liable  to  tax. 

«;4tl  The  Commissioner,  for  the  purpose  of  ascertaining  the  correctness  1877 
of  any  return  or  for  the  purpose  of  making  a return  where  none  has 
been  made,  is  hereby  authorized,  by  any  revenue  agent  or  inspector 
designated  by  him  for  that  purpose,  to  examine  any  books,  papew, 
records  or  memoranda  bearing  upon  the  matters  required  to  be 
included  in  the  return,  and  may  require  the  attendance  of  the  peison 
rendering  the  return  or  of  any  officer  or  employee  of  such  person,  or  the 
attendanceof  any  other  person  having  knowledge  m the  premises,  and 
may  take  his  testimony  with  reference  to  the  matter  required  by  law  to 
be  included  in  such  return,  with  power  to  administer  oaths  to  such 
person  or  persons. 


[TAX  TO  BE 


COLLECTED  AS  COMMISSIONER  MAY  PRESCRIBE  IF  NO  METHOD 
IS  SPECIFICALLY  PROVIDED.] 


11432  Sec.  1307.  (Revenue  Act  of  1918.)  That  in  all  cases  where  the  1583 

method  of  collecting  the  tax  imposed  by  this  Act  is  not  specifically  pro- 
vided in  this  Act,  the  tax  shall  be  collected  in  such  manner  as  the  Com- 
missioner, with  the  approval  of  the  Secretary,  may  prescribe.  . . . 

[THE  COMMISSIONER  AUTHORIZED  TO  MAKE  RULES  AND  REGULATIONS-! 

11433  Sec.  1309.  (Revenue  Act  of  1918.)  That  the  Commissioner,  with  2227 
the  approval  of  the  Secretary,  is  hereby  authorized  to  make  all  needful 
rules  and  regulations  for  the  enforcement  of  the  provisions  of  this 

Act.  * * * 

[FRACTIONAL  PARTS  OF  A CENT  IN  PAYMENT  OF  TAX.] 

Sec.  1313.  (Revenue  Act  of  1918.)  That  in  the  payment  of  any  2089 
tax  under  this  Act  not  payable  by  stamp  a fractional  part  of  a cent 
shall  be  disregarded  unless  it  amounts  to  one-half  cent  or  more,  in 
which  case  it  shall  be  increased  to  1 cent. 

ITPEASURY  CERTIFICATES  OF  INDEBTEDNESS  AND  UNCERTIFIED  CHECKS 
' " IN  PAYMENT  OF  TAXES.] 

[35  Sec.  1314.  (Revenue  Act  of  1918.)  That  collectors  may  receive,  2091 
at  par  with  an  adjustment  for  accrued  interest,  certificates^  of  in- 
debtedness issued  by  the  United  States  and  uncertified  checks  in  pay- 

48 


T.434 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 


Repfa  e 
at  f 


^1f435)  merit  of  income,  war-profits  and  excess-profits  taxes  and  any  other  (2091) 
taxes  payable  other  than  by  stamp,  during  such  time  and  under  such 
regulations  as  the  Commissioner,  with  the  approval  of  the  Secretary, 
shall  prescribe;  but  if  a check  so  received  is  not  paid  by  the  bank  o a 
which  it  is  drawn  the  person  by  whom  such  check  has  been  tendered 
shall  rernain  liable  for  the  payment  of  the  tax  and  for  all  legal  penalties 
and  additions  the  same  as  if  such  check  had  not  been  tendered. 


[AMENDED  SECTIONS  OF  THE  REVISED  STATUTES.) 

[Commient:  The  following  sections  of  the  Revised  Statutes,  having 
directly  to  do  with  the  admxinistration  of  the  Income  Tax  Law,  are 
reprinted  here  because  of  the  fact  that  they  were  am.ended  by’  the 
Revenue  Act  of  1918.  These  sections,  with  the  exception  of  section 
3220  and  sections  3164  and  3165,  were  carried  into  the  Income 
Tax  Title  of  the  Re\enue  Act  of  1916  as  amended  by  the  Revenue 
Act  of  1917.  They  are  no  longer  embodied  in  the  Income  Tax  Law. 
Section  3173,  Revised  Statutes,  heretofore  carried  in  the  Income 
Tax  Law,  was  so  amended  by  the  Revenue  Act  of  1918  (Sec.  1317), 
as  to  make  it  inapplicable  to  the  income  tax,  and  for  that  reason  it  is 
not  incorporated  here.] 


[REMISSION  AND  REFUSING  OF  TAXES  AND  PENALTIES.] 

^436  Sec.  1316.  (Revenue  Act  of  1918.)  (a)  That  section  3220  of  2116 

the  Revised  Statutes  is  hereby  amended  to  read  as  follows: 

“Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject 
to  regulations  prescribed  by  the  Secretary  of  the  Treasury,  is  author- 
ized to  remit,  refund,  and  pay  back  all  taxes  erroneously  or  illegally 
assessed  or  collected,  all  penalties  collected  without  authority,  and  all 
taxes  that  appear  to  be  unjustly  assessed  or  excessive  In  amount, 
or  in  any  manner  wrongfully  collected;  also  to  repay  to  any  collector 
or  deputy  collector  the  full  amount  of  such  sums  of  money  as  may  be 
recovered  against  him  In  any  court,  for  any  internal  revenue  taxes 
collected  by  him,  with  the  cost  and  expenses  of  suit;  also  all 
damages  and  costs  recovered  against  any  assessor,  assistant  assessor, 
collector,  deputy  collector,  agent,  or  inspector,  in  any  suit  brought 
against  him  by  reason  of  anything  done  in  the  due  performance  ofliis 
official  duty,  and  shall  make  report  to  Congress  at  the  beginning  of 
each  regular  session  of  Congress  of  all  transactions  under  this  section.” 

[BURDEN  OF  PROOF  AS  TO  FRAUD  IN  CONNECTION  WITH  SUITS  TO  RECOVER 

TAXES  ON  SECOND  ASSESSMENT.) 

^437  (b)  Section  3225  of  the  Revised  Statutes  of  the  United  States  is  2176 

hereby  amended  to  read  as  follows: 

“Sec.  3225.  When  a second  assessment  is  made  in  case  of  any 
list,  statement,  or  return,  which  in  the  opinion  of  the  collector  or 
deputy  collector  was  false  or  fraudulent,  or  contained  any  under- 
statement or  undervaluation,  such  assessment  shall  not  be  remitted 
nor  shall  taxes  collected  under  such  assessment  be  refunded,  or  paid 
back,  or  recovered  by  any  suit,  unless  It  Is  proved  that  such  list, 
statement,  or  return  was  not  willfully  false  or  fradulent  and  did  not 
contain  any  willful  understatement  or  undervaluation.” 

49 


THE  INCOME  TAX  LAW. 


Law  Repeated 

Paragrs  ph  at  «lf 

^438  Sec.  1317.  (Revenue  Act  of  1918.)  That  sections  3164,  3165, 

3167,  3172,  3173,  and  3176  of  the  Revised  Statutes  as  amended  are 
hereby  amended  to  read  as  follows: 


[Duty  of  Collectors  to  Report  Violations  of  Law.] 

^[439  ‘‘Sec.  3164.  It  shall  be  the  duty  of  every  collector  of  internal  2068 
revenue  having  knowledge  of  any  willful  violation  of  any  law  of  the 
United  States  relating  to  the  revenue,  within  thirty  days  after  com- 
ing into  possession  of  such  knowledge,  to  file  with  the  district  attorney 
of  the  district  in  which  any  fine,  penalty'  or  forfeiture  may  be  in- 
curred, a statement  of  all  the  facts  and  circumstances  of  the  case 
within  his  knowledge,  together  with  the  names  of  the  witnesses, 
setting  forth  the  provisions  of  law  believed  to  be  so  violated  on  which 
reliance  may  be  had  for  condemnation  or  conviction. 


[R.evenue  Officers  Who  May  Administer  Oaths.] 

^j440  “Sec.  3165.  Every  collector,  deputy  collector,  internal-revenue  1790 
agent,  and  internal-revenue  officer  assigned  to  duty  under  an  internal- 
revenue  agent,  is  authorized  to  admiinister  oaths  and  to  take  evidence 
touching  any  part  of  the  administration  of  the  internal-revenue  laws 
with  which  he  is  charged,  or  v/here  such  oaths  and  evidence  are 
authorized  by  law  or  regulation  authorized  by  law  to  be  taken. 


[Disclosure  of  Information  Made  Available  to  Internal  Revenue  Officers.] 

^441  “Sec.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  col-  1976 
lector,  agent,  clerk,  or  other  officer  or  employee  of  the  United  States 
to  divulge  or  to  make  known  in  any  manner  whatever  not  provided 
by  law  to  any  person  the  operations,  style  of  work,  or  apparatus  of 
any  m.anufacturer  or  producer  visited  by  him  in  the  discharge  of  his 
official  duties,  or  the  amount  or  source  of  income,  profits,  losses, 
expenditures,  or  any  particular  thereof,  set  forth  or  disclosed  in  any 
income  return,  or  to  permit  any  income  return  or  copy  thereof  or  any 
book  containing  any  abstract  or  particulars  thereof  to  be  seen  or 
examined  by  any  person  except  as  provided  by  law;  and  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner  whatever 
not  provided  by  law  any  income  return,  or  any  part  thereof  or  source 
of  income,  profits,  losses,  or  expenditures  appearing  in  any  income 
return;  and  any  offense  against  the  foregoing  provision  shall  be  a mis- 
demeanor and  be  punished  by  a fine  not  exceeding  $1,000  or  by 
imprisonment  not  exceeding  one  year,  or  both,  at  the  discretion  of  the 
court;  and  if  the  offender  be  an  officer  or  employee  of  the  United 
States  he  shall  be  dismissed  from  office  or  discharged  from  employ- 
ment. 

[Canvass  of  Districts  by  Collectors.] 

^[442  “Sec.  3172.  Every  collector  shall,  from  time  to  time,  cause  his  1867 
deputies  to  proceed  through  every  part  of  his  district  and  inquire 
after  and  concerning  all  persons  therein  who  are  liable  to  pay  any 
internal-revenue  tax,  and  all  persons  owning  or  having  the  care  and 
management  of  any  objects  liable  to  pay  any  tax,  and  to  make  a list 
of  such  persons  and  enumerate  said  objects. 

* * * Hi  * H 


“Sec.  3173. 


50 


[See  111981.] 


THE  INCOME  TAX  LAW. 


Repeated 
at  *11 


Law 

Paragraph 

[Penalties  for  Failure  to  Make  Return  and  for  False  Returns.] 

1[443  Sec.  3176.  If  any  person,  corporation,  company,  or  associa-  1889 
tion  fails  to  make  and  file  a return  or  list  at  the  time  prescribed  by 
law  or  by  regulation  made  under  authority  of  law,  or  makes,  will- 
fully or  otherwise,  a false  or  fraudulent  return  or  list, 

1[444  the  collector  or  deputy  collector  shall  make  the  return  or  list  from  1890 
his  own  knowledge  and  from  such  information  as  he  can  obtain 
through  testimony  or  otherwise. 

1[445  In  any  such  case  the  Commissioner  may,  from  his  own  knowledge  1891 
and  from  such  information  as  he  can  obtain  through  testimony  or 
otherwise,  make  a return  or  amend  any  return  made  by  a collector  or 
deputy  collector. 

1f446  Any  return  or  list  so  made  and  subscribed  by  the  Commissioner,  or  1892 
'by  a collector  or  deputy  collector  and  approved  by  the  Commis- 
sioner, shall  be  prima  facie  good  and  sufficient  for  all  legal  purposes. 

1[447  “If  the  failure  to  file  a return  or  list  is  due  to  sickness  or  absence,  1847 
the  collector  may  allow  such  further  time,  not  exceeding  thirty  days, 
for  making  and  filing  the  return  or  list  as  he  deems  proper. 

1[448  “The  Commissioner  of  Internal  Revenue  shall  determine  and|l893 
assess  all  taxes,  other  than  stamp  taxes,  as  to  which  returns  or  lists 
are  so  made  under  the  provisions  of  this  section. 

^449  In  case  of  any  failure  to  make  and  file  a return  or  list  within  the  1894 
time  prescribed  by  law,  or  prescribed  by  the  Commissioner  of  In- 
ternal Revenue  or  the  collector  in  pursuance  of  law,  the  Commis- 
sioner of  Internal  Revenue  shall  add  to  the  tax  25  per  centum  of  its 
amount, 

1[450  except  that  when  a return  is  filed  after  such  time  and  it  is  shown  that  1895 
the  failure  to  file  it  was  due  to  a reasonable  cause  and  not  to  willful 
neglect,  no  such  addition  shall  be  made  to  the  tax. 

' K451  In  case  a false  or  fraudulent  return  or  list  is  willfully  made,  the  1896 
Commissioner  of  Internal  Revenue  shall  add  to  the  tax  50  per  centum 
of  its  amount. 

^452  “The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  1897 
time  and  in  the  same  manner  and  as  part  of  the  tax 

^453  unless  the  tax  has  been  paid  before  the  discovery  of  the  neglect,M898 
falsity,  or  fraud,  in  which  tase  the  amount  so  added  shall  be  collected 
in  the  same  manner  as  the  tax.” 

[Jurisdiction  of  U.  S.  District  Courts.) 

1(454  Sec.  1318.  (Revenue  Act  of  1918.)  That  if  any  person  is  sum-  1878 
moned  under  this  Act  to  appear,  to  testify,  or  to  produce  books, 
papers  or  other  data,  the  district  court  of  the  United  States  for  the 
district  in  which  such  person  resides  shall  have  jurisdiction  by  ap- 

51 


THE  INCOME  TAX  LAW. 


I Law  Repeated 

Paragraph  at  t 

propriate  process  to  compel  such  attendance,  testimony,  or  produc- 
tion of  books,  papers,  or  other  data. 

1[455^,The  district  courts  of  the  United  States  at  the  instance  of  the  United  1879 
States  are  hereby  invested  with  such  jurisdiction  to  make  and  issue, 
both  in  actions  at  law  and  suits  in  equity,  writs  and  orders  of  injunction 
and  of  ne  exeat  republica,  orders  appointing  receivers,  and  such  other 
orders  and  process,  and  to  render  such  judgments  and  decrees,  granting 
in  proper  cases  both  legal  and  equitable  relief  together,  as  may  be 
necessary  or  appropriate  for  the  enforcement  of  the  provisions  of  this 
Act.  The  remedies  hereby  provided  are  in  addition  to  and  not  exclu- 
sive of  any  and  all  other  remedies  of  the  United  States  in  such  courts 
or  otherwise  to  enforce  such  provisions. 


(UNITED  STATES  BONDS  IN  LIEU  OF  SURITIES,  IN  CONNECTION  WITH 

“PENAL  BONDS.”] 

f456  Sec.  1320.  (Revenue  Act  of  1918.)  That  wherever  by  the  laws  of  1500 
• the  United  States  or  regulations  made  pursuant  thereto,  any  person  is 
required  to  furnish  any  recognizance,  stipulation,  bond,  guaranty,  ^ or 
undertaking,  hereinafter  called  “penal  bond”,  with  surety  or  sureties, 
such  person  may,  in  lieu  of  such  surety  or  sureties,  deposit  as  security 
with  the  official  having  authority  to  approve  such  penal  bond.  United 
States  Liberty  bonds  or  other  bonds  of  the  United  States  in  a sum 
equal  at  their  par  value  to  the  amount  of  such  penal  bond  required  to  be 
furnished,  together  with  an  agreement  authorizing  such  official  to 
collect  or  sell  such  bonds  so  deposited  in  case  of  any  default  in  the 
performance  of  any  of  the  conditions  or  stipulations  of  such  penal 
bond.  The  acceptance  of  such  United  States  bonds  in  lieu  of  surety 
or  sureties  required  by  law  shall  have  the  same  force  and  effect  as 
individual  or  corporate  sureties,  or  certified  checks,  bank  drafts, 
post-office  money  orders,  or  cash,  for  the  penalty  or  amount  of  such 
penal  bond.  The  bonds  deposited  hereunder,  and  such  other  United 
States  bonds  as  may  be  substituted  therefor  from  time  to  time  as 
such  security,  may  be  deposited  with  the  Treasurer,  or  an  Assistant 
Treasurer  of  the  United  States,  a Government  depository.  Federal 
Reserve  bank,  or  member  bank,  which  shall  issue  receipt  therefor, 
describing  such  bonds  so  deposited.  As  soon  as  security  for  the  per- 
formance of  such  penal  bond  is  no  longer  necessary,  such  bonds  so 
deposited,  shall  be  returned  to  the  depositor:  Provided,  * * * , 


1457 

Provided  further,  That  nothing  herein  contained  shall  affect  or 
impair  the  priority  of  the  claim  of  the  United  States  against  the 
bonds  deposited  or  any  right  or  remedy  granted  by  said  Acts  or 
by  this  section  to  the  United  States  for  (default  upon  any  obliga- 
tion of  said  penal  bond: 

1501 

1(458 

Provided  further.  That  all  laws  inconsistent  with  this  section  are 
hereby  so  modified  as  to  conform  to  the  provisions  hereof: 

1502 

1(459 

And  provided  further,  That  nothing  contained  herein  shall  aftect 
the  authority  of  courts  over  the  security,  where  such  bonds  are  taken 
as  security  in  judicial  proceedings,  or  the  authority  of  any 

52 

1503 

Law 

Paragraph 


THE  INCOME  TAX  LAW. 


Repeated 
at  ^ 


administrative  officer  of  the  United  States  to  receive  United 
States  bonds  for  security  in  cases  authorized  by  existing  laws, 

1[460  The  Secretary  may  prescribe  rules  and  regulations  necessary  and  1504 
proper  for  carrying  this  section  into  effect. 

TITLE  XIV.— GENERAL  PROVISIONS. 

(Of  the  Revenue  Act  of  1918.) 

[Repeal  of  Prior  Laws.) 

1[461  Sec.  1400.  (Revenue  Act  of  1918.)  (a)  That  the  following  2032 

parts  of  Acts  are  hereby  repealed,  subject  to  the  limitations  provided 
in  subdivision  (b): 

(1)  The  following  titles  of  the  Revenue  Act  of  1916: 

Title  I (called  “Income  Tax”); 

********* 

(2)  The  following  parts  of  the  Act  entitled  “An  Act  to  provide 
increased  revenue  to  defray  the  expenses  of  the  increased  appropria- 
tions for  the  Army  and  Navy  and  the  extensions  of  fortifications, 
and  for  other  purposes,”  approved  March  3,  1917: 

********* 

Section  402  (called  “Returns  of  Dividends”). 

(3)  The  following  titles  of  the  Revenue  Act  of  1917: 

Title  I (called  “War  Income  Tax”); 

********* 

Title  X (called  “Administrative  Provisions”) ; 

Title  XII  (called  “Income-Tax  Amendments”). 

^462  (b)  Such  parts  of  Acts  shall  remain  in  force  for  the  assessment  2033 

and  collection  of  all  taxes  which  have  accrued  thereunder,  and  for 
the  imposition  and  collection  of  all  penalties  or  forfeitures  which  have 
accrued  and  may  accrue  in  relation  to  any  such  taxes,  and  except  that 
the  unexpended  balance  of  any  appropriation  heretofore  made  and 
now  available  for  the  administration  of  any  such  part  of  an  Act  shall 
be  available  for  the  administration  of  this  Act  or  the  corresponding 
provision  thereof:  Provided^  That,  except  as  otherwise  provided  in 
this  Act,  no  taxes  shall  be  collected  under  Title  I of  the  Revenue  Act 
of  1916  as  amended  by  the  Revenue  Act  of  1917,  or  Title  I or  II  of 
the  Revenue  Act  of  1917,  in  respect  to  any  period  after  December  31, 

1917:  ******** 

^463  In  the  case  of  any  tax  imposed  by  any  part  of  an  Act  herein  re-  2034 
pealed,  if  there  is  a tax  imposed  by  this  Act  in  lieu  thereof,  the  pro- 
vision imposing  such  tax  shall  remain  in  force  until  the  corresponding 
tax  under  this  Act  takes  effect  under  the  provisions  of  this  Act. 

1[464  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue  542 
Act  of  1917  shall  remain  in  force  for  the  assessment  and  collection  of  the 
income  tax  in  Porto  Rico  and  the  Philippine  Islands,  except  as  may  be 
otherwise  provided  by  their  respective  legislatures. 

53 


THE  INCOME  TAX  LAW. 


Law 

Paragraph 

[Invalidating  Clause.] 

1[465  Sec.  1402.  (Revenue  Act  of  1918.)  That  if  any  clause,  sen-  2240 
tence,  paragraph,  or  part  of  this  Act  shall  for  any  reason  be  adjudged 
by  any  court  of  competent  jurisdiction  to  be  invalid,  such  judgment 
shall  not  affect,  impair,  or  invalidate  the  remainder  of  this  Act,  but 
shall  be  confined  in  its  operation  to  the  clause,  sentence,  paragraph, 
or  part  thereof  directly  involved  in  the  controversy  in  which  such 
judgment  has  been  rendered. 

[Short  Titles.] 

1[466  Sec.  1403.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  774 

1916  is  hereby  amended  by  adding  at  the  end  thereof  a section  to 

read  as  follows: 

“Sec.  903.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1916’.”  - 

lf467  Sec.  1404.  (Revenue  Act  of  1918.)  That  the  Revenue  Act  of  776 

1917  is  hereby  amended  by  adding  at  the  end  thereof  a section  to 

read  as  follows: 

“Sec.  1303.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of 
1917’.” 

Tf468  Sec.  1405.  (Revenue  Act  of  1918.)  That  this  Act  may  be  cited  777 
as  the  “Revenue  Act  of  1918.” 

Sec.  1408.  [See  11580.] 

[Effective  Date.] 

1f469  Sec.  1409.  Revenue  Act  of  1918.)  That  unless  otherwise  2418 
herein  specially  porvided,  this  Act  shall  take  effect  on  the  day  fol- 
lowing its  passage. 

Comment. — [The  p rovisions  of  Title  XIII  and  Title  XIV,  so  far 
as  reproduced  above,  there  being  no  specific  provision  to  the  con- 
trary, became  effective  on  the  day  following  “the  passage”  of  the 
Act,  that  is  on  February  25,  1919,  the  day  after  approval  by  the 
President.] 

Approved  by  the  President,  February  24,  1919,  at  6.55  P.  M. 


Repeated 

at^ 


11470 


For  1(470  see  page  55. 


The  CosnpHation 


INCOME  TAX  LAW 
AND 

REGULATIONS. 


INCOME  TAX  LIABILITY. 

Law  j[12.  “Taxpayer”  Defined. — “The  term  ‘taxpayer’  includes 
any  person,  trust  or  estate  subject  to  a tax  imposed  by 

this  Act;” 

471  A taxpayer  is  any  person,  trust  or  estate  subject  to  tax.  (Art.  1501, 
Reg.  45,  Rev.,  April  17,  1919.) 

472  Law  1[2.  The  Term  “Person”  as  Used  in  the  Revenue  Act  of 

1918. — “The  term  ‘person’  includes  partnerships  and 
corporations,  as  well  as  individuals 

473  The  statute  recognizes  three  chief  classes  of  persons,  to  wit,  individ- 
uals, partnerships  and  corporations.  Corporations  include  associa- 
tions, joint-stock  companies  and  insurance  companies,  but  not  partner- 
ships properly  so-called,  (Art.  1501,  Reg.  45,  Rev.,  April  17,  1919.) 

474  Income  Tax  Liability — The  statute  imposes  an  income  tax  on 
individuals,  including  a normal  tax  and  a surtax.  See  section  211 

of  the  statute  [for  surtax  |[482].  The  tax  is  upon  net  income,  as  defined 
in  the  statute,  after  deducting  from  gross  income,  as  defined  in  the  statute, 
the  allowable  deductions.  In  certain  cases  credits  are  allowed  against  net 
income  and  against  the  amount  of  the  tax.  Special  provisions  of  the  statute 
deal  with  the  effect  of  the  tax  on  nonresident  alien  individuals,  partnerships 
and  personal  service  corporations,  estates  and  trusts,  and  the  stockholders 
of  corporations  which  unreasonably  accumulate  their  profits.  The  tax  is 
payable  upon  the  basis  of  returns  rendered  by  the  persons  liable  thereto, 
except  that  m some  instances  it  is  to  be  paid  at  the  source  of  the  income! 
i he  statute  also  imposes  an  income  tax  at  a fixed  rate  and  a war  profits 
1919T^^^^  corporations.  (Art.  1,  Reg.  45,  Rev.,  April  17, 


Persons  Paying  Income  Taxes  to  Other  Countries.— American 
citizens,  whether  residing  at  home  or  abroad,  resident  aliens,  and 
non-resident  aliens  receiving  income  from  property  owned  and  from  busi- 
ness, trade,  or  profession  carried  on  witliin  the  United  States,  all  of  whom 
flv  October  3,  1913,  are  not  relieved  from 

tTtbe  Wn  T 1 '’y ‘he  faet  that  they  are  also  subject 

in283  1 7t  eetmtries.  [See  credit  for  such  taxes  at 

1I1283.J  (T.  D.  2152,  February  12,  1915.) 

470  Lavv  [[75.  Normal  Tax  on  All  Individuals. — “Sec.  210.  That,  in 
1 rxT  1 . . Ihe  taxes  imposed  by  sub-division  (a)  of  section 

rwT“  '"'^hyiduals]  of  the  Revenue  Act  of  1916  and  byf  section 

[War-normal  tax  on  individuals]  of  the  Revenue  Act  of  1917  there  shall 
e levied  collected,  and  paid  for  each  taxable  year  upon  the  net  income 

'SIS •' • "“"-I 


INC.  55 


TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 

477  Law]f76.  Rates  for  1918. — “(a)  For  the  calendar  year  1918,  12 

per  centum  of  the  amount  of  the  net  income  in  excess 
of  the  credits  provided  in  section  216  [j[1513] 

478  Law  ^77.  Special  1918  Rate  for  Citizens  and  Residents. — “Pro- 

vided, That  in  the  case  of  a citizen  or  resident  of  the 
United  States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall  be 
6 per  centum;” 

Application  of  Rates  for  Fiscal  Year  Embracing  Parts  of  Calendar 
Years  with  Differing  Rates. — [Read  at  1|613]. 

479  Law1f78.  Rates  for  1919. — “(b)  For  each  calendar  year  there- 

after, 8 per  centum  of  the  amount  of  the  net  income  in 
excess  of  the  credits  provided  in  section  216  [111513] 

480  LawU79.  Special  1919  Rate  for  Citizens  and  Residents. — “Pro- 

vided, That  in  the  case  of  a citizen  or  resident  of  the 
United  States  the  rate  upon  the  first  $4,000  of  such  excess  amount  shall 
be  4 per  centum.” 

481  For  the  calendar  year  1918  the  normal  income  tax  on  individual 
citizens  or  residents  of  the  United  States  is  at  the  rate  of  6 per 

cent  upon  the  first  $4,000  of  net  income  subject  to  the  normal  tax  and 
12  per  cent  upon  the  excess  over  that  amount,  and  for  the  calendar  year 
1919  and  subsequent  years  is  at  the  rate  of  4 per  cent  upon  the  first  $4,000 
and  8 per  cent  upon  the  excess  over  that  amount.  The  lower  rate  on  the 
first  $4,000  applies  to  each  separate  individual,  whether  married  or  un- 
married, and  should  not  be  confused  with  the^  joint  exemption  granted 
married  persons.  In  the  case  of  non-resident  alien  individuals  the  normal 
tax  for  1918  is  12  per  cent  and  for  subsequent  years  8 per  cent.  In  order 
to  determine  the  income  to  which  the  normal  tax  is  applied,  the  net  income, 
as  defined  in  section  212  of  the  statute  and  articles  21-26  [beginning  at 
|[769]  of  the  regulations,  is  first  entitled  to  the  credits  and  exemptions 
specified  in  section  216  of  the  statute  and  articles  301-307  [beginning  at 
P516].  (Art.  2,  Reg.  45,  Rev.,  April  17,  1919.) 

482  LawT|80.  Surtax  on  Net  Income:  All  Individuals. — ;‘‘Sec.  211. 

(a) That,  in  lieu  of  the  taxes  imposed  by  subdivision  (b) 
of  section  1 [surtax  on  individuals — income  tax]  of  the  Revenue  Act  of 
1916  and  by  section  2 [surtax  on  individuals — war-income  tax]  of  the 
Revenue  Act  of  1917,  but  in  addition  to  the  normal  tax  imposed  by  section 
210  [11476]  of  this  Act,  there  shall  be  levied,  collected,  and  paid  for  each 
taxable,  year  upon  the  net  income  of  every  individual,  a surtax  equal  to  the 
sum  of  the  following:” 

483  In  addition  to  the  normal  tax  a surtax  is  imposed  at  the  rates 
specified  in  the  statute  upon  the  net  income  of  every  ^ individual, 

resident  or  nonresident.  In  determining  the  taxable  net  income  for 
the  purpose  of  the  surtax,  the  credits  provided  by  section  216  [TI1513] 
of  the  statute  in  the  case  of  the  normal  tax  are  not  applicable.  (Art.  11, 
Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


56  TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 

484  Full  Credit  for  All  Allowable  Deductions  to  be  Taken  in  Com- 
puting  Net  Income  Subject  to  Surtax. — In  reply  to  your  second 

inquiry  you  are  informed  that  if  Item  J,  page  2 of  Form  1040  [as 
prescribed  for  use  in  returning  income  for  the  taxable  year  1918] 
shows  a net  loss,  the  amount  of  same  may  be  deducted  from  thci  total  of 
Items  K-a  and  K-b  as  shown  on  line  I,  before  bringing  this  itemi  forward 
to  line  15,  page  1 of  the  return.  (Letter  to  Alexander  John  Lindsay, 'Jslew 
York,  N.  Y.,  signed  by  J.  A.  Callan,  Assistant  to  the  Commissioner,  and 
dated  May  6,  1919.) 

485  Law]f81.  Surtax  Rates. — “1  per  centum  of  the  amount  by  which 

the  net  income  exceeds  $5,000  and  does  not  exceed 

$6,000; 

2  per  centum  of  the  amount  by  which  the  net  income  exceeds  $6,000 
and  does  not  exceed  $8,000; 

3 per  centum  of  the  amount  by  which  the  net  income  exceeds  $8,000 
and  does  not  exceed  $10,000; 

4 per  centum  of  the  amount  by  which  the  net  income  exceeds  $10,000' 
and  does  not  exceed  $12,000; 

5 per  centum  of  the  amount  by  which  the'  net  income  exceeds  $12,000 
and  does  not  exceed  $14,000; 

6 per  centum  of  the  amount  by  which  the  net  income  exceeds  $14,000 
and  does  not  exceed  $16,000; 

7 per  centum  of  the  amount  by  which  the  net  income  exceeds  $16,00G 
and  does  not  exceed  $18,000; 

8 per  centum  of  the  amount  by  which  the  net  income  exceeds  $18,000 
and  does  not  exceed  $20,000 ; 

9 per  centum  of  the  amount  by  which  the  net  income  exceeds  $20,000 
and  does  not  exceed  $22,000 ; 

10  per  centum  of  the  amount  by  which  the  net  income  exceeds  $22,000 
and  does  not  exceed  $24,000; 

11  per  centum  of  the  amount  by  which  the  net  income  exceeds  $24,000 
and  does  not  exceed  $26,000; 

12  per  centum  of  the  amount  by  which  the  net  income  exceeds  $26,000 
and  does  not  exceed  $28,000 ; 

13  per  centum  of  the  amount  by  which  the  net  income  exceeds  $28,000' 
and  does  not  exceed  $30,000; 

14  per  centum  of  the  amount  by  which  the  net  income  exceeds  $30,000' 
and  does  not  exceed  $32,000; 

15  per  centum  of  the.  amount  by  which  the  net 'income  exceeds  $32,000 
and  does  not  exceed  $34,000; 

16  per  centum  of  the  amount  by  which  the  net  income  exceeds  $34,000 
and  does  not  exceed  $36,000; 

17  per  centum  of  the  amount  by  which  the  net  income  exceeds  $36,000 
and  does  not  exceed  $38,000; 

18  per  centum  of  the  amount  by  which  the  net  income  exceeds  $38,000 
and  does  not  exceed  $40,000; 

19  per  centum  of  the  amount  by  which  the  net  income  exceeds  $40,00Q 
and  does  not  exceed  $42,000; 

20  per  centum  of  the  amount  by  which  the  net  income  exceeds  $42,000 
and  does  not  exceed  $44,000; 

21  per  centum  of  the  amount  by  which  the  net  income  Exceeds  $44,000 
and  does  not  exceed  $46,000; 

INC.  57  TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 

(485) 


22  per  centum  of  the  amount  by 
and  does  not  exceed  $48,000 ; 

23  per  centum  of  the  amount  by 
and  does  not  exceed  $50,000; 

24  per  centum  of  the  amount  by 
and  does  not  exceed  $52,000 ; 

25  per  centum  of  the  amount  by 
and  does  not  exceed  $54,000 ; 

26  per  centum  of  the  amount  by 
and  does  not  exceed  $56,000 ; 

27  per  centum  of  the  amount  by 
and  does  not  exceed  $58,000; 

28  per  centum  of  the  amount  by 
and  does  not  exceed  $60,000; 

29  per  centum  of  the  amount  by 
and  does  not  exceed  $62,000; 

30  per  centum  of  the  amount  by 
and  does  not  exceed  $64,000; 

31  per  centum  of  the  amount  by 
and  does  not  exceed  $66,000  ; 

32  per  centum  of  the  amount  by 
and  does  not  exceed  $68,000 ; 

, , , 33  per  centum  of  the  amount  by 
and  does  not  exceed  $70,000 ; 

34  per  centum  of  the  amount  by 
and  does  not  exceed  $72,000 ; 

35  per  centum  of  the  amount  by 
and  does  not  exceed  $74,000 ; 

36  per  centum  of  the  amount  by 
and  does  not  exceed  $76,000 ; 

37  per  centum  of  the  amount  by 
and  does  not  exceed  $78,000 ; 

38  per  centum  of  the  amount  by 
and  does  not  exceed  $80,000 ; 

39  per  centum  of  the  amount  by 
and  does  not  exceed  $82,000; 

40  per  centum  of  the  amount  by 
and  does  not  exceed  $84,000 ; 

41  per  centum  of  the  amount  by 
and  does  not  exceed  $86,000 ; 

42  per  centum  of  the  amount  by 
and  does  not  exceed  $88,000; 

43  per  centum  of  the  amount  by 
and  does  not  exceed  $90,000; 

44  per  centum  of  the  amount  by 
and  does  not  exceed  $92,000; 

45  per  centum  of  the  amount  by 
and  does  not  exceed  $94,000 ; 

46  per  centum  of  the  amount  by 
and  does  not  exceed  $96,000 ; 

47  per  centum  of  the  amount  by 
and  does  not  exceed  $98,000; 


which  the  net  income  exceeds  $46,000 
which  the  net  income  exceeds  $48,000 
which  the  net  income  exceeds  $50,000 
which  the  net  income  exceeds  $52,000 
which  the  net  income  exceeds  $54,000 
which  the  net  income  exceeds  $56,000 
which  the  net  income  exceeds  $58,000 
which  the  net  income  exceeds  $60,000 
which  the  net  income  exceeds  $62,000 
which  the  net  income  exceeds  $64,000 
which  the  net  income  exceeds  $66,000 
which  the  net  income  exceeds  $68,000 
which  the  net  income  exceeds  $70,000 
which  the  net  income  exceeds  $72,000 
which  the  net  income  exceeds  $74,000 
which  the  net  income  exceeds  $76,000/ 
which  the  net  income  exceeds  $78,000 
which  the  net  income  exceeds  $80,000 
which  the  net  income  exceeds  ’ $82,000 
which  the  net  income  exceeds  $84,000 
which  the  net  income  exceeds  $86,000 
which  the  net  income  exceeds  $88,000 
which  the  net  income  exceeds  $90,000 
which  the  net  income  exceeds  $92,000 
which  the  net  income  exceeds  $94,000 
which  the  net  income  exceeds  $96,000 
58  TAX 


INC. 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 


amount  by  which  the  net  income  exceeds 


(485) 

48  per  centum  of  the  amount  by  which  the  net  income  exceeds  $98,000 
and  does  not  exceed  $100,000; 

52  per  centum  of  the  amount  by  which  the  net  income  exceeds  $100,000 
and  does  not  exceed  $150,000; 

56  per  centum  of  the  amount  by  which  the  net  income  exceeds  $150,000 
and  does  not  exceed  $200,000 ; 

60  per  centum  of  the  amount  by  which  the  net  income  exceeds  $200,000 
and  does  not  exceed  $300,000 ; 

63  per  centum  of  the  amount  by  which  the  net  income  exceeds  $300  000 
and  does  not  exceed  $500,000; 

64  per  centum  of  the  amount  by  which  the  net  income  exceeds  $500  000 
and  does  not  exceed  $1,000,000; 

65  per  centum  of  the 
$1,000,000.’’ 

Application  of  the  Rates  for  Fiscal  Year  Embracing  Parts  of  Cal- 
endar Years  With  Differing  Rates.— [Read  at  11613.] 

Cornputation  of  Surtax.— The  following  table  shows  the  surtax  on 
net  incomes  of  the  specified  amounts.  In  each  instance  the  first 
figure  of  net  income  in  the  net  income  column  is  to  be  excluded  and  the  sec- 
ond figure  included.  The  percentage  given  opposite  applies  to  the  excess  of 
income  over  the  first  figure  in  the  net  income  column,  and  the  sum  in  the  next 
column  is  the  tax*  on  the  entire  difference  between  the  first  figure  and  fhe 
second  figure  in  the  net  income  column.  The  final  column  gives  the  total 
suitax  on  a net  income  equal  to  the  second  figure  in  the  net  income  column. 

Net  Income 

$5,000  to  $6,000 

$6,000  to  S8.000.  .. ..  . 

$8,000  to  $10, 000 

$10,000  to  $12,000 

$12,000  to  $14, 000 

$14,000  to  816,000 

$16,000  to  $18, 000 

$18,000  to  $20,000 

$20,000  to  $22,000 

$22,000  to  $24,000 

$24,000  to  $26,000 

$26,000  to  $28,000 

$28,000  to  $30,000 

$30,000  to  $32,000 

$32,000  to  $34, 000 

$34,000  to  $36, 000 

$36,000  to  $38,000 

$38,000  to  $40,000 

$40,000  to  $42,000 

$42,000  to  $44,000 

$44,000  to  $46,000 

$46,000  to  $48,000 

$48,000  to  $50,000 

$50,000  to  $52,000 

$52,000  to  $54, 000 

$.54,000  to  $56,000 


Per  Cent. 

Surtax 

Total  surtax 

1 

• $10 

$10 

2 

40 

50 

3 

60 

no 

4 

80 

190 

5 

100 

290 

6 

120 

410 

7 

140 

550 

8 

160 

710 

9 

180 

890 

10 

200 

1,090  ^ 

11 

220 

1,310' 

12 

240 

1,550 

13 

260 

1,810 

14 

280 

2,090 

15 

300 

2,390 

16 

320 

2,710 

17 

340 

3,050 

18 

360 

3,410 

19 

380 

3,790  ^ 

20 

400 

4,190  - 

21 

420 

4,610 

22 

440 

5,050 

23 

460 

5,510 

24 

480 

5,990 

25 

500 

6,490 

26 

520 

7,010 

INC.  59 


TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 


Per  Cent. 

27 

28 

29 

30 

31 

32 

33 

34 

35 

36 

37 

38 

39 

40 

41 

42 

43 

44 

45 

46 

47 

48 
52 
56 
60 

63 

64 

65... 


Surtax 

540 

560 

580 

600 

620 

640 

660 

680^ 

700^ 

720 

740 

760 

780 

800 

820 

840 

860 

880 

900 

920 

940 

960 

26,000 

28,000 

60,000 

126,000 

320,000 


Total  Surtax 
7,550 


(486) 

Net  Income 

$56,000  to  $58,000 

$58,000  to  $60,000 

$60,000  to  $62,000 

$62,000  to  $64,000 

$64,000  to  $66,000 

$66,000  to  $68,000 

$68,000  to  $70,000 

$70,000  to  $72,000 

$72,000  to  $74,000 

$74,000  to  $76,000 

$76,000  to  $78,000 

$78,000  to  $80,000 

$80,000  to  $82,000 : 

$82,000  to  $84,000 

$84,000  to  $86,000 

$86,000  to  $88,000 

$88,000  to  $90,000 

$90,000  to  $92,000 

$92,000  to  $94,000 

$94,000  to  $96,000 

$96,000  to  $98,000 

$98,000  to  $100,000 

$100,000  to  $150,000 

$150,000  to  $200,000 

$200,000  to  $300,000 

$300,000  to  $500,000 

$500,000  to  $1,000,000 

$1,000,000  up 

The  surtax  for  any  amount  of  net  income  not  shown  in  the  above  tab  e 
is  computed  by  adding  to  the  total  surtax  for  the  largest  amount  shown 
which  is  less  than  the  income  the  surtax  upon  the  excess  over  that  amoun 
at  the  rate  indicated  in  the  table.  For  example,  if  the  amount  of  net  i^me 
is  $63,128,  the  surtax  is  the  sum  of  $8,690  (the  surtax  upon  $62,000  as 
shown  by  the  table)  plus  30  per  cent  of  $1,128,  or  $^8.40  making  a total 
surtax  of  $9,028.40.  (Art.i  12,  Reg.  45,  Rev.,  April  17,  1919.) 

487  Law  1182.  Maximum  Surtax  Limitation  in  the  Case  of  the  Sak 

of  Certain  Mines,  or  Oil  or  Gas  Wells.-"  (b)  In  the 
case  of  a bona  fide  sale  of  mines,  oil  or  gas  wells,  or  any  interest  therein, 
where  the  principal  value  of  the  property  has  been  demonstrated  by  pros- 
pecting or  exploration  and  discovery  work  done  by  the  taxpayer,  the  portion 
of  the  tax  imposed  by  this  section  attributable  to  such  sale  shall  not  exceed 
20  per  centum  of  the  selling  price  of  such  property  or  interest.” 

488  Where  the  taxpayer  by  prospecting  and  locating  claims,  or  by  ex- 
ploring and  discovering  undeveloped  claims,  has  ^ demonstrated  the 

principal  value  of  mines,  oil  or  gas  wells,  which  prior  to  his  efforts 
had  a merely  nominal  value,  the  portion  of  the  surtax  attributable  to 
a sale  of  such  property  or  of  the  taxpayer’s  interest  therein  shall  not  exceed 
20  per  cent  of  the  selling  price.  Exploration  work  alone  without  discovep^ 
is  not  sufficient  to  bring  a case  within  this  provision.  Shares  of  stock  in 
a corporation  owning  mines,  oil  or  gas  wells  do  not  constitute  an  interest 

INC.  60  TAX 


8,110 

8.690 
9,290 

9.910 

10.550 
11,210 
11,890 

12.590 
13,310 

14.050 
14,810 

15.590 
16,390 
17,210 

18.050 

18.910 
19,790 

20.690 
21,610 

22.550 

23.510 

49.510 

77.510 

137.510 

263.510 

583.510 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 


in  such  property.  To  determine  the  application  of  this  provision  to  a 
particular  case,  die  taxpayer  should  first  compute  the  surtax  in  the  ordinary 
way  upon  his  net  income,  including  his  net  income  from  any  such  sale.  The 
proportion  of  the  surtax  indicated  by  the  ratio  which  the  taxpayer’s  net 
income  from  the  sale  of  the  property,  computed  as  prescribed  in  article  715, 
[|[489]  bears  to  his  total  net  income  is  the  portion  of  the  surtax  attribu- 
table to  such  sale,  and  if  it  exceeds  20  per  cent  of  the  selling  price  of  the 
property  such  portion  of  the  surtax  shall  be  reduced  to  that  amount. 
See  articles  218-221,  [for  discovery  of  mine  or  oil  or  gas  well,  beginning 
at  P4251.  (Art.  13,  Reg.  45,  Rev.,  April  17,  1919.) 

489  Allocation  of  Net  Income  to  Particular  Source. — Whenever  it  is 
necessary  to  determine  the  portion  of  the  net  income  derived  from 

or  attributable  to  a particular  source,  the  corporation  shall  allocate  to 
the  gross  income  derived  from  such  source,  and  to  the  gross  income 
derived  from  each  other  source,  the  expenses,  losses  and  other  deduc- 
tions properly  appertaining  thereto,  and  shall  apply  any  general  ex- 
penses, losses  and  deductions  (which  can  not  properly  be  otherwise 
apportioned)  ratably  to  the  gross  income  from  all  sources.  The  gross 
income  derived  from  a particular  source,  less  the  deductions  properly 
appertaining  thereto  and  less  its  proportion  of  any  general  deductions, 
shall  be  the  net  income  derived  from  such  source.  The  corporation 
shall  submit  with  its  return  a statement  fully  explaining  the  manner  in 
which  such  expenses,  losses  and  deductions  were  allocated  or  distrib- 
uted. (Art.  715,  Reg.  45,  Rev.,  April  17,  1919.) 

490  Surtax  Computed  on  Separate  Incomes  of  Husband  and  Wife. — 
The  regulations  of  the  department  requiring  the  incomes  of  husband 

and  wife  to  be  combined  and  authorizing  the  aggregate  exemption  * * * 
from  such  combined  income  are  applicable  for  the  purpose  of  the  normal 
tax  only.  The  additional,  or  surtax,  imposed  by  the  act  will  be  computed 
on  the  basis  of  the  separate  income  of  each  individual ; that  is,  on  the  amount 
of  each  individual’s  income  in  excess  of  the  minimum  amounts  upon  which 
the  surtax  at  the  graduated  rate  is  to  be  calculated.  (T.  D.  2090,  Dec. 
14,  1914.) 

491  The  separate  incomes  of  husband  and  wife  should  not  be  combined  in 
a return  of  income  for  the  purpose  of  assessing  the  additional  or 

surtax.  (T.  D.  2137,  Jan.  30,  1915.) 

492  All  Taxable  Income  Received  by  Beneficiaries  Through  Fiduciar- 
ies is  Subject  to  Surtax. — A beneficiary  is  liable  for  the  normal  tax 

upon  the  amount  of  net  income  derived  by  him  from  a taxable  source 
through  a fiduciary  ^ ^ * and  is  also  liable  for  the  additional  tax  assess- 
able on  the  amount  of  net  income  received  by  him  in  excess  of  [$5,000], 
and  in  order  to  determine  whether  the  net  income  of  a beneficiary  is  or  is 
not  in  excess  of  [$5,000]  and  subject  to  the  additional  tax  the  amount 
derived  by  him  from  an  estate  and  all  other  taxable  sources  is  required  to 
be  shown  on  his  personal  annual  return.  (T.  D.  2090,  Dec.  14,  1914.) 

493  Corporations  Are  Not  Subject  to  Surtax. — Corporations  coming 
within  the  terms  of  this  law  are  subject  to  the  normal  tax  only;  that 

is,  a tax  computed  at  a level  rate  of  [10]  per  cent  of  their  entire  net  .'income 
regardless  of  the  amount  of  such  net  income  [in  excess  of  the  credits] 
(Art.  185,  Reg.  33,  Jan.  5,  1914.) 


INC. 


61  TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 

494  Dividends  Received  by  Beneficiaries  Through  Fiduciaries  are  Sub- 
ject to  Surtax. — Dividends  in  the  hands  of  a fiduciary  and  belong- 
ing to  a beneficiary  are  not  subject  to  the  normal  tax,  but  will  be  subject  to 
the  additional  tax  to  the  beneficiary  whenever  the  beneficiary’s  income  from 
all  taxable  sources. is  in  excess  of  [$5,000].  (T.  D.  2090,  Dec.  14,  1914.) 

495  Specific  Exemptions  in  Its  Relation  to  the  Additional  Tax. — Per- 
sonal exemptions  from  tax  are  granted  in  respect  of  the  norrnal 

income  tax  only.  Where  the  total  of  allowable  exemptions  and  credits 
exceeds  the  amount  of  net  income,  the  excess  of  such  exemptions  may  not 
be  availed  of  as  against  the  additional  tax.  (Art.  14,  1[154,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

496  In  Hyman  Cohen  vs.  John  Z.  Lowe,  Jr.,  Collector,  District  Court, 
Southern  District  of  New  York,  July  18,  1916  (234  Fed.  474)  *the 

Court  held  against  the  contention  of  the  plaintiff,  that,  before  assessing  the 
additional  tax  on  the  excess  of  net  income  over  $20,000,  he  should  have 
been  allowed  an  exemption  of  $3,000,  as  in  the  case. of  the  normal  tax 
(Act  of  1913).  [Comment.] 


497  Lawp97.  Individuals  May  Be  Subject  to  Normal  Tax  and  to 

Surtax  on  Undistributed  Profits  of  Certain  Corpora- 
tions.— “Sec.  220.  That  if  any  corporation,  however  created  or  organ- 
ized, is  formed  or  availed  of  for  the  purpose  of  preventing  the  imposition  of 
the  surtax  upon  its  stockholders  or  members  through  the  medium  of  permit- 
ting its  gains  and  profits  to  accumulate  instead  of  being  divided  or  distrib- 
uted, such  corporation  shall  not  be  subject  to  the  tax  imposed  by  section 
230  [J[713],  but  the  stockholders  or  members  thereof  shall  be  subject  to 
taxation  under  this  title  in  the  same  manner  as  provided  in  subdivision  (e) 
of  section  218  [1[593]  in  the  case  of  stockholders  of  a personal  service 
corporation,  except  that  the  tax  imposed  by  Title  III  [war-profits  and 
excess-profits  tax]  shall  be  deducted  from  the  net  income  of  the  corporation 
before  the  computation  of  the  proportionate  share  of  each  stockholder  or 
member.” 

498  LawpQS.  “The  fact  that  any  corporation  is  a mere  holding  com- 

pany, or  that  the  gains  and  profits  are  permitted  to  ac- 
cumulate beyond  the  reasonable  needs  of  the  business,  shall  be  prima 
facie  evidence  of  a purpose  to  escape  the  surtax;” 

499  Law  p99.  “but  the  fact  that  the  gains  and  profits  are  in  any  case 

permitted  to  accumulate  and  become  surplus  shall  not  be 
construed  as  evidence  of  a purpose  to  escape  the  tax  in  such  case  unless 
the  Commissioner  certifies  that  in  his  opinion  such  accumulation  is  un- 
reasonable for  the  purposes  of  the  business.” 

500  Law  ^200.  “When  requested  by  the  Commissioner,  or  any  col- 

lector, every  corporation  shall  forward  to  him  a correct 
statement  of  such  gains  and  profits  and  the  names  and  addresses  of  the 
individuals  or  shareholders  who  would  be  entitled  to  the  same  if  divided  or 
distributed,  and  of  the  amounts  that  would  be  payable  to  each.” 


INC. 


62  TAX 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 


601  Where  a domestic  or  foreign  corporation  permits  its  gains  and  profits 
to  accumulate  for  the  purpose  of  preventing  the  imposition  of  the 
surtax  upon  such  income  if  distributed  to  its  stockholders,  it  shall 
not  be  subject  to  the  income  tax  as  a corporation,  but  its  stockholders 
shall  be  subject  to  tax  in  the  same  way  as  the  stockholders  of  a personal 
service  corporation,  except  that  the  war  profits  and  excess  profits  tax  on  the 
corporation  shall  first  be  deducted  from  its  net  income  before  computing 
the  proportionate  shares  of  the  stockholders.  See  section  218  of  the  statute 
and  articles  328-335  [for  taxation  of  shareholders  in  personal  service  cor- 
porations, beginning  at  1[593].  In  any  case  the  Commissioner  or  a col- 
lector may  require  a corporation  to  furnish  a statement  of  its  gains  and 
profits  and  of  the  names,  addresses  and  shareholdings  of  the  stockholders. 
If  upon  the  basis  of  such  statement  or  other  evidence  the  Commissioner 
certifies  that  in  his  opinion  its  accumulation  of  profits  is  unreasonable  for 
the  purposes  of  the  business,  but  only  if  he  so  certilies,  the  corporation  and 
its  stockholders  shall  make  their  returns  accordingly.  (Art.  351,  Reg.  45, 
Rev.,  April  17,  1919.) 

502  Subdivision  2 of  paragraph  A,  income  tax-law  of  October  3,  1913 
[^497  et  seq.  above],  imposes  no  duty  on  the  taxpayer  to  aseertain  his 

distributive  interest  in  the  undivided  surplus  of  eorporations  for  the  purpose 
of  making  return  of  the  amount,  in  addition  to  the  amount  of  dividends 
declared  on  his  stock,  unless  the  [Commissioner]  has  certified  that,  in  his 
opinion,  such  accumulation  is  unreasonable  for  the  purpose  of  the  business. 
(T.  D.  2135,  Jan.  23,  1915.) 

503  law  1f7.  “Secretary”  Defined. — “The  term  ‘Secretary’  means 

the  Secretary  of  the  Treasury;” 

504  Law  |[8.  “Commissioner”  Defined. — “The  term  ‘Commissioner’ 

means  the  Commissioner  of  Internal  Revenue 

505  Lav/  |f9.  “Collector”  Defined. — “The  term  ‘collector’  means  col- 

lector of  internal  revenue 

500  Purpose  to  Escape  Surtax. — The  application  of  section  220  of 
the  statute  depends  upon  the  two  elements  of  (a)  purpose!  to  escape 
the  surtax  and  (b)  unreasonable  accumulation  of  gains  and  profits.  Prima 
facie  evidence  of  (a)  exists  where  a corporation  has  practically  no  business 
except  holding  stocks,  securities  or  other  property  and  collecting  the 
income  therefrom,  or  where  a corporation  other  than  a mere  holding  com- 
pany permits  its  gains  and  profits  to  accumulate  beyond  the  reasonable 
needs  of  the  business.  The  business  of  a corporation  is  not  limited  to  that 
which  it  has  previously  carried  on,  but  in  general  includes  any  line  of'  busi- 
ness which  it  may  legitimately  undertake.  However,  a radical  change  of 
business  when  a considerable  surplus  has  been  accumulated  may  afford  evi- 
dence of  a purpose  to  escape  the  surtax.  When  one  corporation  owns  the 
stock  of  another  corporation  in  the  same  or  a related  line  of  business  and 
in  effect  operates  the  other  corporation,  the  business  of  the  latter  may  be 
considered  in  substance  the  business  of  the  first  corporation.  Gains  and 
profits  of  the  first  corporation  put  into  the  second  through  the  purchase  of 
stock  or  otherwi.se  may  therefore,  if  a subsidiary  relationship  is  established, 
constitute  employment  of  the  income  in  its  own  business.  To  establish  that 

63  TAX 


INC. 


NORMAL  TAX  AND  SURTAX  ON  INDIVIDUALS. 

the  business  of  one  corporation  can  be  regarded  as  including  the  business 
of  another  it  is  ordinarily  essential  that  the  first  corporation  own  substan- 
tially all  of  the  stock  of  the  second.  Investment  by  a corporation  of  its 
income  in  stock  and  securities  of  another  corporation  is  not  without  more 
to  be  regarded  as  employment  of  the  income  in  its  business.  (Art  352,  Reg. 
45,  Rev.,  April  17,  1919.) 

507  Unreasonable  Accumulation  of  Profits. — An  accumulation  of 

gains  and  profits  is  unreasonable  if  it  is  not  required  for  the  pur- 
poses of  the  business,  considering  all  the  circumstances  of  the  case.  No 
attempt  can  be  made  to  enumerate  all  the  ways  in  which  gains  and  profits 
of  a corporation  may  be  accumulated  for  the  reasonable  needs'  of  the  busi- 
ness. Undistributed  income  is  properly  accumulated  if  invested  in  in- 
creased inventories  or  additions  to  plant  reasonably  needed  by  the  business. 
It  is  properly  accumulated  if  retained  for  working  capital  required  by  the 
business  or  in  accordance  with  contract  obligations  placed  to  the  credit  of 
a sinking  fund  for  the  purpose  of  retiring  bonds  issued  by  the  corporation. 
In  the  case  of  a banking  institution  the  business  of  which  is  to  receive  and 
loan  money,  using  capital,  surplus  and  deposits  for  that  purpose,  undistri- 
buted income  actually  represented  by  loans  or  reasonably  retained  for  future 
loans  is  not  accumulated  beyond  the  reasonable  needs  of  the  business.  The 
nature  of  the  investment  of  gains  and  profits  is  immaterial  if  they  are  hot 
in  fact  needed  in  the  business.  (Art.  353,  Reg.  45,  Rev.,  April  17,  1919.) 

508  Status  of  Undistributed  Profits,  Unduly  Accumulated,  if  Invested 
in  United  States  Bonds.— In  reply  to  your  letter  of  March  20, 

1919,  you  are  advised  that  any  corporation  which  permits  its  gains 
and  ’pi’ofits  to  accumulate  for  the  purpose  of  preventing  the  imposi- 
tion of  the  surtax  upon  its  stockholders  and  members  will  be  subject  to 
the  provisions  of  Section  220,  of  the  Revenue  Act  of  1918,  regardless  of 
whether  or  not  such  gains  and  profits  are  invested  by  the  corporation,  m 
obligations  of  the  United  States.  (Letter  to  The  Corporation  Trust  Com- 
pany, signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April  9,  1919.) 

509  Obligation  to  Render  Undistributed  Profits  Tax  Returns  by  Cor- 
porations with  Fiscal  Years  Ending  in  .1918. — ^Receipt  is  acknowl- 
edged of  your  letter  of  recent  date,  in  which  you  inquire  whether 
corporations  having  a fiscal  year  ended  on  July  31,  1919,  are  required 
[under  Sec.  10  (b),  Revenue  Act  of  1916  as  amended  by  Revenue  Act  of 
1917]  to  file  Corporation  Undistributed  Net  Income  Tax  Returns  (Form 
1112)  and  how  the  undistributed  net  income  to  be  shown  in  the  return  is 
to  be  computed.  Pn  reply,  you  are  advised  that  corporations  having  a fiscal 
year  ended  on  the  last  day  of  any  month  subsequent  to  May  31,  1918,  will 
not  be  required  to  render  returns  on  Form  1112  for  the  period  covered  by 
such  fiscal  year.  [Returns  of  undistributed  profits  were  required  to  be 
made  within  60  days  after  end  of  6 months  after  end  of  taxable  year. 
Time  for  making  returns  by  corporations  with  fiscal  years  ending  June  30, 
1918,  would  have  been  on’  or  before  March  1,  1919.  The  Revenue  Act  of 
1918,  repealing  the  old  law,  became  effective  February  25,  1919.]  (Letter 
to  Oppenheim,  Collins  and  Company,  New  York,  N.  Y.,  signed  by  Acting 
Deputy  Commissioner  P.  S.  Talbert,  and  dated  May  13,  1919.) 


INC. 


64  TAX 


RESIDENT  AND  NONRESIDENT  ALIENS. 


510  The  10%  Undistributed  Profits  Tax,  Being  Considered  an  Income 
Tax,  Is  Not  Deductible. — Replying  to  your  communication  of 
March  14,  1919,  you  are  informed  that  the  10%  tax  which  was 
imposed  on  corporations'  undistributed  net  income  by  Section  10  (b) 
of  the  Revenue  Act  of  September  8,  1916,  as  amended  by  the  Revenue  Act 
of  October  3,  1917,  is  not  an  allowable  deduction  from  the  gross  income  of 
a corporation  shown  on  an  income  tax  return.  (Letter  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April 
1,  1919.) 


511  Individuals  Liable  to  Tax. — Every  citizen  of  the  United  States, 
wherever  resident,  is  liable  to  the  tax.  It  makes  no  difference  that 

he  may  own  no  assets  within  the  United  States  and  may  receive  no  incorne 
from  sources  within  the  United  States.  Every  resident  alien  individual  is 
liable  to  the  tax,  even  though  his  income  is  wholly  from  sources  outside  the 
United  States.  Every  non-resident  alien  individual  is  liable  to  the  tax  on  his 
income  from  sources  within  the  United  States.  See, section  213  (c)  of  the 
statute  and  articles  91-93  [for  non-resident  aliens,  ]fl545].  Estates  and 
trusts  are  also  subject  to  the  tax.  See  section  219  of  the  statute  and  articles 
341-346  [for  estates  and  trusts,  |[636].  (Art.  3,  Reg.  45,  Rev.,  April  17, 
1919.) 

512  Who  Is  a Citizen. — Every  person  born  in  the  United  States  sub- 
ject to  its  jurisdiction,  or  naturalized  in  the  L^nited  States,  is  a citizen. 

When  any  naturalized  citizen  has  left  the  United  States  and  resided  for 
two  years  in  the  foreign  country  from,  which  he  came,  or  for  five  years  in 
any  other  foreign  country,  he  is  presumed  to  have  lost  his  American  citi- 
zenship ; but  this  presumption  does  not  apply  to  residence  abroad  while  the 
United  States  is  at  war.  An  Italian  who  has  come  to  the  United  States 
and  filed  his  declaration  of  intention  of  becoming  a citizen,  but  who  has  not 
yet  received  his  final  citizenship  papers,  is  an  alien.  A Swede  who,  after 
having  come  to  the  United  States  and  become  naturalized  here,  returned 
to  Sweden  and  resided  there  for  two  years  prior  to  April  6,  1917,  is  pre- 
sumed to  be  once  more  an  alien.  On  the  other  hand,  an  individual  born  in 
the  Ihiited  States  of  citizen  or  resident  alien  parents,  who  has  long  since 
mo\e(l  to  a foreign  country,  and  established  a domicile  there,  but  who  has 
never  been  naturalized  therein  or  taken  an  oath  of  allegiance  thereto,  is 
still  a citizen  of  the  United  States.  For  the  difference  between  resident 
alien  individuals  and  nonresident  alien  individuals  see  articles  312-315 
[plS].  (Art.  4,  Reg.  45,  Rev.,  April  17,  1919.) 

513  American  Wife  of  a Nonresident  Alien. — An  American  woman 
who  marries  a foreigner  takes  the  nationality  of  her  husband  * * * 

(T.  D.  2090,  December  14,  1914.) 

514  Citizenship. — Determination  by  State  Department  of  right  to 
registry  is  not  conclusive  upon  the  Treasury  in  fixing  citizenship  for 

income  tax  purposes.  Held  that  native  and  naturalized  status  remains  unless 
changed  by  affirmative  action  or  forfeited  by  overt  act.  (T.  D.  2135, 
January  23,  1915.) 

515  Non-Resident  Citizens  Against  Whom  the  Presumption  of  Expa- 
triation Has  Arisen. — The  Department  has  received  several  in- 
quiries concerning  the  payment  of  the  income  tax  under  the  provision  of 

65 


ixc. 


TAX 


RESIDENT  AND  NONRESIDENT  ALIENS. 

Section  2 of  the  Act  of  October  3,  1913,  by  persons  ^^iding  abroad  who 
claim  American  Citizenship.  These  inquiries  involve  'r'  ‘ ^ ^ 

tions-  (1)  Whether  a naturalized  American  citizen  who  has  brought  up 

hi„,.df  .he  pjs™.io.  of  ^ 

?S3“t3  ta'/Sd  » Ive^T:  .S  JeW.™’ mder  ,h.  ee.abli.h.d 
Sks  t requied  to  pay  the  income  tax  as  an  American  citizen,  and  (2) 
whether  a naturalized  American  citizen  residing  abroad  can  overcome 
presumption  of  expatriation  by  payment  of  the  income  tax. 

516  The  question  as  to  the  liability  of  a particuiw  persoi  p > 

come  tax  must  be  determined  not  by  this  Department  but  by  the 
Treasurv  Department,  under  which  the  income  tax  law  is  adminis  ered 
Persons' making  inquiry  concerning  this  point  should,  therefore,  be  advi 

have 

proviln  of  the  second  paragraph  of  Section  2 of  the  Act  of  March  2 190/ 
by  protracted  residence  abroad,  may  overcome  such  ^ 

preLnting  “satisfactory  evidence  to  a diplomatic  or  consulai  0®“' 

TJnited  States,  under  such  rules  and  regulations  as  the  Depai  tment  of  State 
may  prescribe.”  The  Department  has  not  prescribed  a rule  tnat  the  pre 
sumption  of  expatriation  arising  under  the  law  mentioned  may  ojeicome 
by  showing  that  the  person  concerned  has  paid,  or  is  ready  to  pay,  the  >ooo 
tax  of  the  United  States.  However,  if  a person  against  whom  the  presumption 
of  expatriation  has  arisen  presents,  in  connection  with  an  application  to 
passport,  or  for  registration  in  a consulate  or  for  actual  protection,  evi  en^ 
that  he  has  paid  the  income  tax,  the  fact  will  receive  due  consideration  in 
connection  with  other  evidence  submitted  to  overcome  the  presumption  of 
expatriation  under  the  established  rules,  and  particu.arly  with  regard  o 
question  of  the  intent  to  return  to  this  country  to  reside.  The  payment 
of  the  income  tax  will  be  dulv  considered  in  deciding  the  question  ot  the 
right  to  the  continued  protection  of  this  Government  in  cases  ot  native 
American  citizens  who  have  resided  abroad  for  a period  so  long  that  the 
natural  presumption  may  be  held  to  have  arisen  that  they  have  a m one 
this  countrv.  (T.etter  to  the  American  Diplomatic  and  Consular  Uthceis, 
signed  by  W.  J.  Bryan,  Secretary  of  State,  and  dated  March  18,  1914.) 

518  Who  Is  a Non-resident  Alien  Individual.-“Non-resMent  alien 
individual”  means  an  individual  (a)  whose  residence  is 
T'nited  States  and  (b)  who  is  not  a citizen  of  the  Lnited  states  An 
alien  living  in  the  United  States  who  is  not  a mere  transient  is  a resident  ot 
the  United  States  for  purposes  of  the  income  tax.  ^ 

sient  or  not  is  determined  by  his  intentions  with  regard  to  his  sta\.  It  he 
Hves°rthe  United  States  and  has  no  definite  intention  to  stay,  he  is  a 
resident  The  best  evidence  of  his  intention  is  afforded  by  the  cond  , 
acts  and  declarations  of  the  alien.  The  typical  .f 

for  a short  time  in  the  course  of  a journey  through  United  States  so 
limes  performing  labor,  sometimes  not,  or  one  who  enters  the  I-n'ted  States 
intending  only  to  stop  long  enough  to  carry  out  sorne  purpose  ^ 

not  inVolvhrg  an  extended  stay.  A mere  floating  intention  indefinite  as  to 
time,  to  return  to  another  country  is  constitute  urn 

sient.  (Art.  312,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  66  TAX 


RESIDENT  AND  NONRESIDENT  ALIENS. 

For  Tax  on  Non-resident  Aliens  and  Withholding  of  the  Tax  at 
the  Source. — See  p536. 

519  Alien  Seaman,  When  to  Be  Regarded  as  Residents.— In  order  to 
determine  whether  an  alien  seaman  is  a resident  within  the  meaning 
of  the  income  tax  law,  it  is  necessary  to  decide  whether  the  presumption  of 
non-residence  is  overcome  by  facts  showing  that  he  has  established  a resi- 
dence in  the  territorial  United  States,  which  consists  of  the  States,  the  Dis- 
trict of  Columbia,  and  the  Territories  of  Hawaii  and  Alaska,  and  excludes 
other  places.  Residence  may  be  established  on  a vessel  regularly  engaged  in 
coastwise  trade,  but  the  mere  fact  that  a sailor  makes  his  home  on  a'  vessel 
flying  the  United  States  flag  and  engaged  in  foreign  trade  is  notjsufficient  to 
establish  residence  in  the  United  States,  even  though  the  vessel,  while  carry- 
ing on  foreign  trade,  touches  at  American  ports.  An  alien  seaman  may  ac- 
quire an  actual  residence  in  the  territorial  United  States,  within  the  rules  laid 
down  in  Art.  312  [IjSlS]  although  the  nature  of  his  calling  requires  him  to  be 
absent  from  the  place  where  his  residence  is  established  for  a long  period. 
An  alien  seamean  may  ^acquire  such  a residence  at  a sailor’s  boarding  house 
or  hotel,  but  such  a claim  should  be  carefully  scrutinized  in  order  to  make 
sure  that  such  residence  is  bona  fide.  The  filing  of  Form^  1078  (Revised),  or 
taking  out  first  citizenship  papers,  is  proof  of  residence  in  the  United  States 
from  the  time  the  form  is  filed'  or  the  papers  taken  out,  unless  rebutted  by 
other  evidence  showing  an  intention  to  be  a transient.  The  fact  that  a head 
tax  has  been  paid  oh  behalf  of  an  alien  seaman  entering  the  United  States 
is  no  evidence  that  he  has  acquired  residence,  because  the^  head  tax  is  pay- 
able unless  the  alien  who  is  entering  the  country  is  merely  in  transit  through 
the  country*.  An  alien  may  remain  a nonresident  although  he  is  not  in  tran- 
sit through  the  country.  As  to  when  the  wages  of  alien  seamen  are  subj^t 
tax,  see  Article  92a  1111547].  (Art.  312a,  Reg.  45,  Rev.,  as  added  by  T.  D. 
2869,  June  20,  1919.) 

520  Article  312  (a)  [lf519],  which  is  added  to  Regulations  45  by  Treasury 
Decision  2869,  provides  in  the  case  of  alien  seamen  that  ‘‘Residence 

may  be  established  on  a vessel  regularly  engaged  in  coastwise  trade. 
This  provision,  however,  merely  places  alien  seamen  employed  on  a vessel 
regularly  engaged  in  coastwise  trade  on  the  same  footing  with  an  alien^^- 
ployed  within  the  United  States  for  purposes  of  proving  residence  within 
the  United  States.  The  employer  should,  therefore,  be  governed  by  the 
requirements  of  Article  315  [11523]  of  Regulations  45  with  respect  to  the 
necessity  for  filing  Form  1078,  Revised.  (Letter  to  Shipown^s  Association 
of  the  Pacific  Coast,  San  Francisco,  Calif.,  signed  by  P.  S.  Talbert,  Acting 
Assistant  to  the  Commissioner,  by  C.  R.  Trobridge,  Acting  Head  of  Div- 
ision, and  dater  September  20,  1919.) 

521  Proof  of  Residence  of  Alien. — An  alien’s  statements  as  to  his  in- 
tention with  regard  to  residence  are  not  conclusive,  but  when  unequiv- 
ocal will  determine  the  question  of  his  intention,  unless  his  conduct,  acts  or 
other  surrounding  circumstances  contradict  the  statements.  It  sometimes 
occurs  that  an  alien  who  genuinely  intends  his  stay  to  be  transient  may  put 
off  his  departure  from  time  to  time  by  reason  of  changed,  conditions,  re- 
maining a transient  though  living  in  the  United  States  for  a considerable 
time.  The  fact  that  an  alien’s  family  is  abroad  does  not  necessarily  indicate 
that  he  is  a transient  rather  than  a resident.  An  alien  who  enters  this  coun- 
try intending  to  make  his  home  in  a foreign  country  as  soon  as  he  has  ac- 

67  TAX 


INC. 


RESIDENT  AND  NONRESIDENT  ALIENS. 


cumulated  a sum  of  money  sufficient  to  provide  for  his  journey  abroad  is  to 
be  considered  a transient,  provided  his  expectation  in  this  regard  may  rea- 
sonably, considering  the  rate  of  his  saving,  be  fulfilled  within  a compara- 
tively short  time.  (Art.  313,  Reg.  45,  Rev.,  April  17,  1919.) 

Loss  of  Residence  by  Alien. — It  will  be  presumed  that  an  alien 

who  has  established  a residence  in  the  United  States,  as  outlined 
above,  continues  to  be  a resident  until  he  or  his  family  evidence  an  intention 
to  change  their  residence  to  another  country  by  starting  to  remove.  Thus, 
alien  residents  who,  following  the  armistice  agreement  of  November  11,  1918, 
take  steps  toward  returning  to  their  native  countries,  as  by  applying  for 
passports,  may  for  the  purpose  of  withholding  be  regarded  as  residents  for 
that  portion  of  the  taxable  year  which  elapsed  up  to  the  time  such  step  was 
taken.  But  the  status  of  the  alien  on  the  last  day  of  his  taxable  year  or 
period  determines  his  liability  to  tax  for  such  year  or  period  as  a resident 
or  non-resident.  See  articles  305  [for  date  of  determining  exemption  status, 
j[1526]  and  306  [for  credits  to  non-resident  alien  individuals,  ^[1571]. 
(Art.  314,  Reg.  45,  Rev.,  April  17,  1919.) 

523  Duty  of  Employer  to  Determine  Status  of  Alien  Employee. — 

Aliens  employed  in  the  United  States  are  prima  facie  regarded  as 
non-residents.  If  wages  are  paid  without  withholding  the  tax,  except  as 
permitted  in  the  following  article,  the  employer  should  be  provided  with 
written  proof  of  facts  which  overcome  the  presumption  that  such  alien  is  a 
non-resident.  Such  facts  include  the  following:  (a)  If  an  alien  has  been 
living  in  the  United  States  for  as  much  as  one  year  immediately  prior  to  the 
time  he  entered  the  employment  of  the  withholding  agent,  or  if  he  has  been 
regularly  employed  by  a resident  individual  or  corporation  in  the  same 
county  for  as  much  as  three  months  immediately  prior  to  any  payment  by 
the  employer,  he  may  be  treated  as  a resident  in  the  absence  of  facts  known 
to  the  employer  showing  that  he  is  in  fact  a transient,  such  as  one  of  the 
types  mentioned  under  article  312  [1|518].  The  facts  with  regard  to  the 
length  of  time  the  alien  has  thus  lived  in  the  country  or  county  and  has  been 
so  regularly  employed  may  be  established  by  the  certificate  of  the  alien,  (b) 
The  employer  may  also  obtain  evidence  to  overcome  the  prima  facie  pre- 
sumption of  non-residence  by  securing  from  the  alien  Form  1078  (revised) 
or  an  equivalent  certificate  of  the  alien  establishing  residence.  Having  se- 
cured such  evidence  from  the  alien,  the  employer  may  rely  thereon  unless 
the  statement  of  the  alien  was  false  and  the  employer  has  reasonable  cause 
to  believe  it  false,  and  may  continue  to  rely  thereon  until  the  alien  ceases 
to  be  a resident  under  the  provisions  of  article  314  [1[522].  An  employer 
who  seeks  to  account  for  failure  to  withhold  in  the  past,  if  he  did  not  at 
the  time  secure  Form  1078  (revised)  or  its  equivalent,  is  permitted  to  prove 
the  former  status  of  the  alien  by  any  material  evidence.  (Art.  315,  Reg.  45, 
Rev.,  April  17,  1919.) 

524  To  avoid  inconvenience  a resident  alien  individual  should  file  a cer- 
tificate of  residence  on  Form  1078  (revised)  with  withholding 

agents,  who  shall  forward  such  certificates  to  the  Commissioner  (Sort- 
ing Division)  with  a letter  of  transmittal.  (Art.  363,  Reg.  45.,  April 
17,  1919.) 

525  Reference  is  made  to  your  letter  dated  June  18,  1919,  in  regard  to 

Article  315  [|f523].  Regulations  45  which  is  quoted  here:  “(b)  The 

employer  may  also  obtain  evidence  to  overcome  the  prima  facie  pre- 

INC.  68  TAX 


PORTO  RICO  AND  PHILIPPINE  ISLANDS. 

sumption  of  the  non-residence  by  securing  from  the  alien  Form  1078 
(revised)  or  an  equivalent  certificate  of  the  alien  establishing  residence. 
Having  secured  such  evidence  from  the  alien,  the  employer  may  rely  thereon 
unless  the  statement  of  the  alien  was  false  and  the  employer  has  reasonable 
cause  to  believe  it  false,  and  may  continue  to  rely  thereon  until  the(,  alien 
ceases  to  be  a resident  under  the  provisions  of  Article  314  [^S22]”  It 
is  noted  that  you  have  been  advised  by  the  Collector  of  Internal  Revenue  at 
Baltimore  that  it  will  be  necessary  for  the  employer  to  obtain  Form  1078 
for  each  year  that  a non-resident  alien  was  employed., 

526  In  reply  you  are  advised  that  when  Form  1078  is  filed,  with  the 
employer,  the  alien  may  be  (treated  as  a resident  of  the  United  States 

in  so  far  as  withholding  of  income  tax  at  source  is  concerned  and  it  is  not 
necessary  for  the  employer  to  secure  from  the  alien  employees  new*  cer- 
tificates, Form  1078,  for  each  taxable  year  The  ruling  contained  m the 
article  quoted  herein  will  govern,  namely,  that  when  Form  1078  is  filed, 
the  employer  may  continue  to  rely  thereon  until  the  alien  ceases  to  be  a 
resident  under  the  provisions  of  Article  314.  (Fetter  to  W.  B.  Reed,  Ac- 
counting Secretary,  National  Coal  Association,  Washington,  D.  C.,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  July  9,  1919. )i 

527  Referring  to  your  fourth  inquiry  you  are  advised  that  every  em- 
ployer with  whom  affidavits  of  claim  of  Form  1078  are  filed  by  em- 
ployees, should  make  a record  thereof  and  forward  the  certificates  to  the 
Commissioner  of  Internal  Revenue,  Sorting  Division,  Washington,  D.  C., 
not  later  than  the  twentieth  day  of  the  month  succeeding  that  during  's^ich 
such  certificates  were  received.  (Fetter  to  The  Corporation  Trust  Com- 
pany, signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  21,  1919.) 

528  If  an  officer,  qualified  to  administer  oaths,  is  not  reasonably  acces- 
sible, Form  1078,  Revised,  will  be  accepted  if  signed  in  the  pres- 
ence of  an’ official  of  the  employer  company  under  whose  supervision 
the  employee’s  duties  are  performed,  and^  one  other  credible  witless. 
(Fetter  to  Shipowners’  Association  of  the  Pacific  Coast,  San  Francisco,  Cal., 
signed  by  P S.  Talbert,  Acting  Assistant  to  the  Commissioner,  by  C.  R. 
Trobridge,  Acting  Head  of  Division,  and  dated  September  20,  1919.) 

529  Withholding  When  Resident  Status  Has  Not  Been  Established 
and  for  Procedure  on  change  of  Residence  Status. — Read  dis- 
cussion at  jfl597. 

530  Tax  on  Non-resident  Aliens  and  the  Withholding  of  the  Tax  at 
the  Source  Provisions. — See  1|1536. 


531  Law  Ml  3.  The  Income  of  a Citizen  of  Any  Possession  of  the 
United  States  Who  Is  not  a Resident  of  the  United 
States,  Is  Taxed  Under  This  Title  on  Income  Derived  from  United 
States  Sources  Only,  the  Tax  Being  Computed  and  Paid  in  the  Same 
Manner  and  Subject  to  the  Same  Conditions  as  in  the  Case  of  Other 
Persons  Liable  on  Such  Income  Only.— “Sec.  260.  That  any  individual 
who  is  a citizen  of  any  possession  of  the  Fhiited  States  (but  not  other- 
wise a citizen  of  the  United  States)  and  who  is  not  a resident  of  the 
United  States,  shall  be  subject  to  taxation  under  this^  title  only  as  to 
income  derived  from  sources  within  the  United  States,’’ 


INC. 


69  TAX 


PORTO  RICO  AND  PHILIPPINE  ISLANDS. 

532  Law  T[414.  “and  in  such  case  the  tax  shall  be  computed  and  paid 

in  the  same  manner  and  subject  to  the  same  conditions 
as  in  the  case  of  other  persons  who  are  taxable  only  as  to  income  derived 
from  such  sources.” 

533  Status  of  Citizen  of  United  States  Possession. — A citizen  of  a 
possession  of  the  United  States,  who  is  not  otherwise  a citizen  or  a 

resident  of  the  United  States,  including  only  the  States,  the  Terri- 
tories of  Alaska  and  Hawaii,  and  the  District  of  Columbia,  is  treated 
for  the  purpose  of  the  tax  as  if  he  were  a nonresident  alien  individual. 
See  articles  91-93,  271,  306,  307,  311,  316  and  404  [for  general  discussion 
of  tax  on  non-residents,  p536].  His  income  from  sources  within  the 
United  States  is  subject  to  withholding.  See  section  221  and  articles 
361-376  [for  withholding  of  the  tax  at  the  source,  |fl585].  (Art.  1121, 
Reg.  45,  Rev.,  April  17,  1919.) 

534  Law  Tf415.  Income  Taxes  in  Porto  Rico  and  the  Philippine  Islands. 

— “Sec.  261.  That  in  Porto  Rico  and  the  Philippine 
Islands  the  income  tax  shall  be  levied,  assessed,  collected,  and  paid  in*  ac- 
cordance with  the  provisions  of  the  Revenue  Act  of  1916  as  amended. 

535  Law  Tf416.  “Returns  shall  be  made  and  taxes  shall  be  paid  under 

Title  I of  such  Act  in  Porto  Rico  or  the  Philippine 
Islands,  as  the  case  may  be,  by” 

536  Law  11417.  “(1)  every  individual  who  is  a citizen  or  resident  of 

Porto  Rico  or  the  Philippine  Islands  or  derives  income- 
from  sources  therein,  and” 

537  Law  11418.  “(2)  every  corporation  created  or  organized  in  Porto 

Rico  or  the  Philippine  Islands  or  deriving  income  from 

sources  therein.” 

538  Law1[419.  “An  individual  who  is  neither  a citizen  nor  a resident 

of  Porto  Rico  or  the  Philippine  Islands  but  derives  in- 
come from  sources  therein,  shall  be  taxed  in  Porto  Rico  or  the  Philippine 
Islands  as  a non-resident  alien  individual,” 

539  Law  1|420.  “and  a corporation  created  or  organized  outside  Porto 

Rico  or  the  Philippine  Islands  and  deriving  income 
from  sources  therein  shall  be  taxed  in  Porto  Rico  or  the  Philippine 
Islands  as  a foreign  corporation.” 

540  Law1f421.  “For  the  purposes  of  section  [1[1514]  and  of  para- 

graph (6)  [1[1325]  of  subdivision  (a)  of  section  234 
a tax  imposed  in  Porto  Rico  or  the  Philippine  Islands  upon  the  net 
income  of  a corporation  shall  not  be  deemed  to  be  a tax  under  this  title.” 

541  Law  1[422.  “The  Porto  Rican  or  Philippine  Legislature  shall  have 

power  by  due  enactment  to  amend,  modify,  or  repeal 
the  income  tax  laws  in  force  in  Porto  Rico  or  the  Philippine  Islands, 
respectively.” 


INC. 


70  TAX 


PORTO  RICO  AND  PHILIPPINE  ISLANDS. 

^2  Law  ^464.  “Title  I of  the  Revenue  Act  of  1916  as  amended  by  the 
Revenue  Act  of  1917  shall  remain  in  force  for  the 
assessment  and  collection  of  the  income  tax  in  Porto  Rico  and  the 
Philippine  Islands,  except  as  may  be  otherwise  provided  by  their  re- 
spective legislatures/' 

543  Income  Tax  in  Porto  Rico  and  Philippine  Islands. — In  Porto  Rico 
and  the  Philippine  Islands  the  Revenue  Act  of  1916,  as  amended, 

is  in  force  and  the  Revenue  Act  of  1918  is  not.  See  also  section 
1400  of  the  statute  [542].  No  credit  against  net  income  is  al- 
lowed individuals  and  no  deduction  from  gross  income  is  allowed 
corporations  with  respect  to  dividends  received  from  a foreign  corpora- 
tion (foreign  with  respect  to  the  United  States)  taxed  in  Porto  Rico  or 
the  Philippines,  but  having  no  income  from  sources  within  the  United 
States.  lArt.  1131,  Reg.  45,  Rev.,  April  17,  1919.) 

544  Taxation  of  Individuals  Between  United  States  and  Porto  Rico 
and  Philippine  Islands. — (a)  A citizen  of  the  United  States  who 

resides  in  Porto  Rico,  and  a citizen  of  Porto  Rico  who  resides  in  United 
States,  are  taxed  in  both  places,  but  the  income  tax  in  the  United 
States  is  credited  with  the  amount  of  any  income,  war  profits  and  excess 
profits  taxes  paid  in  Porto  Rico.  See  section  222  of  the  statute  and 
articles  381-384  [for  credit  for  taxes  p290].  (b)  A resident  of  the 
United  States,  who  is  not  a citizen  of  Porto  Rico,  is  taxable  in  Porto 
Rico  as  a nonresident  alien  individual  on  any  income  derived  from 
sources  within  Porto  Rico,  but  the  income  tax  in  the  United  States 
is  credited  with  the  tax  paid  in  Porto  Rico,  (c)  A resident  of  Porto  Rico, 
who  is  not  a citizen  of  the  United  States,  is  taxable  in  the  United  States 
as  a nonresident  alien  individual  on  any  income  derived  from  sources 
within  the  United  States,  and  receives  no  credit.  See  also  section  260 
and  article  1121  [for  status  of  citizen  of  United  States  possessions, 
jf533].  The  same  principles  apply  in  the  case  of  the  Philippine  Islands. 
(Art.  1132,  Reg.  45,  Rev.,  April  17,  1919.) 

545  Taxation  of  Corporations  Between  United  States  and  Porto  Rico 
and  Philippine  Islands. — (a)  A United  States  corporation  which  de- 
rives income  from  sources  within  Porto  Rico,  (b)  a Porto  Rico  corpora- 
tion which  derives  income  from  sources  within  the  United  States,  and 
(c)  a corporation  of  a foreign  country  which  derives  income  both  from 
sources  within  Porto  Rico  and  from  sources  within  the  United  States, 
are  all  taxed  in  both  places.  In  the  case  of  the  United  States  corporation 
the  income,  war  profits  and  excess  profits  taxes  in  the  United  States  are 
credited  with  the  amount  of  any  income,  war  profits  and  excess  profits 
taxes  paid  in  Porto  Rico.  In  the  case  of  the  Porto  Rico  corporation  there 
is  no  such  credit.  See  section  238  of  the  statute  and  article  611  [for 
credit  for  taxes,  |[1301].  The  corporation  of  the  foreign  country  deriving 
income  from  both  places  is  subject  to  no  double  taxation  so  far  as  the 
United  States  and  Porto  Rico  are  concerned.  For  the  purpose  of  with- 
holding a Porto  Rico  corporation  is  a foreign  corporation.  See  section 
237  and  article  601  [for  withholding  in  the  case  of  nonresident  foreign 
corporations,  p619].  The  same  principles  apply  in  the  case  of  the  Phil- 
ippine Islands.  (Art.  1133,  Reg.  45,  Rev.,  April  17,  1919.) 


INC 


71  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

546  Law  p68.  Common-Law  Partnerships  Are  Not  Taxable  as  Such. 

— “Sec.  218,  (a)  That  individuals  carrying  on  business 
in  partnership  shall  be  liable  for  income  tax  only  in  their  individual 
capacity.'’ 

547  Limited  Partnerships. — [For  discussion  of  status  of  various  types, 
see  Tf734.] 

548  Partnership  Banks  Considered  Corporations  in  Certain  Cases. — 

Read  at  T[731. 

549  Foreign  Partnerships  Defined. — Read  at  pOlO. 

550  Hawaiian  Partnerships  Composed  of  Corporations. — [Such  part- 
nerships, permitted  under  the  laws  of  Hawaii,  were 

partnerships  for  Federal  income  tax  purposes  rather  than  joint-stock 
associations  in  Haiku  Sugar  Company,  et  ah,  vs.  Johnstone.  Circuit 
Court  of  Appeals,  Ninth  Circuit.  April  1,  1918  (249  Fed.  103).  How- 
ever, “joint-stock  associations”  are  no  longer  included  in  the  definition 
of  “corporations.”  The  wording  now  is  “associations”  and  “joint-stock 
companies.”  See  ^736.] 

551  Partnerships.— Partnerships  as  such  are  not  subject  to  taxation 
under  the  statute,  but  are  required  to  make  returns  of  income. 

See  section  224  of  the  statute  and  article  411  and  412  [for  returns 
by  partnerships,  ^S60].  Individuals  carrying  on  business  in  part- 
nership are,  however,  taxable  upon  their  distributive  shares  of  the,  net 
income  of  such  partnerships,  whether  distributed  or  not,  and  are  re- 
quired to  include  such  distributive  shares  in  their  returns.  (Art.  321,  Reg. 
45,  Rev.,  April  17,  1919.) 

552  Law|[176.  Manner  of  Computing  Net  Income  by  Partnerships  to 

Determine  Taxable  Distributive  Interests. — “(d)  The 
net  income  of  the  partnership  shall  be  computed  in  the  same  manner 
and  on  the  same  basis  as  provided  in  section  212  [1[769]  except  that  the 
deduction  provided  in  paragraph  (11)  [contributions,  T[1447]  of  subdivi- 
sion (a)  of  section  214  shall  not  be  allowed.” 

553  The  net  income  of  a partnership  shall  be  computed  in  the  same 
manner  and  on  the  same  basis  as  the  net  income  of  an  individual, 

except  that  the  deduction  of  contributions  or  gifts  is  not  permitted. 
See  section  212  and  articles  21-26  [for  net  income  generally,  11769]. 
(Art.  321,  Reg.  45,  Rev.,  April  17,  1919.) 

554  Deduction  by  Members  on  Account  of  Non-Deductible  Donations 
Made  by  a Partnership. — Any  donation  allowed  as  a business 

expense  of  the  partnership  would  of  course  not  be  deductible  by  individ- 
ual members  of  the  partnership  in  their  personal  income  tax  returns. 
Donations  made  by  the  partnership  but  not  allowable  as  deductions  by 
it  may  be  prorated  among  the  individual  members  of  the  partnership 
for  the  purpose  of  their  individual  income  tax  returns,  as  contributions 
or  gifts,  subject  to  the  limitations  of  Section  5 of  the  Act  of  September 
8,  1916,  subdivision  a,  clause  ninth,  added  by  Section  1201  of  the  Act 
of  October  3,  1917.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  May  23,  1918.) 

72  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

Law  |[238.  Returns  by  Partnerships. — “Sec.  224.  That  every  part- 
nership shall  make  a return  for  each  taxable  [][798] 

year/’ 

556  Lawf238.  Return  of  Gross  Income  and  Deductions. — “stating 

specifically  the  items  of  its  gross  income  and  the  de- 
ductions allowed  by  this  title  [11552]  and” 

557  Law  1f238.  Return  to  Disclose  Names  and  Addresses  of  All  Mem- 

' bers. — “shall  include  in  the  return  the  names  and  ad- 
dresses of  the  individuals  who  would  be  entitled  to  share  in  the  net 
income  if  distributed  and” 

558  Law  If 238.  Return  to  Show  Distributive  Share  of  Each  Member. — 

— “the  amount  of  the  distributive  share  of  each  individ- 
ual [11564].” 

559  Law  1[238.  Return  to  Be  Sworn  to  by  One  of  the  Partners. — “The 

return  shall  be  sworn  to  [P788]  by  any  one  of  the 

partners.” 

560  Partnership  Returns. — Every  partnership  must  make  a return  of 
income,  regardless  of  the  amount  of  its  net  income.  The  return 

shall  be  on  Form  1065  (revised)  and  shall  be  sworn  to  by  one  of 
the  partners.  Such  return  shall  be  made  for/  the  taxable  year  of 
the  partnership,  that  is,  for  its  annual  accounting  period  (fiscal  year 
or  calendar  year  as  the  case  may  be),  irrespective  of  the  taxable  years 
of  the  partners.  See  sections  218  of  the  statute  and  articles  321-327 
I1f601  et  seq.].  If  the  partnership  makes  any  change  in  its  accounting 
period,  it  shall  make  its  return  in  accordance  with  the  provisions  of 
section  226  and  article  431  [for  returns  when  accounting  period  changed, 
^1862].  See  also  article  424  [for  return  by  receiver,  1f701].  (Art.  411, 
Reg.  45,  Rev.,  April  17,  1919.) 

561  Contents  of  Partnership  Return.— The  return  of  a partnership 

shall  state  specifically  (a)  the  items  of  its  gross  income  enumer- 
ated in  section  213  of  the  statute;  (b)  the  deductions  enumerated  in  sec- 
tion 214,  other  than  the  deduction  provided  in  paragraph  (11)  of  sub- 
division (a)  of  that  section;  [contributions:  see  1f554]  (c)  the  amounts 
specified  in  subdivisions  (a)  and  (b)  of  section  216  received  by  the 
partnership ; (d)  the  amount  of  any  income,  war  profits  and  excess  prof- 
its taxes  of  the  partnership  paid  during  the  taxable  year  to  a foreign 
country  or  to  any  possession  of  the  United  States,  and  the  amount  of 
any  such  taxes  accrued  but  not  paid  during  the  taxable  year;  (e)  the 
names  and  addresses  of  the  individuals  who  would  be  entitled  to  share 
in  the  net  income  of  the  partnership  if  distributed;  (f)  the  amount  of  the 
distributive  share  of  such  net  income  of  each  such  individual;  and  (g) 
such  other  facts  as  are  required  by  Form  1065  (revised).  See  also  sec- 
tions 222  and  227  and  articles  381-384  [for  credit  for  taxes,  1[1290],  and 
441-448  [for  time  and  place  for  filing  returns,  111810].  (Art.  412,  Reg-. 
45,  Rev.,  April  17,  1919.)  ^ 

562  General  Law  Provisions  and  Applicable  Regulations  Relative  to 
Returns. — Read  beginning  at  1[1808. 

73  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS, 


563  Returns  of  Information  at  the  Source. — Read  at  ^1728. 

564  Law]fl69.  Distributive  Share  of  Partnership’s  Net  Income, 

Whether  Distributed  or  Not,  to  Be  Accounted  for 
by  Each  Partner. — “There  shall  be  included  in  computing  the  net  income 
of  each  partner  his  distributive  share,  whether  distributed  or  not,  of  the 
net  income  of  the  partnership  for  the  taxable  year,  or,” 


565  Lawj[170.  Partner’s  Accounting  Period  Differing  from  That  of 

the  Partnership. — “if  his  net  income  for  such  taxable 
year  is  computed  upon  the  basis  of  a period  different  from  that  upon  the 
basis  of  which  the  net  income  of  the  partnership  is  computed,  then  his  dis- 
tributive share  of  the  net  income  of  the  partnership  for  any  accounting 
period  of  the  partnership  ending  within  the  fiscal  or  calendar'  year  upon  the 
basis  of  which  the  partner’s  net  income  is  computed.” 


566  Distributive  Shares  of  Partners. — The  distributive  share  of  the 

net  income  of  a partnership  which  a partner  is  required  to  include  in 
his  return  is  his  proportionate  share  of  the  net  income  of  the'  partnephip, 
either  (a)  for  the  taxable  year  upon  the  basis  of  which  the  partner’s  net 
income  is  computed,  or  (b)  if  the  partner’s  net  income  is  computed  upon 
the  basis  of  a taxable  year  different  from  that  upoit  the  basis  of  which  the 
net  income  of  the  partnership  is  computed,  for  the  taxable  year  of  the  part- 
nership ending  within  the  taxable  year  upon  the  basis  of  which  the  partner  s 
net  income  is  computed.  Amounts  earned  and  distributed  to  a partnei  by  a 
partnership  after  the  end  of  its  taxable  year  and  before  the  end  of  his  cor- 
responding taxable  year  should  be  accounted  for  both  by  the  partnership 
and  by  the  partner  in  their  returns  for  their  next  succeeding  taxable  years. 
(Art.  322,  Reg.  45,  Rev.,  April  17,  1919.) 

567  Distributive  Shares  of  Non-resident  Alien  Partners  in  the  Income 
Accruing  to  a Foreign  Partnership  from  United  States  Sources.— 

Read  at  ][1554. 


568  Net  Losses  Suffered  by  Partnerships. — Where  the  result  of  part- 
nership operation  is  a net  loss,  the  loss  will  be  divisible  between  the 

partners  in  the  same  proportion  as  net  income  would  have  been  divisible, 
and  may  be  used  bv  the  individual  partners  in  their  returns  of  income. 
(Art.  30,  ^[213,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

569  Benefit  of  the  Special  “Net  Loss”  Provision  Accrues  to  Members 
of  a Partnership. — [Read  at  fllOS.] 

570  Undistributed  Distributable  Interests  Once  Taxed  Are  Not  Taxed 
Again  When  Distributed.— Undivided  annual  net  profits  of  part- 
nerships thus  returned  by  the  individual  members  thereof,  and  tax  paid 
thereon,  shall  not,  when  said  profits  are  actually  distributed  and  paid  to 

- such'  members,  be  again  included  in  their  annual  return  as  a part  of  their 
J ;gros$' ificome.  (Art.  14,  Reg.  33,  Jan.  5,  1914.) 


5^1  ' Law  11171.  Credits  Allowed  Members  of  Partnerships  for  Normal 
Tax  Purposes.— “The  partner  shall,  for  the  purpose  of 
the  fiorinSl  taxj  be  allowed  as  credits,  in  addition  to  the  credits  allowed  to 
him  under  section  216  [1[1513],  his  proportionate  share  of  such  amounts 


>ntc.  74  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


■specified  in  subdivisions  (a)  [dividends,  1fl514]  and  (b)  [United  States 
bond  interest  included  in  gross  income,  111515]  of  section  216  as  are  re- 
ceived by  the  partnership.” 

572  Credits  Allowed  Partners.— In  addition  to  the  credits  ordinarily 
allowed  to  an  individual,  a partner  is  entitled  to  the  following  credits : 
'(a)  a credit  against  net  income  for  the  purpose  of  the  normal  tax  only  of 
his  proportionate  share  of  such  dividends  from  corporations  subject  to  tax 
and  of  such  interest  not  entirely  exempt  from  tax  upon  obligations  of ^ the 
United  States  and  bonds  of  the  War  Finance  Corporation  as  are  received 
by  the  partnership;  and  (b)  a credit  against  income  tax  of  the  partner’s 
proportionate  share  of  any  income,  war  profits  and  excess  profits  taxes  of 
the  partnership  paid  or  accrued  during  the  taxable  year  to  a foreign  country 
upon  income  derived  from  sources  therein,  or  to  any  possession  of  the 
United  States,  subject  to  the  limitations  of  section  222  of  the  statute 
[1112891.  See  section  216  and  articles  301  [for  credits  against  income, 
1fl516]  and  381-384  [for  credits  for  taxes,  111290].  (Art.  323,  Reg.  45, 
Rev.,  April  17,  1919.) 


573  Law1f23.  “Personal  Service  Corporation”  Defined. — “The  term 

‘personal  service  corporation’  means  a corporation  , 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the  principal 
owners  or  stockholders  who  are  themselves  regularly  engaged  in  the 
active  conduct  of  the  affairs  of  the  corporation  and  in  which  capital 
(whether  invested  or  borrowed)  is  not  a material  income-producing 
factor;” 

574  Law1f24.  “but  does  not  include  any  foreign  corporation,” 


575  Law  1[25.  “nor  any  corporation  50  per  centum  or  more  of  whose 

gross  income  consists  either” 

576  Law  1126.  (1)  of  gains,  profits  or  income  derived  from  trading  as 

a principal,  or” 

577  Law1f27.  “(2)  of  gains,  profits,  commissions,  or  other  income, 

derived  from  a government  contract  or  contracts  made 
between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive;” 
[Read  at  1[583.] 


578  Lawp3.  “Government  Contract”  Defined.-— “The  term  ‘Govern- 
ment contract’  means  (a)  a contract  made  with  the  United  States, 
or  with  any  department,  bureau,  officer,  commission,  board,  or  agency, 
under  the  United  States  and  acting  in  its  behalf,  or  with  any  agency  con- 
trolled by  any  of  the  above  if;  the  contract  is  for  the  benefit  of  the  United 
States,  or  (b)  a sub-contract  made  with  a contractor  performing  such  a 
contract  if  the  products  or  services  to  be  furnished  under  the  sub-contract 
are  for  the  benefit  of  the  United  States.  The  term  ‘Government  contract  or 
contracts  made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive’  when  applied  to  a contract  of  the  kind  referred  to  in  clause  (a) 
of  this  paragraph,  includes  all  such  contracts  which,  although  entered  into 
during  such  period,  were  originally  not  enforceable,  but  which  have  been  or 

75  TAX 


• INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

may  become  enforceable  by  reason  of  subsequent  validation  in  pursuance 
of  law;” 

Government  contracts  may  include  (a)  a contract  with  the  United 
States,  (b)  a contract  with  an  agency  of  the  United  States,  (c)  a 
contract  with  an  agency  of  such  agency,  and  (d)  a subcontract  with 
a contractor  under  any  such  contract;  provided  in  every  case  the  contract 
or  subcontract  is  for  the  benefit  of  the  United  States.  Unenforceable  con- 
tracts  subsequently  ratified  are  treated  as  though  made  when  originally- 
executed.  The  Commissioner  may  require  any  contractor  to  file  with  him 
copies  of  his  Government  contracts  entered  into  on  or  after  April  6,  1917, _ 
and  shall  have  access  to  the  information  in  the  possession  of  the  Govern- 
ment relating  to  such  contracts.  See  section  1408  of  the  statute  [][580]. 
The  realization  by  a corporation  of  income  from  a Government  contract  may- 
affect  its  status  under  the  consolidated  returns  provision  [^1826]  and  the- 
amount  of  its  war  profits  and  excess  profits  tax.  The  agreements  for  the 
operation  of  transportation  systems  while  under  federal  control  and  fon 
the  iust  compensation  of  their  owners  made  pursuant  to  the  act  of  March 
21,  1918,  are  not  Government  contracts  within  the  meaning  of  this  article- 
[T[738].  (Art.  1510,  Reg.  45,  Rev.,  April  17,  1919.) 

580  “Sec.  1408  [of  the  Revenue  Act  of  1918].  That  every  person 
who  on  or  after  April  6,  1917,  has  entered  into  any  contract,. 

undertaking,  or  agreement  with  the  United  States,  or  with  any  depart- 
ment, bureau,  officer,  commission,  board,  or  agency  under  the  United* 
States  or  acting  in  its  behalf,  or  with  any  other  person  having  contract 
relations  with  the  United  States,  for  the  performance  of  any  work  or  the- 
supplying  of  any  materials  or  property  for  the  use  of  or  for  the  account 
of  the  United  States,  shall,  within  thirty  days  after  a request  of  the 
Commissioner  therefor,  file  with  the  Commissioner  a true  and  correct 
copy  of  every  such  contract,  undertaking,  or  agreement. 

581  “Whoever  fails  to  comply  with  such  request  of  the  Commissioner 
shall  be  guilty  of  a misdemeanor  and  shall  be  punished  by  a fine 

of  not  more  than  $1,000,  or  by  imprisonment  for  not  more  than  one 
year,  or  both. 

582  “The  Commissioner  shall  (when  not  violative  of  the  technical 
military  or  naval  secrets  of  the  Government)  have  access  to  all 

information  and  data  relating  to  any  such  contract,  undertaking,  or 
agreement,  in  the  possession,  control  or  custody  of  any  department, 
bureau,  board,  agency,  officer  or  commission  of  the  United  States  and 
may  call  upon  any  such  department,  bureau,  board,  agency,  officer  or 
commission  for  a "full  statement  and  description  of  any  allowance  for 
amortization,  obsolescence,  depreciation  or  loss,  or  of  any  valuation, 
appraisal,  adjustment  or  final  settlement,  made  in  pursuance  of  any  such 
contract,  undertaking,  or  agreement.”  (Sec.  1408,  Revenue  Act  of  1918.) 


583  Personal  Service  Corporation. — The  term  “personal  se^ice  cor- 
poration” means  a corporation,  not  expressly  excluded,  the  income  of' 
which  is  derived  from  a profession  or  business  (a)  which  consists, 
principally  of  rendering  personal  service,  (b)  the  earnings  of  which- 
are  to  be  ascribed  primarily  to  the  activities  of  the  principal  owners  or  stock- 
holders, and  (c)  in  which  the  employmenti  of  capital  is  not  necessary  or  is- 
only  incidental.  No  definite  and  conclusive  tests  can  be  prescribed  by  which. 

76  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


it  can  be  finally  determined  in  advance  of  an  examination  of  the  corpora- 
tion’s return  whether  or  not  it  is  a personal  service  corporation.  In  the 
following  articles  are  laid  down  the  general  principles  under  which  such, 
determination  will  be  made.  See  also  section  303  of  the  statute  and  articles 
741-743  [for  excess  profits  tax. — War  Tax  Service].  (Art.  1S23,  Reg.  45,. 
Rev.,  April  17,  1919.) 

584  Personal  Service  Corporation:  Certain  Corporations  Excluded. — 

The  following  classes  of  corporations  are  expressly  excluded  from 
classification  as  personal  service  corporations:  (a)  foreign  corporations; 
(b)  corporations  50  per  cent  or  more  of  whose  gross  income  consists  of 
gains,  profits  or  income  derived  from  trading  as  a principal;  and  (c)  cor- 
porations 50  per  cent  or  more  of  whose  gross  income  consists  of  gains, 
profits,  commissions  or  other  income  derived  from  a Government  contract 
or  contracts  made  between  April  6,  1917,  and  November  11,  1918,  inclu- 
sive. See  article  1510  [for  discussion  of  ‘‘Government  contract,”  1[579]. 
A corporation  is  not  a personal  service  corporation  merely  because  less  than 
50  per  cent  of  its'  gross  income  was  derived  from  trading  as  a principal  or 
from  Government  contracts.  A corporation  can  not  be  considered  a personal 
service  corporation  when  another  corporation  owns  or  controls  substantially 
all  of  its  stock,  or  when  substantially  all  of  its  stock  and  of  the  stock  of 
another  corporation  (not  itself  a personal  service  corporation)  forming  part 
of  the  same  business  enterprise  is  owned  or  controlled  by  the  same  interests. 
vSee  section  240  of  the  statute  and  articles  631-638  [for  consolidated  returns 
by  affiliated  corporations,  ^826].  (Art.  1524,  Reg.  45,  Rev.,  April  17, 
1919.) 

585  Personal  Services  Rendered  by  Personal  Service  Corporation. — 

In  order  that  a corporation  may  be  deemed  to  be  a personal  service 
corporation  its  earnings  must  be  derived  principally  from  compensation  for 
personal  seiwices  rendered  by  the  corporation  to  the  persons  with  whom  it 
does  business.  Merchandising  or  trading  either  directly  or  indirectly  in 
commodities  or  the  services  of  others  is  not  rendering  personal  service.  Con- 
ducting an  auction,  agency,  brokerage  or  commission  business  strictly  on 
the  basis  of  a fee  or  commission  is  rendering  personal  service.  If,  how- 
ever, the  corporation  assumes  any  such  risks  as  those  of  market  fluctua- 
tion, bad  debts,  failure  to  accept  shipments,  etc.,  or  if  it  guarantees  the 
accounts  of  the  purchaser  or  is  in  any  way  responsible  to  the  seller  fori  the 
payment  of  the  purchase  price,  the  transaction  is  one  of  merchandising  or 
trading,  and  this  is  true  even  though  the  goods  are  shipped  directly  from 
the  producer  to  the  consumer  and  are  never  actually  in  the  possession  of 
the  corporation.  The  fact  that  earnings  of  the  corporation  are  termed  com- 
missions or  fees  is  not  controlling.  The  fact,  that  a commission  or  fee  is 
based  on  a difference  in  the  prices  at  which  the  seller  sells  and  the  buyer 
buys  raises  a presumption  that  the  transaction  is  one  of  merchandising  or 
trading,  and  it  will  be  so  considered  in  the  absence  of  satisfactory  evidence 
to  the  contrary.  (Art.  1525,  Reg.  45,  Rev.,  April  17,  1919.) 

586  Personal  Services  Rendered  by  Personal  Service  Corporation: 

More  than  One  Business. — It  frequently  happens  that  corpora- 
tions are  engaged  in  two  or  more  professions  or  businesses  which  are  more 
or  less  related,  one  of  which  does  not  consist  of  rendering  persona!  service. 
Thus  an  engineering  concern  may  also  engage  in  contracting,  which  amounts 

77  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


to  trading  in  materials  and  labor,  a brokerage  concern  may  guarantee  some 
of  its  accounts,  a photographer  may  sell  pictures,  frames,  art  goods  and 
supplies  or  a dealer  in  a commodity  may  furnish  expert  advice  or  services 
with  respect  to  its  installation,  use,  etc.  In  such  case  the  corporation  is  not 
a personal  service  corporation  unless  the  non-personal  service  element  is 
negligible  or  merely  incidental  and  no  appreciable  part  of  its  earnings  are 
to  be  ascribed  to  such  sources.  See  also  section  303  of  the  statute  and 
articles  741-743  [for  excess-profits  tax.- — War  Tax  Service].  (Art.  1526, 
Reg.  45,  Rev.,  April  17,  1919.) 


587  Activities  of  Stockholders  of  Personal  Service  Corporation. — In 

determining  whether  a corporation  is  a personal  seiwice  corpora- 
tion, no  weight  can  be  given  to  the  fact  that  it  renders  personal  services 
unless  (a)  the  principal  owners  or  stockholders  are  regularly  engaged  in 
the  active  conduct  of  its  affairs  and  are  engaged  in^  such  a manner  that  the 
earnings  are  to  be  ascribed  primarily  to  their  activities,  and  (b)  its  affairs 
are  conducted  principally  by  such  owners  or  stockholders.  (Art.  1527, 
Reg.  45,  Rev.,  April  17,  1919.) 

588  Activities  of  Stockholders  of  Personal  Service  Corporation : Con- 
duct of  Affairs. — Where  the  principal  owners  or  stockholders  do 

not  render  the  principal  part  of  the  services,  but  merely  supei*vise  or  direct  a 
force  of  employees,  the  corporation  is  not  a personal  service  corporation. 
If  employees  contribute  substantially  to  the  services  rendered  by  a corpora- 
tion, it  is  not  a personal  service  corporation  unless  in  every  case  in  which 
services  are  so  rendered  the  value  of  and  the  compensation  charged  for 
such  services  are  to  be  attributed  primarily  to  the  experince  or  skill  of  the 
principal  owners  or  stockholders  and  such  fact  is  evidenced  in  some  definite 
manner  in  the  normal  course  of  the  profession  or  business.  The  fact  that 
the  principal  owners  or  stockholders  give  personal  attention  or  render  valu- 
able services  to  the  corporation  as  a result  of  which  its  earnings  are  greater 
than  those  of  a corporation  engaged  in  a like  or  similar  business,  the  princi- 
pal owners  or  stockholders  of  which  do  not  devote  personal  attention  to  the 
management  or  supervision  of  its  affairs,  does  not  of  itself  constitute  the 
corporation  a personal  service  corporation.  (Art.  1528,  Reg.  45,  Rev., 
April  17,  1919.) 


589  Activities  of  Stockholders  of  Personal  Service  Corporation : Stock 
Interest  Required. — No  definite  percentage  of  stock  or  interest  in 
the  corporation  which  must  be  held  by  those  engaged  in  the  active 
conduct  of  its  affairs  in  order  that  they  may  be  deemed  to  be  the 
principal  owners  or  stockholders  can  be  prescribed  as  a conclusive  test, 
as  other  facts  may  affect  any  presumption  so  established.  No  corpora- 
tion or  its  owners  or  stockholders  shall,  however,  make  a return  in  the 
first  instance  on  the  basis  of  its  being  a personal  service  corporation 
unless  at  least  80  per  cent  of  its  stock  is  held  by  those  regularly  engaged 
in  the  active  conduct  of  its  affairs.  (Art.  l.')29,  Reg.  45,  Rev.,  April  , 


1919.) 


590  Activities  of  Stockholders  of  Personal  Service  Corporation: 

Change  in  Ownership.— The  fact  that  the  owners  or  stockholders 
of  the  corporation  may  change  during  the  course  of  the  taxable  year 
does  not  take  a corporation  which  is  normally  in  the  personal  service 
class  out  of  that  class.  Frequent  changes  in  the  ownership  of  any  sub- 

78  TAX 


INC. 


% 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

stantial  interest  or  number  of  shares  are,  however,  evidence  bearing  on 
the  question  as  to  whether  the  principal  owners  or  stockholders  are  ac- 
tively engaged  in  the  conduct  of  the  affairs  of  the  corporation.  The 
incapacity,  retirement  or  death  of  a principal  owner  or  stockholder  who 
has  been  actively  engaged  in  the  conduct  of  its  affairs  will  not  be 
deemed  to  make  any  change  in  the  status  of  the  corporation  during  a 
reasonable  time  thereafter.  (Art.  1530,  Reg.  45,  Rev.,  April  17,  1919.) 

Capital  of  Personal  Service  Corporation. — In  determining  whether 

a corporation  is  a personal  service  corporation,  no  weight  can 
be  given  to  the  fact  that  the  invested  capital  of  the  corporation  for  the 
purpose  of  the  war  profits  and  excess  profits  tax  or  the  actual  invest- 
ment of  the  principal  owners  or  stockholders  is  comparatively  small. 
The  test  established  by  the  statute  with  respect  to  capital  is  entirely 
different.  That  test  is  the  nature  of  the  profession  or  business  as  indicated 
(a)  by  the  kind  of  services  it  renders  and  (b)  the  extent  to  which 
capital  is  required  to  carry  on  such  profession  or  business.  If  the  use 
of  capital  is  necessary  or  more  than  incidental,  capital  is  a material 
income-producing  factor  and  the  corporation  is  not  a personal  service 
corporation.  No  corporation  is  a personal  service  corporation  if  it 
carries  on  business  of  a kind  which  ordinarily  requires  the  use  of  capital, 
irrespective  of  whether  the  owners  or  stockholders  have  actually  in- 
vested a substantial  amount  of  capital.  (Art.  1531,  Reg.  45,  Rev.,  April 
17,  1919.) 

592  Capital  of  Personal  Service  Corporation:  Inference  from  Use. — 

The  term  “capital”  as  used  in  section  200  of  the  statute  and  in 

articles  1523-1532  [beginning  at  1f583]  means  not  only  capital  actually 
invested  by  the  owners  or  stockholders,  but  also  capital  secured  in 
other  ways.  Thus  if  capital  is  borrowed  either  directly  as  shown  by 
bonds,  debentures,  certificates  of  indebtedness,  notes,  bills  payable  or 
other  paper,  or  indirectly  as  shown  by  accounts  payable  or  other  forms 
of  credit,  or  if  the  business  of  the  corporation  is  in  any  way  financed  by 
or  through  any  of  the  owners  or  stockholders,  these  facts  will  be  deemed 
evidence  that  the  use  of  capital  is  necessary.  If  a substantial  amount  of 
capital  is  used  to  finance  or  carry  the  accounts  of  clients  or  customers, 
it  will  be  inferred  that  because  of  competition  or  other  reasons  such 
practice  is  necessary  in  order  to  secure  or  hold  business  which  other- 
wise would  be  lost,  and  that  the  corporation  is  not  a personal  service 
corporation.  If  a corporation  engaged  in  an  agency,  brokerage  or  com- 
mission business  regularly  employs  a substantial  amount  of  capital  to 
lend  to  principals,  to  buy  and  carry  goods  on  its  own  account,  or  to  buy 
and  carry  odd  lots  in  order  that  it  may  render  more  satisfactory  service 
to  its  principals  or  customers,  it  is  not  a personal  service  corporation.  In 
general  the  larger  the  amount  of  the  capital  actually  used  the  stronger 
is  the  evidence  that  capital  is  necessary  and  is  a material  income-pro- 
ducing factor  and  that  the  corporation  is  not  a personal  service  corpora- 
tion. (Art.  1532,  Reg.  45,  Rev.,  April  17,  1919.) 

593  Lawp77.  Tax  Liability  of  Personal  Service  Corporations  and 

Their  Stockholders. — “(e)  Personal  service  corpora- 
tions shall  not  be  subject  to  taxation  under  this  title,  but  the  individual 
stockholders  thereof  shall  be  taxed  in  the  same  manner  as  the  members 
of  partnerships.” 


INC.  79 


TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

594  Law  11178.  “All  the  provisions  of  this  title  relating  to  partnerships 
and  the  members  [1(546,  et  seq.]  thereof  shall  so 
far  as  practicable  apply  to  personal  service  corporations  and  the  stock- 
liolders  thereof 

•595  Lawp79.  Amounts  Distributed  or  Distributable  by  Personal 
Service  Corporations. — “Provided,  That  for  the  pur- 
pose of  this  subdivision  amounts  distributed  by  a personal  service  cor- 
poration during  its  taxable  year  shall  be  accounted  for  by  the  distribu- 
tees* and  any  portion  of  the  net  income  remaining  undistributed  at  the 
close  of  its  taxable  year  shall  be  accounted  for  by  the  stockholders  of 
such  corporation  at  the  close  of  its  taxable  year  in  proportion  to  their 
respective  shares/’  [Read  at  “Dividends  pil.] 

596  Personal  service  corporations  are  defined  in  section  200  of  the 
statute.  See  articles  1523-1532  [beginning  at  11583].  Such  cor- 
porations are  not  subject  to  tax  as  corporations,  unless  they  make 
returns  for  fiscal  years  beginning  in  1917,  but  they  are  required 
to  make  returns  of  income.  See  sections  231  [for  exempt  corpomtions, 
11753],  239  [for  returns  for  income  tax  purposes,  p778]  and  304  It  or 
exemption  for  excess-profits  tax  purposes.-— War  Tax  Service]  of  the 
statute  and  the  articles  thereunder.  An  individual  stockholder  oi  a 
personal  service  corporation  is,  however,  subject  to  tax  much  like  a 
member  of  a partnership  upon  his  distributive  share  of  the  net  income  of 
the  corporation.  The  net  income  of  a personal  service  corporation,  as  in 
the  case  of  a partnership,  shall  be  computed  in  the  same  manner  and  on 
the  same  basis  as  the  net  income  of  an  individual,  except  that  the  deduc- 
tion of  contributions  or  gifts  is  not  permitted.  See  sectmn  212  and 
articles  21-26  [for  net  income  generally,  11771].  A corporation  which  is 
taxable  under  section  303  [partial  personal  service  corporations.— War 
Tax  Service.  See  p86  herein]  is  not  a personal  service  corporation 
and  its  stockholders  are  taxed  like  stockholders  in  an  ordinary  corpora- 
tion. (Art.  328,  Reg.  45,  Rev.,  April  17,  1919.) 

597  Returns  of  Personal  Service  Corporations. — Every  personal  serv- 
ice corporation  must  make  a return  of  income,  regardless  of  the 

amount  of  its  net  income.  The  return  shall  be  on  Form  1065 
(revised).  It  shall  be  made  for  the, taxable  year  of  the  personal  service 
corporation ; that  is,  for  its  annual  accounting  period  (fiscal  year  or 
calendar  year,  as  the  case  may  be),  regardless  of  the  taxable  years  of  its 
stockholders.  See  Sections  200,  212  and  218  of  the  statute  and  articles 
1523-1532  [for  general  discussion  of  personal  service  corporations, 
‘1(583],  25,  26  [for  discussion  of  accounting  periods,  1(799]  and  328-335 
[for  discussion  of  the  taxation  of  personal  service  corpomtions,  1(599]. 
If  the  personal  service  corporation  makes  any  change  in  its  accounting 
period  it  shall  render  its  return  in  accordance  with  the  provisions  of 
section  226  of  the  statute  and  article  431  [1(1862].  The  return  of  a 
personal  service  corporation  shall  state  specifically  (a)  the  items  of  its 
gross  income  enumerated  in  section  213  of  the  statute;  (b)  the  deduc- 
tions enumerated  in  section  214  of  the  statute,  other  than  the  deduction 
provided  in  paragraph  (11)  [contributions  to  charitable  institutions]  of 
subdivision  (a)  of  that  section;  (c)  the  amounts  specified  in  subdivisions 
(a)  and  (b)  of  section  216  of  the  statute  received  by  the  personal  service 
corporation;  (d)  the  amount  of  any  income,  war  profits  and  excess 

80  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 


profits  taxes  of  the  personal  service  corporation  paid  during  the  taxable 
year  to  a foreign  country  or  to  any  possession  of  the  United  States, 
and  the  amount  of  any  such  taxes  accrued  but  not  paid  during  the  tax- 
able year;  (e)  the  amounts  distributed  by  the  corporation  during  its 
taxable  year  with  the  dates  of  distribution ; (f ) the  names  and  addresses 
•of  the  stockholders  of  the  corporation  at  the  close  of  its  taxable  year  and 
their  respective  shares  in  such  corporation;  (g)  such  facts  as  tend  to 
show  whether  or  not  the  corporation  is  a personal  service  corporation; 
and  (h)  such  other  facts  as  are  required  by  the  form.  A personal  service 
corporation  which  makes  a return  for  a fiscal  year  beginning  in  1917 
shall  include  therein  all  the  facts  required  for  the  computation  of  in- 
come and  excess  profits  taxes  under  Title  I of  the  Revenue  Act  of  1916, 
.as  amended  by  the  Revenue  Act  of  1917,  and  under  Titles  I and  II  of  the 
Revenue  Act  of  1917.  See  sections  205  and  335  of  the  statute  and  articles 
1621-1625  [for  fiscal  year  with  different  rates,  lf621]  and  951  [for  war- 
profits  and  excess-profits  taxes  in  the  case  of  fiscal  years  ended  in  1918 
only. — War  Tax  Service.  Personal  service  corporations  having  fiscal 
years  ended  in  1919  are  not  subject  to  war-profits  and  excess-profits 
taxes].  (Art.  624,  Reg.  45,  Rev.,  April  17,  1919.) 

598  General  Law  Provisions  and  Applicable  Regulations  Relative  to 
Returns. — Read  beginning  at  |[1808. 

599  Distributive  Shares  of  Stockholders  in  Personal  Service  Corpora- 
tion.—A stockholder  of  a personal  service  corporation  is  required 

to  include  in  his  gross  income  for  the  taxable  year  (a)  any  dividends 
paid  by  the  corporation  in  such  year  out  of  earnings  or  profits 
accumulated  since  February  28,  1913,  and  before  January  1,  1918; 
(b)  his  share  of  any  distribution  made  by  the  corporation  in  such  year 
out  of  earnings  or  profits  accumulated  since  December  31,  1917,  and  since 
the  close  of  its  taxable  year  ending  with  or  during  his  next  preceding 
taxable  year;  and  (c)  his  distributive  share  of  the  undistributed  net 
income  of  the  corporation  for  its  taxable  year  ending  with  or  during  his 
taxable  year  provided  he  was  at  the  close  of  its  taxable  year  a stock- 
holder in  the  corporation,  notwithstanding  he  might  since  have  ceased 
to  be  a stockholder.  See  section  201  of  the  statute  and  articles  1541-1543 
[for  dividends,  |f811].  In  the  case  of  personal  service  corporations  with 
taxable  years  other  than  the  calendar  year,  however,  such  distributive 
shares  or  distributions  may  be  subject  to  different  rates  of  tax.  [See 
1[612.]  (Art.  330,  Reg.  45,  Rev.,  April  17,  1919.) 

^90  Credits  Allowed  Stockholders  of  Personal  Service  Corporation. — 
A stockholder  of  a personal  service  corporation  is  entitled  to 
credit  for  the  purpose  of  the  normal  tax  only  for  amounts  received  in 
distribution  of  earnings  or  profits  of  the  corporation  accumulated  since 
February  28,  1913,  and  prior  to  January  1,  1918.  See  sections  201  and 
216  of  the  statute  and  articles  1541  [for  dividends  1|815]  and  301  [for 
credit  for  dividends  for  normal  tax  ])urposcs  |[1516].  In  addition  to  the 
credits  ordinarily  allowed  to  an  individual  a stockholder  of  a personal 
service  corporation  is  entitled  to  the  following  credits : (a)  a credit 
against  net  income  for  the  purpose  of  the  normal  tax  only  of  his  pro- 
portionate share  of  such  dividends  from  a corporation  subject  to  tax  and 
of  such  interest  not  entirely  exempt  from  tax  upon  obiigations  of  the 
United  States  and  bonds  of  the  War  Finance  Corporation  as  are  received 

81  TAX 


INC. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

bv  the  personal  service  corporation,  and  (b)  a credit  against  income 
tax  of  the  stockholder’s  proportionate  share  of  income,  war  profits  and 
excess  profits  taxes  of  the  personal  service  corporation  paid  or  accrued 

601  Law  P72.  Taxable  Year  Embracing  Parts  of  Two  C^War  Years 

for  which  the  Rates  Differ.—  Sec.  218.  (b)  It  a tiscai 
year  of  a partnership  ends  during  a calendar  year  for  which  the  rates  of 
tax  differ  from  those  for  the  preceding  calendar  year,  then 

602  Law  11173.  "(1)  the  rates  for  such  preceding  calendar  year  shall 

apply  to  an  amount  of  each  partner’s  share  of  such 
partnership  net  income  equal  to  the  proportion  which  the  part  of  such 
Leal  year^falling  within  such  calendar  year  bears  to  the  full  fiscal  year, 

and” 

603  Law  11174.  “(2)  the  rates  for  the  calendar  year  during  which  such- 

fiscal  year  ends  shall  apply  to  the  remainder. 

604  Law  11175.  Credit  to  a Member  of  a Partnership  Whose  FiscM 

Year  Ends  in  1918,  for  his  Proportionate  Share  of  an^ 
Excess  Profits  Tax  Imposed  on  the  Firm  for  the  1917  Portion  of  su^ch 

Fiscal  Year “(c)  In  the  case  of  an  individual  member  of  a partnership- 

S mak^s  returi  for  a fiscal  year  beginning  in  1917  and  ending  m 
1918  his  proportionate  share  of  any  excess  profits  tax  imposed  "Pon  the 
Sership  under  the  Revenue  Act  of  1917  with  respect  to  that  part  of 
Lch  fiscalLear  falling  in  1917,  shall,  for  the  purpose  of  determining  tEe 
tax  imposed  by  this  title,  be  credited  against  that  portion  of  the  ne 
income  embraced  in  his  personal  return  for  the  taxable  year  19  8 
which  the  rates  for  1917  apply.” 

Law  1168.  Special  for  1917-1918  and  1918-1919  Partnership  Fiscal 
Ywrs.— “Sec.  205.  (c)  If  a fiscal  year  of  a partnership 

begins  in  1917  and  ends  in  1918  or  begins  in  1918  and  L^pflfSlT 

notwithstanding  the  provisions  of  subdivision  (b)  of  section  [1[  ]>• 

606  Law1[69.  “(1)  the  rates  for  the  calendar  year  during  which  such- 

fiscal  year  begins  shall  apply  to  an  amount  of  each- 
partner’s  share  of  such  partnership  net  income  (^termined  under  the 
law  applicable  to  such  year)  equal  to  the  proportion  "'^ich  the  part  o 
such  Leal  year  falling  within  such  calendar  year  bears  to  the  full  fiscal 

year,  and” 


605 


607  Law  1170. 


“(2)  the  rates  for  the  calendar  year  during  which  such 
fiscal  years  ends  shall  apply  to  an  amount  of  each 
partner’s  share  of  such  partnership  net  income  (determined  under  the 
Lw  applicable  to  such  calendar  year)  equal  to  the  proportion  which  th 
part  of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full 

fiscal  year 


INC. 


82  TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

608  Law  ^71.  “Provided,  That  in  the  case  of  a personal  service  cor- 

poration with  respect  to  a fiscal  year,  beginning  in 
1917  and  ending  in  1918,  the  amount  specified  in  clause  (1)  shall  not  be 
subject  to  normal  tax.” 

609  Taxation  of  Partners  in  Partnership  with  Fiscal  Year  Ending  in 

1918.  — If  the  fiscal  year  of  a partnership  began  in  the  calendar 
year  1917  and  ended  in  the  calendar  year  1918,  the  rates  of  tax  for 
the  calendar  year  1917  apply  to  the  amount  of  each  partner’s  distrib- 
utive share  of  the  net  income  of  the  partnership  for  such  fiscal  year 
attributable  to  the  calendar  year  1917,  and  the  rates  for  the  calendar 
year  1918  to  the  amount  of  each  partner’s  distributive  share  of  such 
net  income  of  the  partnership  attributable  to  the  calendar  year 

1918.  (a)  The  amount  of  each  partner’s  distributive  share  of  the  net 
income  of  the  partnership  for  such  fiscal  year  attributable  to  the 
calendar  year  1917  is  found  by  determining  the  net  income  of  the  part- 
nership for  its  entire  fiscal  year  in  accordance  with  the  law  applicable 
to  the  calendar  year  1917  (see  Title  I of  the  Revenue  Act  of  1916  and 
Titles  I and  XII  of  the  Revenue  Act  of  1917)  and  the  distributive  share 
thereof  of  each  partner,  and  then  taking  such  proportion  of  that  distribu- 
tive share  as  the  part  of  the  fiscal  year  falling  within  the  calendar  year 

1917  bears  to  the  full  fiscal  year,  (b)  The  amount  of  each  partner's 

distributive  share  of  the  net  income  of  the  partnership  for  such  fiscal 

year  attributable  to  the  calendar  year  1918  is  found  by  determining  the 
net  income  of  the  partnership  for  its  entire  fiscal  year  in  accordance  with 
the  law  applicable  to  the  calendar  year  1918  and  the  distributive  share 
thereof  of  each  partner,  and  then  taking  such  proportion  of  that  distrib- 
utive share  as  the  part  of  the  fiscal  year  falling  within  the  calendar  year 

1918  bears  to  the  full  fiscal  year.  See  section  205  (c)  of  the  statute 

[1[605]  and  article  1621  [1f621].  (Art.  324,  Reg.  45,  Rev.,  April  17, 

1919. ) 

610  Taxation  of  Partners  in  Partnership  with  Fiscal  Year  Ending  in 

1919.  — If  the  fiscal  year  of  a partnership  began  in  the  calendar 

year  1918  and  ends  in  the  calendar  year  1919,  the  rates  of  tax  for 
the  calendar  year  1918  apply  to  the  amount  of  each  partner’s  dis- 
tributive share  of  the  net  income  of  the  partnership  for  such  fiscal 
year  attributable  to  the  calendar  year  1918,  and  the  rates  for  the 
calendar  year  1919  to  the  amount  of  each  partner’s  distributive  share  of 
such  net  income  of  the  partnership  attributable  to  the  calendar  year 
1919.  (a)  The  amount  of  each  partner’s  distributive  share  ot  the  net 

income  of  the  partnership  for  such  fiscal  year  attributable  to  the  calen- 
dar year  1918  is  found  by  determining  the  net  income  of  the  partnership 
for  its  entire  fiscal  year  in  accordance  with  the  law  applicable  to  the 
calendar  year  1918  and  the  distributive  share  thereof  of  each  partner, 
and  then  taking  such  proportion  of  that  distributive  share  as  the  part 
of  the  fiscal  year  falling  within  the  calendar  year  1918  bears  to  the  full 
fiscal  year,  (b)  The  amount  of  each  partner’s  distributive  share  of  the 
net  income  of  the  partnership  for  such  fiscal  year  attributable  to  the 
calendar  year  1919  is  found  by  determining  the  net  income  of  the  part- 
nership for  its  entire  fiscal  year  in  accordance  with  the  law  applicable 
to  the  calendar  year  1919  and  the  distributive  share  thereof  of  each 
partner,  and  then  taking  such  proportion  of  that  distributive  share  as 
the  part  of  the  fiscal  year  falling  within  the  calendar  year  1919  bears  to 

INC.  83 


TAX 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS. 

the  full  fiscal  year.  See  section.  ^OS  (c)  of  the- statute  and  article  1621 
[for  fiscal  year  with  different  rates,  11621].  (Art.  326,  Reg-.  45,  Rev., 
April  17,  1919.)  . - 

CIA  Taxation  of  Stockholders  cf  Personal  Service  Corporation  with 
Fiscal  Year  Ending  in  1918. — A stockholder  of  aipersonal:  service 
corporation  with  a fiscal  year  beginning  in  1917  and  ending  in  1918 
is  taxed  at  the  rates  for  the  calendar  year  A918  (a)  on  • any  divi- 
dends received  in  such  calendar  year  out  of  earnings  -or,'  profits  ac- 
cumulated since  February  28,  1913,  and  before  _ January  1,  .1918 
(except  as  provided  under  (d)  below)  ; (b)  on  any  distribution  made  in 
such  calendar  year  out  of  earnings  or  profits  accumulated  since  Decem- 
ber 31,  1917;  and  (c)  on  his  distribiitive  share  of  the  undistributed.net 
income  of  the  corporation  for  its  fiscal  year  attributable  to  the  calendar 
year  1918.  (d)  On  his  distributive  share  of  the  undistributed  net.  in- 

come of  the  corporation  for  its  fiscal  year  attributable  .to.,  the  calendar 
year  1917,  however,  the  stockholder  is  liable,  to  surtax  at.  the  rates  for 
the  calendar  year  1917,  but  to  no  normal  tax,  and  any  distribution  by 
the  corporation  subsequently  to  the  close  of  its  fiscal  year  out  of  such 
undistributed  net  income  so  taxed  to  the  stockholders  is  free  from  any 
tax.  The  part  of  the  net  income  of  a corporation  for  its  fiscal  year 
attributable  .to  the  calendar  year  1918  is  found  by  determining  the  net 
income  of  the  corporation  for  its  fiscal  year  in  the  same  manner  as  if 
the  fiscal  year  were  the  calendar  year  1918,  and  then  taking  the  pro- 
portion thereof  which  the  part  of  such  fiscal  year  falling  within  such 
calendar  year  bears  to  the  full  fiscal  year.  The  part  of  the  net  income 
of  a corporation  for  its  fiscal  yxar  attributable  to  the  calendar  year 
1917  is  found  by  determining  the  net  income  of  the  corporation  for  its 
fiscal  year  in  accordance  v/ith  the  law  applicable  to  the  calendar  year 
1917,  and  then  taking  the  proportion  thereof  which  the  part  of  such 
fiscal  year  falling  v/ithin  the  calendar  year  1917  bears  to  the  full  fiscal 
year.  See  section  205  (c)  of  the  statute  and  article  1621  [.for  fiscal  year 
with  different  rates,  ^[621].  (Art.  332,  Reg.  45,  Rev.,  April  17,  1919.) 

61S  Fiscal  Year  Ending  in  1919. — Such  part  of  a stocklmldeffs  distrib- 
utive share  of  the  net  income  of  a personal  service  corporation 
for  its  fiscal  y^ear  ending  in  1919  as  is  attributable  to  the  calendar 
year  1919  is  taxable  at  the  rates  for  such  calendar  year,  and  such 
part  of  such  distributive  share  as  is  attributable  to  the  calendar 
year  1918  is  taxable  at  the  rates  for  such  calendar  year.  The  part 
of  a stockholder’s  distributive  share  of  the  net  income  of  a corpora- 
tion for  its  fiscal,  year  attributable  to  the  calendar  year  1919  is  found  by 
determining  his  distributive  share  of  the  net  income  of  the  corporation 
for  its  fiscal  year,  whether  distributed  or  not,  in  the  same  manner  as 
if  the  fiscal  year  were  the  calendar  year  1919,  and  then  taking  the  pro- 
portion thereof  which  the  part  of  such  fiscal  year  falling  within  such 
calendar  year  bears  to  the  full  fiscal  year.  The  part  of  a stockholder’s 
distributive  share  of  the  net  income  of  a corporation  for  its  ^ fiscal  year 
attributable  to  the  calendar  year  1918  is  found  by  determining  his  dis- 
tributive share  of  the  net  income  of  the  corporation  for  its  fiscal  year, 
whether  distributed  or  not,  in  the  same  manner  as  if  the  fiscal  year  were 
the  calendar  year  1918,  and  then  taking  the  proportion  thereof  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year  bears  to 
t.he  full  fiscal  year.  The  stockholder  is  also  liable  to  tax  on  dividends 

84  TAX 


INC. 


FISCAL  YEARS  EMBRACING  PARTS  OF  CALENDAR  YEARS. 

• 

received  out  af-  'tarnitigs  6r  profits  acctimulated  sinc6  'February  28,  1913, 
and  before  January  1,  1918.  See  sections  201  and  205  (c)  of  the  statute 
and  articles  1541-1543  [for  dividends,  816),  and  ■p621,-|foF  fiscal  year  With 
different  rate's^’ [[621[.  ' (Art,  334,  Reg’iHS,'  Rev.,  April  17,  1919.) 

j - ' • - ■ ' ’ U 

- ^ ■ - V ' , r' 

613  Lav/  tfoO.  App-lication  of  the  Rates  for  Fiscal  Tear  Embracing 

Parts  of  Calendar  Years  with  Differing  Rates.— 'See. 
205.  (a)  That  if  a taxpayer  makes  return  for  a liseal  year  beginning  in 

1917  and  ending  in  1918,  his:  tax  under  this  title  for  the^  first  taxable 
year  shall  be  the  sum  of.:”  ' - 

r’  - ■ 

614  Lawlfbl.  "(1)  the  same  proportion  of  a tax  for  the  entire  period 

computed  under  Title  I of  the  Revenue  Act  of  1916  as 
amended  by  the  Revenue  Act  of  1917  and  under  Title  I of  the  Revenue 
Act  of  1917,  which  the  portion  ofc.such  period  falling  within  tlie  calen- 
dar year  1917  is  of  the  entire  period,  aiid”  ' 

’!  • ' 

615  Law1f62.  “(2)  the  same  proportion  of ‘a  tax  for  the  entire  period 

computed  under  this  title  at  the  rates  for  the  calen- 
dar year  1918  which  the  portion  of  such  period  falling  ‘ wdthin  the 
calendar  year  1918  is  of  the  entire  period:”  > 

616  Law  ][63.  “Provided,  That  in  the  case  of  a personal  service  cor,- 

poration  the  amount  to  be  paid  shall  be  only  that 
specified  in  clause  (1).” 

617  Law  ^64.  “Any  amount  heretofore  or  hereafter  paid  on  account 

of  the  tax  imposed  for  such  fiscal  year  by  Title  I of 
the  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917,  and 
by  Title  I of  the  Revenue  Act  of  1917,  shall  be  credited  towards  the 
payment  of  the  tax  imposed  for  such  fiscal  year  by  this  act,  and  if  the 
amount  so  paid  exceeds  the  amount  of  such  tax  imposed  by  this  act,  or, 
in  the  case  of  a personal  service  corporation,  the  amount  specified  in 
clause  (1),  the  excess  shall  be  credited  or  refunded  in  accordance  with 
the  provisions  of  section  252  [If2i21].” 

618  Law  |f65.  ‘'(b)  If  a taxpayer  makes  a return  for  a fiscal  year  be- 

ginning in  1918  and  ending  in  1919,  the  tax  under  this 
title  for  such  fiscal  year  shall  be  the  sum  of:” 

619  Law  |[66.  “(1)  the  same  proportion  of  a tax  for  the  entire  period 

computed  under  this  title  at  the  rates  specified  for  the 
calendar  year  1918  which  the  portion  of  such  pei'iod  falling  within  the 
calendar  year  1918  is  of  the  entire  period,  and” 

620  Law  1|67.  “(2)  the  same  proportion  of  a tax  for  the  entire  period 

computed  under  this  title  at  the  rates  specified  for  the 
calendar  year  1919  which  the  portion  of  such  period  falling  within  the 
calendar  year  1919  is  of  the  entire  period.” 

621  Fiscal  Year  with  Different  Rates.' — Section  205  of  the  statute  ap- 
plies to  income  taxes.  For  the  provisions  with  respect  to  war 

profits  and  excess  profits  taxes  see  section  335  and  articles  951-955 

INC.  85  TAX 


FISCAL  YEARS  EMBRACING  PARTS  OF  CALENDAR  YEARS. 


[War  Tax  Service].  Subdivision  (a)  [][613],  which  deals  with 
fiscal  years  beginning  in  1917  and  ending  in  1918,  applies  to  corpora- 
tions, including  personal  service  corporations,  and  to  individuals.  Sub- 
division (b)  []f618],  which  deals  with  fiscal  years  beginning  in  1918  and 
ending  in  1919.  applies  to  corporations  other  than  personal  service 
corporations  and  to  individuals.  Subdivision  (c)  [605],  which  deals 
with  fiscal  years  beginning  in  1917  or  1918  and  ending  in  1918  or  1919 
applies  to  partnerships  and  to  personal  service  corporations.  See  as  to 
partnerships  articles  321-327  [see  1|551],  and  as  to  personal  service 
corporations  articles  328-335  [see  1J596].  (Art.  1621,  Reg.  45,  Rev., 
April  17,  1919.) 

622  Fiscal  Year  of  Corporation  Ending  in  1918. — The  method  provided 
for  computing  the  tax  for  a fiscal  year  beginning  in  1917  and  end- 
ing in  1918  is  as  follows : (a)  the  tax  attributable  to  the  calendar  year  1917 
is  found  by  computing  the  income  of  the  taxpayer  and  the  tax  thereon  in 
accordance  with  Title  I of  the  Revenue  Act  of  1916  as  amended  and  Title  I 
of  the  Revenue  Act  of  1917  as  if  the  fiscal  year  was  the  calendar  year  1917, 
and  determining  the  proportion  of  such  tax  which  the  proportion  of  the 
fiscal  year  falling  within  the  calendar  year  1917  is  of  the  full  fiscal  year; 
(b)  the  tax  attributable  to  the  calendar  year  1918  is  found  by  computing 
^he  income  of  the  taxpayer  and  the  tax  thereon  in  accordance  with  the 
present  statute  as  if  the  fiscal  year,  was  the  calendar  year  1918,  and  deter- 
mining the  proportion  of  such  tax  which  the  portion  of  such  fiscal  year 
falling  within  the  calendar  year  is  of  the  full  fiscal  year;  and  (c)  the  tax 
for  the  fiscal  year  is  found  by  adding  the  tax  attributable  to  the  calendar 
year  1917  and  the  tax  attributable  to  the  calendar  year  1918.  If  a cor- 
poration made  its  return  for  the  taxable  year  1917  on  the  calendar  year 
basis  and  for  the  taxable  year  1918  on  a fiscal  year  basis,  the  tax  attributa- 
ble to  the  calendar  year  1917  need  not  again  be  computed  and  the  tax  attrib- 
utable to  the  calendar  year  1918  computed  as  herein  provided  shall  be 
the  tax  of  the  corporation  for  the  portion  of  such  fiscal  year  falling  within 
the  calendar  year  1918.  A personal  service  corporation  is  not  required  to 
pay  the  tax  attributable  to  the  calendar  year  1918,  since  for  that  year  it  is 
treated  substantially  like  a partnership  for  the  purposes  of  taxation.  See 
section  218  of  the  statute  and  articles  328-335  [1f611  and  tf612].  (Art. 
1622,  Reg.  45,  Rev.,  April  17,  1919.) 

623  Deductions  and  Credits  in  the  Case  of  Corporation  Fiscal  Year 
Ending  in  1918. — Net  losses  deductible  from  net  income  of  the 

fiscal  year  under  the  provisions  of  section  204  [net  losses,  p097]  of  the 
statute  shall  be  deducted  in  computing  the  tax  attributable  to  the  calendar 
year  1917,  as  well  as  in  computing  the  tax  attributable  to  the  calendar  year 
1918.  In  computing  the  tax  attributable  to  the  calendar  year  1917  the  net 
income  cumputed  for  the  entire  period  under  Title  I of  the  Revenue  Act 
of  1916  as  amended  and  Title  I of  the  Revenue  Act  of  1917  shall  be  cred- 
ited with  the  excess  profits  tax  computed  for  the  entire  period  under  Title  II 
of  the  Revenue  Act  of  1917.  In  computing  the  tax  attributable  to  the  cal- 
endar year  1918  the  net  income  computed  for  the  entire  period!  under  the 
present  statute  shall  be  credited  with  the  war  profits  and  excess  profits 
taxes  computed  for  the  entire  period  under  Title  III  of  the  statute;  at  the 
rates  prescribed  for  1918.  See  section  236  of  the  statute  and  article  591 
[for  credits  allowed,  p533].  Amounts  previously  paid  by  the  taxpayer  on 

INC.  86  TAX 


FISCAL  YEARS  EMBRACING  PARTS  OF  CALENDAR  YEARS. 


account  of  the  income  tax  for  such  fiscal  year  shall  be  credited  towards  the 
pa3anent  of  the  income  tax  imposed  for  such  fiscal  year  by  the  present 
statute.  Any  excess  shall  be  credited  or  refunded  in  accordance  with  the 
provisions  of  section  252.  See  articles  10v51  [][2115]  and  1034-1036  [for 
claims  for  credit  on  account  of  taxes  erroneously  collected,  beginning  at 
U2123].  (Art.  1623,  Reg.  45,  Rev.,  April  17,  1919.) 

624  Personal  Service  Corporation  with  Fiscal  Year  Ending  in  1918. — 

If  the  fiscal  year  of  a personal  service  corporation  began  in  the 
calendar  year  1917  and  ended  in  the  calendar  year  1918,  it  is  sub- 
ject to  tax  as  a corporation  for  the  part  of  such  fiscal  year  which 
falls  within  the  calendar  year  1917.  The  amount  for  which  such  a corpo- 
ration is  liable  is  such  proportion  of  the  tax  for  the  entire  fiscal  year  com- 
puted in  accordance  with  Title  I of  the  Revenue  Act  of  1916  as  amended 
and  with  Title  I of  the  Revenue  Act  of  1917  as  the  portion  of  such  fiscal 
year  falling  within  the  calendar  year  1917  is  of  the  entire  period.  An 
amount  previously  paid  by  the  corporation  on  account  of  the  income  tax 
for  such  fiscal  3^ear  shall  be  credited  toward  the  payment  of  the  tax  for 
the  portion  of  the  fiscal  year  falling  within  the  calendar  year  1917,  and 
any  excess  shall  be  credited  or  refunded  in  accordance  with  the  provisions 
of  section  252  [][2121]  of  the  statute.  See  section  205  (a)  [1|613]  and 
article  1621  [for  fiscal  year  with  different  rates,  1[621].  As  to  the  excess 
profits  tax  see  section  335  Tc)  [War  Tax  Service].  (Art.  329,  Reg.  45, 
Rev.,  April  17,  1919.) 

<>25  Fiscal  Year  of  Individual  Ending  in  1918. — Since  under  the  law 
applicable  to  the  calendar  year  1917  individuals  were  not  permitted 
to  make  returns  on  the  fiscal  year  basis  (see  Title  I of  the  Revenue  Act 
of  1916  as  amended),  the  tax  of  an  individual  for  that  part  of  a fiscal  year 
ending  in  1918  attributable  to  the  calendar  year  1917  has  already  been  in- 
cluded in  the  tax  for  such  calendar  year  and  need  not  ordinarily  again  be 
computed.  The  tax  for  that  part  of  the  year  attributable  to  the  calendar 
year  1918  is  found'  by  computing  the  income  of  the  taxpayer  for  the  taxa- 
ble year  and  the  tax  thereon  in  accordance  with  the  present  statute  as  if 
the  taxable  year  was  the  calendar  year  1918,  and  determining  the  propor- 
tion of  such  tax  which  the  portion  of  such  fiscal  year  falling  within  the 
calendar  year  is  of  the  full  fiscal  vear.  (Art.  1624,  Reg.  45,  Rev.,  April 
17,  1919.) 

<>26  Fiscal  Year  of  Corporation  or  Individual  Ending  in  1919. — The 
method  provided  for  computing  the  tax  for  a fiscal  year  beginning  in 
1918  and  ending  in  1919  is  as  follows:  (a)  the  tax  attributable  to  the  cal- 
endar year  1918  is  found  by  computing  the  income  of  the  taxpayer  and 
the  tax  thereon  in  accordance  with  the  statute  as  if  the  fiscal  year  was  the 
calendar  year  1918,  and  determining  the  proportion  of  such  tax  which  the 
portion  of  such  fiscal  year  falling  within  the  calendar  year  is  of  the  full 
fiscal  year;  (b)  the  tax  attributable  to  the  calendar  year  1919  is  found  by 
cumputing  the  income  of  the  taxpayer  and  the  tax  thereon  in  accordance 
with  the  statute  as  if  the  fiscal  year  was  the  calendar  year  1919,  and  deter- 
mining the  proportion  of  such  tax  which  the  portion  of  such  fiscal  year 
falling  within  the  calendar  year  is  of  the  full  fiscal  year;  and  (c)  the  tax 
for  the  fiscal  year  is  found  by  adding  the  tax  attributable  to  the  calend;ar 
year  1918  and  the  tax  attributable  to  the  calendar  year  1919.  (Art.  1625, 
Keg.  45,  Rev.,  April  17,  1919.) 

INC. 


87  TAX 


FISCAL  YEARS  EMBRACING  PARTS  OF  CALENDAR  YEARS. 


627  Re  Method  of  Computing  Tax  in  the  Case  of  Fiscal  Year  Cor- 
poration.— Reference  is  made  to  your  letter  dated  October^  27, 

1919,  addressed  to  tRe  Chairman  of  Committee  on  Appeals  and  Review, 
and  by  him  referred  to  this  office  for  reply,  after  full  consideration  had 
been  given  to  the  subject  matter  contained  therein.  In  reply  you  are 
advised  that  the  questions  presented  were  carefully  considered  before  the 
regulations  were  issued  or  the  forms  were  drafted,  and  have  since  that 
time  been  the  subject  of  most  thoughtful  consideration  and  analysis. 
The  view  of  the  Department  is  expressed  in  the  regulations  and  the 
forms  now  in  use.  The  Bureau,  therefore,  does  not_  deem  it  advisable 
to  modify  the  regulations  or  to  make  any  change  in  the  forms  until 
such  time  as  it  may  be  required  to  do  so  by  a court  decision.  (Letter 
to  K.  Sheridan  Hayes,  Washington,  D.  C.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  November  5,  1919.) 

628  Lawjf72.  Parts  of  Income  Subject  to  Rates  for  Different  Yearsi 

—“Sec.  206.  That  whenever  parts  of  a taxpayer’s  income 
are  subject  to  rates  for  different  calendar  years,  the  part  subject  to  the 
rates  for  the  most  recent  calendar  year  shall  be  placed  in  the  lower  brackets 
of  the  rate  schedule  provided  in  this  title,  the  part  subject  to  the  rates  tor 
the  next  preceding  calendar  year  shall  be  placed  in  the  next  higner  brackets 
of  the  rate  schedule  applicable  to  that  year,  and  so  on  until  the  entiie  net 
income  has  been  accounted  for.” 

629  Law  1173.  “In  determining  the  income,  any  deductions,  exemip- 

tions  or  credits  of  a kind  not  plainly  and  properly  charge- 
able against  the  income  taxable  at  rates  for  a preceding  year  shall  first  be 
applied  against  the  income  subject  to  rates  for  the  most  recent  calendar 

year;” 

630  Law  1174.  “but  any  balance  thereof  shall  be  applied  against  the 

income  subject  to  the  rates  of  tne  next  preceding  year 

or  years  until  fully  allowed.” 


681  Section  206  of  the  statute  applies  to  a partner’s  share  of  partner- 
shio  net  income ; to  a stockholder’s  share  of  the  net  income  of  a 
personal  service  corporation ; and  to  stock  dividends  received  by  a tax- 
payer between  janiiary  1 and  November  1 918,  or  declared  during  that 

oeriod  and  received  by  the  taxpayer  after  November  1,  1918,  and  before 
March  27,  1919.  For  the  treatment  of  income  of  a partner  or  of  a stock- 
holder in  a personal  service  corporation  see  sections  218  [1[601]  and  2Ub 
1116051  of  the  statute  and  articles  3^1-335  | beginning  at  ^3],  1621 
tel  and  1624  11I6251.  For  the  treatment  of  stock  dividends  see  sec- 
lion  Tl  and  artiLs  1546  ll[859]  and  1642  [p60].  (Art.  1641,  Reg. 
45,  Rev.,  April  17,  1919.) 

632  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year  of 
Partnership  Ending  in  1918.— Any  deductions,  exemptions  or 
credits  to  which  the  partner  in  a partnership  with  a fiscal  year  end- 
ing in  1918  is  entitled  shall  first  be  applied  against  his  income  subject 
to  the  rates  for  the  calendar  year  1918,  unless  of  a kind  plainly  and  proper  y 
chargeable  against  income  taxable  at  the  rates  for  the  calendar  year  19  . 

The  proportionate  share  of  a partner  of  any  excess  profits  tax  imposed  upon 


88  TAX 


INC. 


m 


FISCAL  YEARS  EMBRACING  PARTS  OF  CALENDAR  YEARS. 

the  partnership  under  the  Revenue  Act  of  1917  with  respect  to  that  part  of 
the  fiscal  year  falling within  the  calendar  year  1917  is  plainly  and  properly 
chargeable  against  income  taxable  at  the  rate  for  that  year  and  shall  be 
credited  against  such  income  of  the  partner.  In  determining  the  rates  of 
tax  applicable  to  the  amounts  of  the  distributive  shares  of  the  partners 
attributable  to  the  calendar  years.  1917  and  1918,  respectively,  the  amounts 
subject  to  the  rates  for  the  calendar  year  1918  shall  be  placed  in  the 
lower  brackets  of  the  rate  schedule  provided  in  the  present  statute 
and  the  amounts  attributable  to  the  calendar  year  1917  in  the  next  higher 
brackets  of  the  rate  schedule  applicable  to  that  year.  See  section  206 
[]j628]  of  the  statute  and  article  1641  [for  parts  of  income  subject  to 
rates  for  different  years,  1|631],  and  also  section  1 of  Title  I of  the  Rev- 
enue Act  of  1916  and  sections  1 and  2 of  Title  I of  the  Revenue  Act  of 

1917.  (Art.  325,  Reg.  45,  Rev.,  April  17,  1919.) 

<533  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year  of 
Partnership  Ending  in  1919. — Any  deductions,  exemptions  or 
credits  to  which  the  partner  in  a partnership  with  a fiscal  year  ending 
in  1919  is  entitled  shTil  first  be  applied  against  his  income  subject 
to  the  rates  for  the  calendar  year  1919,  unless  of  a kind  plainly  and  prop- 
erly chargeable  against  income  taxable  at  the  rates  for  the  calendar  year 

1918.  In  determining  the  rates  of  tax  applicable  to  the  amounts  of  the 
distributive  shares  of  the  partners  attributable  to  the  calendar  years  1918 
and  1919,  respectively,  the  amounts  subject  to  the  rates  for  the  calendar 
year  1919  shall  be  placed  in  the  lower  brackets  of  the  rate  schedule  pro- 
vided in  the  statute,  and  the  amounts  attributable  to  the  calendar  year  1918 
in  the  next  higher  brackets  of  the  rate  schedule  applicable  to  that  year. 
See  section  206  [tf628]  of  the  statute  and  article  1641  [for  parts  of  in- 
come subject  to  rates  for  different  years,  11631].  (Art.  327,  Reg.  45,  Rev., 
17,  1919.) 

634  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year  of 
Personal  Service  Corporation  Ending  in  1918. — Any  deductions, 
exemptions  or  credits  to  which  the  stockholder  of  a personal  service 
corporation  with  a fiscal  year  ending  in  1918  is  entitled  shall  first 
be  applied  against  his  income  subject  to  the  rates  for  the  calendar  year  1918, 
unless  of  a kind  plainly  and  properly  chargeable  against  income  taxable  at 
the  rates  for  the  calendar  year  1917.  The  proportionate  share  of  a stock- 
holder of  any  excess  profits  tax  imposed  upon  the  corporation  under  the 
Revenue  Act  of  1917  with  respect  to  that  part  of  the  fiscal  year  falling, 
within  the  calendar  year  1917  is  plainly  and  properly  chargeable  against 
incom.e  taxable  at  the  rates  for  that  year  and  shall  be  credited  against  such 
income  of  the  stockholder.  In  determining  the  rates  of  tax  applicable  to 
the  amounts  of  the  distributive  shares  of  the  stockholders  attributable  to 
the  calendar  years  1917  and  1918,  respectively,  the  amounts  subject  to  the 
rates  for  the  calendar  year  1918  shall  be  placed  in  the  lower  brackets  of  the 
rate  schedule  provided  in  the  present  statute  and  the  amounts  attributable 
to  the  calendar  year  1917  in  the  next  higher  brackets  of  the  rate  schedule 
applicable  to  that  year.  See  section  206  [^[628]  of  the  statute  and  article 
1641  [for  parts  of  income  subject  to  rates  for  different  years,  ^[631],  and 
also  section  1 of  Title  I of  the  Revenue  Act  of  1916  and  sections  1 and  2 
of  Title  I of  the  Revenue  Act  of  1917.  (Art.  333,  Reg.  45,  Rev.,  April 
17,  1919.) 


INC.  89  TAX 


ESTATES  AND  TRUSTS. 


635  Application  of  Different  Tax  Rates  in  the  Case  of  Fiscal  Year  of 
Personal  Service  Corporation  Ending  in  1919. — Any  deductions, 
exemptions  or  credits  to  which  the  stockholder  of  a personal  serv- 
ice corporation  with  a fiscal  year  ending  in  1919  is  entitled  shall 
first  be  applied  against  his  income  subject  to  the  rates  for  the  calendar 
year  1919,  unless  of  a kind  plainly  and  properly  chargeable  against  income 
taxable  at  the  rates  for  the  calendar  year  1918.  In  determining  the  rates 
of  tax  applicable  to  the  amounts  of  the  distributive  shares  of  the  stock- 
holders attributable  to  the  calendar  years  1918  and  1919,  respectively,  the 
amounts  subject  to  the  rates  for  the  calendar  year  1919  shall  be  placed  in 
the  lower  brackets  of  the  rate  schedule  provided  in  the  statute  and  the 
amounts  attributable  to  the  calendar  year  1918  in  the  next  higher  brackets 
of  the  rate  schedule  applicable  to  that  year.  See  section  206  [1[628]  of 
the  statute  and  article  1641  [for  parts  of  income  subject  to  rates  for  dif- 
ferent years,  1[631].  (Art.  335,  Reg.  45,  Rev.,  April  17,  1919.) 


'636  LawpSO.  Income  of  Estates  and  Trusts  is  Taxable. — “Sec.  219, 
(a)  That  the  tax  imposed  by  sections  210  [normal  tax 
on  individuals]  and  211  [surtax]  shall  apply  to  the  income  of  estates  or 
of  any  kind  of  property  held  in  trust,  including — ” 

637  LawiyiSl.  Income  Received  by  Estate  During  Period  of  Settle- 
ment is  Taxable.— “(1)  Income  received  by  estates  of 
deceased  persons  during  the  period  of  administration  or  settlement  of 
the  estate 


638  Decedent’s  Estate  During  Administration. — The  “period  of  ad- 
ministration or  settlement  of  the  estate”  is  the  period  required  by 
the  executor  or  administrator  to  perform  the  ordinary  duties  pertaining  to 
administration,  in  particular  the  collection  of  assets  and  the  payment  of 
debts  and  legacies.  It  is  the  time  actually  required  for  this  purpose,  whether 
longer  or  shorter  than  the  period  specified  in  the  local  statute  for  the  set- 
tlement of  estates.  Where  an  executor,  who  is  also  named  as  trustee,  fails 
to  obtain  his  discharge  as  executor,  the  period  of  administration  continues 
up  to  the  time  when  the  duties  of  administration  are  complete  and  he 
actually  assumes  his  duties  as  trustee,  whether  pursuant  to  an  order  of 
the  court  or  not.  No  taxable  income  is  realized  from  the  passage  of  prop- 
erty to  the  executor  or  administrator  on  the  death  of  the  decedent,  even 
though  it  may  have  appreciated  in  value  since  the  decedent  acquired  it. 
In  the  event  of  delivery  of  property  in  kind  to  a legatee  or  distributee, 
no  income  is  realized.  Where,  however,  the  executor  sells  property  of  the 
estate  for  more  than  its  value  at  the  death  of  the  decedent,  the  excess  is 
income  taxable  to  the  estate.  See  article  1562  [for  sale  of  property  ac- 
quired by  bequest,  P074].  (Art.  343,  Reg.  45,  April  17,  1919.) 

639  Law  11182.  Income  Accumulated  in  Trust  is  Taxable. — [lf636.  The 

taxes  imposed  by  sections  210  and  211  apply  to]  (2) 
Income  accumulated  in  trust  for  the_  benefit  of  unborn  or  unascertained 
persons  or  persons  with  contingent  interests , 

640  Law  11183.  Income  Held  for  Future  Distribution  Under  Terms  of 

Will  or  Trust  is  Taxable.— “(3)  Income  held  for  future 
distribution  under  the  terms  of  the  will  or  trust;  and” 

90  TAX 


INC. 


estates  and  trusts. 


641 


Law  11189.  Taxes  to  Be  Paid  by  Fiduciary  on  Income  (1)  Re- 
ceived During  Period  of  Settlement,  (2)  Accumulated 
in  Trust,  and  (3)  Held  for  Future  distribution  under  Terim  Will  or 
Trust. — “(c)  In  cases  under  paragraph  (1)  [637],  (2)  [639],  or  (3) 
[K640]  of  subdivision  (a)  the  tax  shall  be  imposed  upon  the  net  income 
of  the  estate  or  trust  and  shall  be  paid  by  the  fiduciary. 


642  Estates  and  Trusts  Taxed  to  Fiduciary.— In  the  case  of  (a)  es- 
tates of  decedents  before  final  settlement  and  of  (b)  trusts, 
whether  created  by  will  or  deed,  for  accumulation  of  income,  whether 
for  unascertained  persons  or  persons  with  contingent  interests  or 
otherwise,  the  income  is  taxed  to  the  fiduciary  as  to  any  single  in- 
dividual, except  that  from  the  income  of  a decedent’s  estate  there  may 
first  be  deducted  any  amount  of  income  properly  paid  or  credited  to  a 
beneficiary.  See  section  200  of  the  statute  and  articles  1521  and  152Z 
[for  definition  of  “fiduciary”  11671].  Where  under  the  terms  of  the 
will  or  deed  the  trustee  may  in  his  discretion  distribute  the  income  or 
accumulate  it,  the  income  is  taxed  to  the  trustee,  irrespective  of  the 
exercise  of  his  discretion.  The  imposition  of  the  tax  is  not  anected  by 
the  fact  that  an  ultimate  beneficiary  may  be  a person  exempt  from  tax. 
A statutory  allowance  paid  a widow  out  of  the  corpus  of  the  estate  is 
not  deductible  from  gross  income.  As  an  intestate’s  real  estate  does 
not  pass  to  his  administrator,  upon  a sale  by  the  heirs,  whether  before 
or  after  settlement  of  the  estate,  each  heir  is  taxed  individually  on  any 
profit  derived.  (Art.  342,  Reg.  45,  Rev.,  April  17,  1919.) 

[For  stock  dividends  taxable  to  estate  or  trust,  see  1l849.J 

643  Incidence  of  Tax  on  Estate  or  Trust.— Liability  for^  payment  of 
the  tax  attaches  to  the  person  of  an  executor  or  administrator  up 
to  and  after  his  discharge,  where  prior  to  distribution  and  discharge  he 
had  notice  of  his  tax  obligations  or  failed  to  exercise  due  diligence  in 
determining  whether  or  not  such  obligations  existed.  Liability  for  the 
tax  also  follows  the  estate  itself,  and  when  by  reason  of  the  distribution 
of  the  estate  and  discharge  of  the  executor  or  administrator  it  appears 
that  collection  of  the  tax  can  not  be  made  from  the  executor  or  admin- 
istrator the  legatees  or  distributees  must  account  for  their  proportion- 
ate share  of  the  tax  due  and  unpaid.  The  same  considerations  apply  to 
other  trusts.  Where  the  tax  has  been  paid  on  the  net  income  of  an 
estate  or  trust  by  the  fiduciary,  such  income  is  free  from  tax  when  dis- 
tributed to  the  beneficiaries.  (Art.  344,  Reg.  45,  April  17,  1919.) 


644  Law  11184.  Income  Received  by  a Fiduciary,  Which  is  Distributa- 

table  to  Beneficiaries  is  Taxable.— [The  taxes  imposed 
by  sections  210  and  211  apply  to]  “(4)  Income  which  is  to  be  distributed 
to  the  beneficiaries  periodically,  whether  or  not  at  regular  intervals,  and 
the  income  collected  by  a guardian  of  an  infant  to  be  held  or  distributed 
as  the  court  may  direct.” 

645  Law  11192.  Beneficiaries  Liable  on  Distributable  Income.— “(d)  In 

cases  under  paragraph  (4)  [1[644]  of  subdivision  (a), 

646  Law  11193.  Legatees  Liable  on  Amount  Properly  Paid  or  Credited 

to  Them  During  Period  of  Administration.— “and  in 
the  case  of  any  income  of  an  estate  during  the  period  of  administiation 

91  TAX 


INC. 


ESTATES  AND  TRUSTS. 

or  settlement  permitted,  by  subdivision  (c)  [^[653]  to  be  deducted  from 
the  net  income  upon  which,  tax  is  to  be  paid  by  the  fiduciary,” 

Law  If  194.  Distributable  Income  to  Be  Included  in  Beneficiary’s 
Return. — ''the  tax  shall  not  be  paid  by  the  fiduciary, 
but  there  shall  be  included  in  computing  the  net  income  of  each  bene- 
ficiary his  distributive  share,  whether  distributed  or  not,  of  the  net 
income  of  the  estate_or  trust  for  the  taxable  year,  or,” 


^48  Law  ff  195.  "if  his  net  income  for  such  taxable  year  is  computed 

upon  the  basis  of  a period  different  from  that  u-pon 
the  basis  of  which  the  net  income  of  the  estate  or  trust  is  computed, 
then  his  distributive  share  of  the  net  income  of  the  estate  or  trust  for 
any  accounting  period  of  such  estate  or  trust  ending  within  the  fiscal  or 
calendar  year  upon  the  basis  of  which  such  beneficiary’s  net  income 'is 
computed.” 

649  Estates  and  Trusts  Taxed  to  Beneficiaries. — In  the  case  of  (a)  a 

trust  the  income  of  which  is  distributable  periodically,  (b)  an 

ordinary  guardianship  of  a minor,  and  (c)  an  estate  of  a decedent  be- 
fore final  settlement  as  to  any  income  properly  paid  or  credited  as  such 
to  a beneficiary,  the  income  is  taxable  directly  to  the  beneficiary  or  bene- 
ficiaries. Each  beneficiary  must  include  in  his  return  his  distributive 
share  of  the  net  income,  even  though  not  yet  paid  him,  but  if  the  taxable 
year  on  the  basis  of  which  he  makes  his  returns  fails  to  coincide  with 
the  annual  accounting  period  of  the  estate  or  trust,  then  he  need  only 
include  in  his  return  his  distributive  share  for  such  accounting  period 
ending  within  his  taxable  year.  The  regulations  governing  partner- 
ships are  generally  applicable  to  such  an  estate  or  trust.  See  articles 
321-327  [for  partnerships,  IjSSl].  (Art.  345,  Reg.  45,  Rev.,  April  17, 
1919.) 

650  Credits  to  Beneficiaries. — See  ^665. 

Law  U186.  Hovi^  Net  Income  of  an  Estate  or  Trust  Is  to  Be  Com- 
puted.— "The  net  income  of  the  estate  or  trust  shall  be 
computed  in  the  same  manner  and  on  the  same  basis  as  provided  in 
section  212  [1[769],” 

652  Lawj[187.  Additional  Deduction  Because  of  Payments  Made  for 

Religious,  Charitable,  Educational,  etc.,  Purposes,  Pur- 
suant to  Terms  of  Will  or  Deed  of  Trust. — "except  that  thgre  shall  also 
be  allowed  as  a deduction  (in  lieu  of  the  deduction  authorized  by  para- 
graph (11)  [111447]  of  subdivision  (a)  of  section  214)  any  part  of  the 
gross  income  which,  pursuant  to  the  terms  of  the  will  or  deed  creating 
the  trust,  is  during  the  taxable  year  paid  to  or  permanently  set  aside  for 
the  United  States,  any  State,  Territory,  or  any  political  subdivision 
thereof,  or  the  District  of  Columbia,  or  any  corporation  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or  educational 
purposes,  or  for  the  prevention  of  cruelty  to  children  or  animals,  no 
part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  individual;” 


INC. 


92  TAX 


ESTATES  AND  TRUSTS. 


653  LawpQO.  Additional  Deduction  of  Amounts  Properly  Paid  or 

Credited  to  Legatee  During  Period  of  Administration. 
— “except  that  in  determining  the  net  income  of  the  estate  of  any  de- 
ceased person  during  the  period  of  administration  or  settlement  diere 
may  be  deducted  the  amount  of  any  income  properly  paid  or  credited  to 
any  legatee,  heir  or  other  beneficiary/’ 

654  l^et  Income  of  Estates  and  Trusts. — While  certain  estates  and 
trusts  are  subject  to  tax  as  such  and  others  are  not,  the  fiduciary 

in  every  case  is  required  to  make  a return  of  income.  See  section 
225  of  the  statute  and  articles  421-425^  [for  returns  by  fiduciaries, 
beginning  at  ][669].  The  net  income  of  an  estate  or  trust  shall  be 
computed  in  the  same  manner  and  on  the  same  basis  as  the  net  in- 
come of  an  individual,  except  that  in  place  of  the  deduction  allowed 
individuals  of  certain  gifts  or  contributions  there  may  be  deducted  from 
the  gross  income  any  part  of  it  which  during  the  taxable  year  is  pur- 
suant to  the  will  or  trust  deed  paid  to  or  permanently  set  aside  for  the 
United  States,  a State,  a Territory,  or  any  political  subdivision  thereof, 
the  District  of  Columbia,  or  any  corporation  or  association  of  the  kind 
described  in  section  231  (6)  of  the  statute  and  article  517  [11760].  See 
section  212  and  articles  21-26  [for  manner  and  basis  of  computing  net 
income  generally,  beginning  at  1f771].  The  income  of  a revocable 
trust  must  be  included  in  the  gross  income  of  the  grantor.  (Art.  341, 
Reg.  45,  Rev.,  April  17,  1919.) 

655  Capital  Expenditures  Not  Deductible. — Read  at  1[1190. 

656  Deductibility  of  Losses  Sustained  by  Estates  or  Trusts  and  the 
Bearing  of  Such  Losses  on  the  Taxable  Income  of  Beneficiaries. — 

Receipt  is  acknov/ledged  of  your  letter  of  October  3,  1919,  which 
reads  as  follows : “With  reference  to  the  letter  dated  August 
9^  1919— IT  :T:RR—FMH— signed  by  C.  P.  Trobridge,  Acting 

Head  of  Division,  is  it  possible  to  obtain  any  definite  reply  to  our 
letter  of  July  24,  1919,  inquiring  as  to  whether  or  not  when  a fiduciary 
sells  stock  or  bonds  of  a trust  estate  at  a loss,  the  beneficiary  is  entitled 
to  a credit,  deducting  such  loss  against  his  income,  only  paying  a tax  on 
the  net  amount  of  his  taxable  income  in  excess  of  the  loss?  Inasmuch 
as  your  lettter  of  August  9 stated  that  the  matter  was  at  that  time 
under  consideration  and  we  have  received  no  other  reply,  we  thought 
it  possible  that  the  matter  might  have  been  overlooked.”  1[In  reply 
you  are  advised  that  this  office  holds  that,  under  the  Revenue  Act  of 
1918,  (a)  any  loss  resulting  from  the  sale  of  stocks,  bonds  or  other 
property,  owned  by  a trust,  which  would  be  an  allowable  deduction 
from  the  gross  income  of  an  individual,  is  an  allowable  deduction  from 
the  gross  income  of  a trust,  wTether  or  not  the  income  of  such  trust 
is  “to  be  distributed  to  the  beneficiaries  periodically,  whether  or  not 
at  regular  intervals,”  and  whether  or  not  there  is  any  requirement  in  the 
instrument  creating  the  trust,  a decree  of  court,  or  general  law,  that 
the  principal  of  the  trust  estate  be  kept  intact  at  the  expense  of  income 
as  against  such  loss;  that  (b)  such  a deduction  is  not  allowable  as 
against  the  current  or  future  gross  income  of  the  present  beneficiaries 
or  of  those  who  will  receive  the  property  at  the  termination  of  the  trust; 
and  that  (c)  a beneficiary  is  not  required  to  include  in  his  personal  re- 
turn as  a part  of  “his  distributive  share,  whether  distributed  or  not,  of 

93  TAX 


INC. 


ESTATES  AND  TRUSTS. 


the  net  income  of  the  . . . trust  for  the  taxable  year,  any  part  of  the 
amounts  allowed  to  the  trust  as  a whole  as  a deduction  for  loss  re- 
sulting" from  the  sale  of  the  property.  (Letter  to  The  Equitable  Trust 
Company  of  New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C. 
Roper,  and  dated  October  13,  1919.) 

657  Deduction  for  Depreciation  in  Computing  Net  Income  of  Estates 
and  Trusts  and  the  Bearing  of  Such  Deduction  on  the  Taxable 

Income  of  Beneficiaries. — [In  connection  with  the  following,  the 
foregoing  paragraph  should  be  read.]  Reference  is  made  to  our 
letter  of  May  8,  1919,  in  which  you  refer  to  office  letter  of  April 
14,  1919,  wherein  you  are  informed  that  an  individual  who  re- 
ceives her  income  from  three  trust  estates  is  not  permitted  to  deduct  in 
her  personal  return  the  amount  of  depreciation  sustained  during  the 
year  on  real  estate  which  forms  a part  of  the  assets  of  these  trusts. 
You  now  state  you  note  that  Article  164  of  Preliminary  Regulations 
45,  which  had  reference  to  this  question,  has  been  eliniinated  from 
the  last  edition  of  the  Regulations,  and  you  ask  to  be  advised  whether 
the  decision  contained  in  office  letter  of  April  14  has  been^  modi- 
fied. Pn  reply  vou  are  advised  that  an  individual  who  receives  income 
from  a trust  estate  is  not  permitted  to  claim  a deduction  in  his  personal  in- 
come tax  return  for  any  depreciation  sustained  during  the  year  on  real 
estate  or  other  assets  of  the  estate.  Under  the  Revenue  Act  of  1918, 
however,  it  is  permissible  for  the  fiduciary,  in  ascertaining  the  net 
income  of  the  estate  or  trust  for  which  he  acts,  to  deduct  a proper 
amount  for  the  depreciation  sustained  during  the  taxable  year,  whether 
or  not  the  terms  of  the  will  or  agreement  creating  same  or  a decree  of 
Court  provides  for  the  taking  care  of  depreciation  which  may  be  sus- 
tained on  the  property  held  in  trust.  (Letter  to  William  R.  Conklin, 
New  York,  N.  Y.,  signed  by  J.  H.  Callan,  Assistant  to  the  Commis- 
sioner, by  P.  S.  Talbert,  Head  of  Division,  and  dated  October  6,  1919.) 

658  Dividends  Declared  from  Surplus  Earned  and  Accumulated  Dur- 
ing Life  of  Decedent  and  Subsequent  to  March  1,  1913,  are  Tax- 
able Income  for  Year.— This  office  is  in  receipt  of  ypur  letter  of 

October  11,  1915,  requesting,  as  attorneys  for , executor  of  the 

estate  of  A , a reconsideration  by  this  office  of  its  holding  Sep- 

tember 25,  1915,  in  letter  to  the  Collector  for  the  Second  District  of 
New  York  in  matter  of  assessment  of  tax  upon  certain  dividends  re- 
ceived by  the  executor  as  trustee  in  September  and  December,  1913,  not 
included  in  his  return  as  income. 

659  It  appears  that  the  dividends  in  question  vv’ere  declared  and  paid 
in  1913  from  the  surplus  of  a bank,  accumulated  during  a period 

of  several  years.*  The  dividends  amounted  to  $20,000  and  $13,666.68 
was  excluded  from  the  return  under  the  theory  and  belief  that  the 
amount  so  excluded  was  capital  and  did  not  have  the  status  of  income 
for  the  purposes  of  the  income  tax  for  the  reason  that  this  proportion 

of  the  dividends  was  earned  by  the  bank,  a corporation,  prior  to 

the  death  of , a stockholder  of  the  bank.  You  cite,  as  authority. 

Matter  of  Osborne,  209  N.  Y.  App.,  450. 

660  You  are  advised  that  the  case  has  been  reviewed  and  the  decision 
of  this  office,  September  25,  1915,  is  affirmed. 


* For  taxable  status  of  dividends  under  the  present  law  see  f[811. 

94  TAX 


INC. 


ESTATES  AND  TRUSTS. 


661  The  dividends  in  question,  being  a distribution  in  1913  of  cor- 
porate profits,  had  the  status  of  income  for  income  tax  purposes 

to  the  stockholders  of  the  corporation.* 

662  The  principle  of  decision  in  Matter  of  Osborne,  209  N.  Y.  App., 
450,  is  that  so  far  as  possible  (in  the  absence  of  testarnentary  di- 
rection to  the  contrary),  the  corpus  of  a trust  fund  in  which  life  tenants 
and  remaindermen  are  interested  should  be  kept  at  the  value  it  possessed 
when  the  fund  was  originally  created.  The  court  did  not  attempt  to 
change  the  rule  that  a dividend,  however  evidenced  and  paid,  declared 
and  paid  from  corporate  surplus,  has  the  status  of  income,  but  only  that 
in  holding  evenly  the  balance  between  life  tenants  and  remaindermen 
“the  court  should  look  into  the  fact,  circumstances  and  nature  of  the  trans- 
action and  determine  the  nature  of  the  dividend  and  the  rights  of  the  con- 
tending parties  according  to  justice  and  equity.” 

663  ' Trustees  are  required  to  make  return  and  pay  tax  for  the  persons 

for  whom  they  act.  Where  they  act  for  and  niake  distribution 
within  a taxable  period  to  an  individual  they  are  required  to  make  re- 
turn. * * * Where  they  act  for  an  individual  not  determined,  or  for  an 
individual  not  entitled  to  receive  within  the  taxable  period,  they  are 
held  to  have  the  status,  for  the  purposes  of  the  income  tax,  not  only 
as  a fiduciary  but  also  that  of  agency  for  such  beneficiary,  and  as  such 
fiduciary  and  agent  are  required  to  make  return  and  pay  the  tax  upon 
the  amount  received  and  held.  For  the  purpose  of  the  income  tax  the 
effect  of  accumulation  in  the  hands  of  a trustee  is  held  to  be  the  equiva- 
lent of  distribution  in  the  sum  of  the  accumulation. 

664  In  this  case  the  fiduciary  received  within  the  taxable  period,  re- 
tained and  did  not  distribute,  the  sum  of  $39,154.50.  All  this  sum 

had  the  status  of  “gains,  profits  and  income”  under  the  Act  of  October 
3,  1913,  and,  therefore,  under  the  provisions  of  T.  D.  2231  [or  Art.  342, 
U642],  is  taxable  to  the  trustee.  (Letter  to  Bowers  & Sands,  New  York, 
N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  October 
19,  1915.) 


♦For  taxable  status  of  dividends  under  the  present  law  see  pil. 

665  Law  1fl96.  Credits  Allowed  to  Beneficiaries  When  Making  Returns 

Including  Distributable  Income. — “In  such  cases  the 
beneficiary  shall,  for  the  purpose  of  the  normal  tax,  be  allowed  as  credits 
in  addition  to  the  credits  allowed  to  him  under  section  216  [p513], 
his  proportionate  share  of  such  amounts  specified  in  subdivisions  (a) 
[dividends,  111514]  and  (b)  [interest  on  Government  bonds  included  in 
gross  income  1[1515]  of  section  216  as  are  received  by  the  estate  or 
trust.” 

666  Their  Proportionate  Shares  of  the  Net  Loss  Suffered  by  an  Estate 
or  Trust  During  Certain  Taxable  Years  May  Be  Deducted  by 

Beneficiaries. — [Read  at  1fll05]. 

667  Law  U191.  Credits  Allowed  to  Estate  or  Trust  for  Normal  Tax. — 

“In  such  cases  the  estate  or  trust  shall,  for  the  pur- 
pose of  the  normal  tax,  be  allowed  the  same  credits  as  are  allowed  to 
single  persons  under  Section  216  [1[1518].” 


INC. 


95  TAX 


ESTATES  AND  TRUSTS. 


668  Credits  to  Trust  or  Beneficiary.-— (a)  In  the  case  of  an  estate  or 
trust  taxed  to  the  fiduciary  it  is  allowed  the  same  credits  against 
net  income  as  a single  person;  including  a personal  exemption  of  $1,000 
but  no  credit  for  dependents.  * (b)  -Irr  ’the  case  of  ah  estate  dr  trust 
taxed  to  the  beneficiaries  each  beneficiary  is  alio\V^d  for  the  purpose 
of  the  normal  tax,  in  addition  to  his  individual  credits,  his  proportionate 
share  ol  such  efividends  from  domestic  and  resident' foreign  corporations 
;and  of  such  ihtei'Cst  hot  entirely  exempt  from  tax  upon  obligations  of 
the  United  State4  atid  bonds  Of  the  War  Finance  Corporation  as  are 
received  by  the  estate  dr  trust.  Each  beneficiary  is  entitled  to  but  one 
personal  exemption,  no  matter  from  how  m.any  trusts  he  may  receive 
income.  See  section '216  of  the  statute  and  articles  30U307  [for  credit  bn 
account  of  personal  ejtemptioh,  ^1516] . (Art.  346,.  Reg.:  45,  Rev.,  April 
17,  1919.)  . ' " , 

^69  Lawp39.  Fiduciary  Returns. — “Sec.  225.  “That  every  fiduciary 
- {except  receivers  appointed  by  authority  of  law' in  pos- 
session of  part  only  of  the  property  Of  aii  individual)  [shall  make  return, 
11676]”  ' , ‘ ■ 

670'  Law][21.  The  Term  “Fiduciary”  Defined. — “The  term  'fiduciary’ 

means  a guardian,  trustee,  executor,  admintstrator,  re- 
ceiver, conservator,  or  any  person  acting  in  any  'fiduciary  capacity  for 
any  person,  trust  Or  estate;” 

671  “Fiduciary”  is  a term  which  applies  to  all  persons  that  occupy 
positions  of  peculiar  confidence  toward  others,  such  as  trustees, 

executors  and  administrators,  and  a fiduciary  for  income  tax  pur- 
poses is  a person  who  holds  in  trust  an  estate  to  which  another 
has  the  beneficial  title  or  in  which  another  has  a beneficial  interest,  or 
receives  and  controls  income  of  another  as  in  the  case  of  receivers.  A 
committee  of  the  property  of  an  incompetent  person  is  a fiduciary.  (Art. 
1521,  Reg.  45,  Rev.,  April  17,  1919.) 

672  Fiduciary  Distinguished  from  Argent. — There  may  be  a fiduciary 
relationship  between  an  agent  and  a principal,  but  the  word 

“agent”  does  not  denote  a fiduciary.  A fiduciary  relationship  can  not 
be  created  by  a power  of  attorney.  An  agent  having  entire  charge  of 
property,  with  authority  to  effect  and  execute  leases  with  tenants_  en- 
tirely on  his  own  responsibility  and  without  consulting  his  principal, 
merely  turning  over  the  net  profits  from  the  property  periodically  to  his 
principal,  by  virtue  of  authority  conferred  upon  him  by  a power  of  attor- 
ne}’’,  is  not  a fiduciary  within  the  meaning  of  the  statute.  In  cases  where 
no  legal  trust  has  been  created  in  the  estate  controlled  by  the  agent  and 
attorney  the  liability  to  make  a return  rests  with  the  principal.  (Art.  1522, 
Reg.  45,  Rev.,  April  17,  1919.) 

673  Law  |[237.  Duly  Authorized  A.gent  May  Make  Return. — “If  the 

taxpayer  is  unable  to  make  his  own  return,  the  return 
shall  be  made  by  a duly  authorized  agent  or  by  the  guardian  or  other 
person  charged  with  the  care  of  the  person  or  property  of  such  tax- 
payer.” ' . . , 


INC. 


96  TAX 


ESTATES  AND  TRUSTS. 


■ * ' -P 

G74  The  return  may  be' made  by  an  agent  when  by  reason  of  illness, 
absence  or  nonresidence  the  person  liable  for  the  return  is  unable  to 
make  it,,  the  agent  assuming  the  responsiblity  for  making  the  return  and 
incurring  liablity  to  the  specific  penalties  provided  for  erroneous,  false 
or  fraudulent  returns.  See  section  253  and  article  1041  [for  specific 
penalties,.  1[1903]. . (Art.  402,"Reg‘.  45/'-Rew,  April  17,  ,1919.) 

<>75  Return  for  Non-resident  Alien  by  Agent. — ^^[Read  at  "^1579.] 

<>7G  Law  f 240.  Every  Fiduciary  to  Make  Return. — “[Every  fiduciary] 
shall  make  under  oath  [^jl  788]  a return  for  the  indi- 
vidual, estate  or  trust  for  which  he  acts’  - • • 

G77  Law  ]j  245.  Fiduciary  to  Make  Return  Under  Oath  as  to  Corrcct- 
J ' ness.— ‘The  fiduciary  shall  make  oath  that  he  has  suffi- 

cient knowledge  of  the 'aiiairs  of , such  individual,  estate  or  trust  to  enable 
him  to  make  the  return,  and.  that  tlpre'  same^is,  to  the  best  of  his  knowl- 
edge and  belief,  true  and  correct.”  : . j ^ ^ 

078  Law  p85.  Responsibility  for  Making  Return  Rests  with  Fidu- 
ciary.— “(b)  The  fiduciary  shall  be  responsible  for  mak- 
ing the  return  of  income  for  the  estate  or  trust  for  which  he  acts.” 

679  Law  ]f241.  Return  by  Fiduciary  When  Acting  for  an  Individual. — 

[The  fiduciary  shall  make  under  oath  a return  for  the 
individual  for  whom  he  acts]  “(1)  if  the  net  income  of  such  individual  is 
$1,000  or  over  if  single  or  if  married  and  not  living  with  husband  or  wife, 
or  $2,000  or  over  if  married  and  living  with  husband  or  wife,  or”  [For 
guardians,  other  fiduciaries  and  agents  acting  as  attornevs-in-fact,  read 
at  11673] 

680  Lav/  ]f242.  Return  by  Fiduciary  When  Acting  for  an  Estate  or 

Trust. — [That  every  fiduciary  (except  receivers  ap- 
pointed by  authority  of  law  in  possession  of  part  only  of  the  property  of 
an  individual)  shall  make  under  oath  a return  for  the  individual  [][679], 
estate  or  trust  for  which  he  acts]  “(2)  if  the  net  income  of  such  estate 
or  trust  is  $1,000  or  over  or  if  any  beneficiary  of  such  estate  or  trust  is  a 
nonresident  alien,” 

681  Lav/  j[244.  Return  by  One  of  Two  or  More  Joint  Fiduciaries. — 

“LAder  such  regulations  as  the  Commissioner  with  the 
approval  of  the  Secretary  may  prescribe,  a return  made  by  one  of  two  or 
more  joint  fiduciaries  and  filed  in  the  office  of  the  collector  of  the  district 
where  such  fiduciary  resides  shall  be  a sufficient  compliance  with  the 
above  requirement.” 

682  Law  ][243.  Contents  of  Return  by  Fiduciaries. — “stating  specific- 

ally the  items  of  the  gross  income  and  the  deductions  and 
credits  allowed  by  this  title.” 

688  Lav/ p 88.  Beneficiaries’  Distributive  Shares  to  Be  Listed. — “and 

in  cases  under  paragraph  (4)  of  subdivision  (a)  [1[644] 
of  this  section  the  fiduciary  shall  include  in  the  return  a statement  of  each 
beneficiary’s  distributive  share  of  such  net  income,  whether  or  not  dis- 
tributed before  the  close  of  the  taxable  year  for  which  the  return  is  made.” 

INC.  97 


TAX 


ESTATES  AND  TRUSTS. 


684  Every  fiduciary,  or  at  least  one  of  joint  fiduciaries,  must  make  a 
return  of  income  (a)  for  the  individual  whose  income  is  in  his 

charge,  if  the  net  income  of  such  individual  is  $2,000  or  over  if 
married  and  living  with  husband  or  wife  or  is  $1,000  or  over  in 
other  cases,  or  (b)  for  the  estate  or  trust  for  which  he  acts,  if  the  net 
income  of  such  estate  or  trust  is  $1,000  or  over  or  if  any  beneficiary  of 
such  estate  or  trust  is  a nonresident  alien.  The  return  in  case  (a)  and  also 
in  case  (b)  if  the  tax  is  payable  by  the  fiduciary  shall  be  on  form  1040 
(revised),  except  that  it  may  be  on  short  form  1040  A (revised)  where  the 
net  income  does  not  exceed  $5,000.  The  return  shall  be  on  form  1041 
(revised)  in  case  (b)  if  the  tax  is  payable  by  the  beneficiaries.  In  such  a 
case  the  fiduciary  shall  include  in  the  return  a statement  of  each  bene- 
ficiary’s distributive  share  of  the  net  income,  whether  or  not  distributed 
before  the  close  of  the  taxable  year  for  which  the  return  is  made.  See 
section  219  of  the  statute  and  articles  341-346  [beginning  at  1f636].  If 
the  net  income  of  a decedent  from  the  beginning  of  the  taxable  year  to 
the  date  of  his  death  was  $1,000,  if  unmarried,  or  $2,000,  if  married,  the 
executor  or  administrator  shall  make  a return  for  such  decedent.  See 
article  305  [for  specific  exemption,  1|1526].  (Art.  421,  Reg.  45,  Rev., 
April  17,  1919.) 

685  Constructive  Receipt  of  Income  During  the  Taxable  Year  by  a De- 
cedent Prior  to  His  Death. — Reference  is  made  to  your  letter  of  re- 
cent date,  relative  to  the  proper  treatment,  for  income  tax  purposes,  of  in- 
come received  after  the  death  of  an  individual  in  1918.  You  state  that  you 
represent  a decedent  who  died  on  June  25,  1918,  and  whose  accounts  were 
kept  upon  a cash  receipt  and  disbursement  basis.  On  June  1,  1918,  divi- 
dends were  declared  on  stock  which  he  owned  but  which  were  not  paid 
until  July  1,  1918,  and  interest  accrued  on  bonds  and  mortgages  during  his 
lifetime  was  not  paid  until  after  his  death.  The  question  presented  is 
whether  the  dividends  and  interest  referred  to  should  be  reported  in  the 
return  for  the  period  from  January  1,  1918,  to  the  date  of  his,  death  or  in 
the  return  for  the  period  from  the  date  of  his  death  to  December  31,  1918. 
In  this  connection  you  are  advised  that  under  Section  213  of  the  Revenue 
Act  of  1918,  income  which  is  credited  to  the  account  of  or  set  apart  for  a 
taxpayer  and  which  may  be  drawn  upon  by  him  at  any  time  is  subject  to 
tax  for  the  year  during  which  so  credited  or  set  apart,  although  not  yet 
actually  reduced  to  possession.  Where  interest  coupons  have  matured,  but 
have  not  been  cashed,  such  interest  payment,  though  not  collected  when 
due  and  payable,  is  nevertheless  available  to  the  taxpayer  and  should  be 
included  in 'his  gross  income  for  the  year  during  which  the  coupons  ma- 
tured. Dividends  on  corporate  stock  are  subject  to  tax  when  set  apart 
for  the  stockholder,  although  not  yet  collected  by  him.  Similarly  interest 
on  mortgages  should  be  included  in  gross  income  for  the  year  in  which  it 
becomes  due  and  payable.  (Regulations  45,  Articles  53  [^[946]  and  54 
[^[947].  Therefore,  if  the  income  referred  to  in  your  letter  was  made 
available  to  the  decedent  during  1918  so  that  it  could  have  been  drawn  upon 
by  him  prior  to  his  death  it  should  be  reported  in  the  return  for  the  period 
from  January  1,  1918,  to  June  25,  1918.  (I.etter  to  Douglas,  Armitage  and 
McCann,  New  York,  N.  Y.,  signed  by  J.  H.  Callan,  Assistant  to  the  Com- 
missioner, by  P.  S.  Talbert,  and  dated  May  31,  1919.) 


INC. 


98  TAX 


ESTATES  AND  TRUSTS. 


686  Appreciation  in  Value  of  Decedent’s  Assets  Prior  to  His  Death. — 

Your  Mimeograph  Letter  to  Collectors,  dated  August  14,  1914,  states 
no  appreciation  in  value  of  assets  due  to  appraisal  or  adjustment!  is  taxable 
income  until  such  appreciation  has  been  converted  into  cash.  T.  D.  2090 
[see  Art.  1562  of  Reg.  45,  Rev.,  novr,  at  jfl074]  states  if  property  ac- 
quired by  gift  is  sold  at  price  greater  than  appraised  value  at  time  property 
acquired  by  gift,  such  gain  is  taxable  income.  We  assume  from  these 
rulings  and  request  your  confirmation  by  wire,  collect,  that  when  indi- 
vidual dies  after  March  1,  1913,  leaving  property,  all  gains  or  losses  on 
subsequent  sales  thereof  should  be  computed  from  value  at  date  of  death, 
not  date  of  his  acquisition,  and  that  executor  should  make  no  return  of 
book  gains  or  losses  up  to  date  of  death.  Also  that  on  transfer  of  property 
in  question  by  his  executor  to  legatee  or  to  trustee  under  will  or  from  one 
trustee  to  succeeding  trustee  no  tax  is  due  though  there  be  book  gain  at 
date  of  such  transfer.  (Telegram  to  the  Commissioner  of  Internal  Rev- 
enue from  Ropes,  Gray,  Boyden  and  Perkins,  of  Boston,  dated  January 
31,  1917.)  (Answer.)  When  individual  dies  after  March  1,  1913,  leaving 
property,  all  gains  or  losses  on  subsequent  sales  should  be  computed  on 
basis  of  appraised  value  at  date  of  death  and  executors  should  not  make 
return  of  book  gains  or  losses  either  up  to  date  of  death  or  on  transfer 
of  property  to  legatee  or  to  trustee  under  will  or  from  one  trustee  to 
succeeding  trustee,  the  appraised  value  at  date  of  death  remaining  as 
basis  for  all  subsequent  realization  of  losses  or  gains  in  cash.  (Telegram 
to  Ropes,  Gray,  Boyden  and  Perkins,  Boston,  Mass.,  signed  by  Commis- 
sioner W.  H.  Osborn,  and  dated  February  3,  1917.)  [Read  P074.] 

Taxability  of  Income  Accrued  to  Decedent  Dying  After  March  1, 
1913,  but  Before  October  3,  1913. — The  appended  decision  [Feb.  8, 
1917]  of  the  Circuit  Court  of  Appeals,  Second  Circuit,  in  the  case  of 
Nicholas  F.  Brady,  et  al.  v.  Charles  W.  Anderson,  collector  of  internal 
revenue,  is  published  for  the  information  of  internal-revenue  officers  and 
others  concerned.  The  United  States  Supreme  Court  on  May  21,  1917,  re- 
fused to  grant  a writ  of  certiorari  in  this  case.  (T.  D.  2494,  June  2, 
1917.) 

T mited  States  Circuit  Court  of  Appeals,  for  the  Second  Circuit. 

(240  Fed.  665.) 

Ward,  Circuit  Judge: 

688  This  is  an  action  against  the  Collector  of  Internal  Revenue  by 
the  executors  of  Anthony  N.  Brady,  deceased,  to  recover  taxes 
assessed  by  the  Commissioner  of  Internal  Revenue  and  paid  by  them 
under  protest  upon  income  received  by  Brady  durinf  his  lifetime  before 
the  income  tax  of  October  3,  1913,  imposing  a tax,  had  been  passed. 

089  The  Sixteenth  Amendment,  by  virtue  of  which  the  statute  was 
enacted,  was  ratified  February  28,  1913,  and  the  Supreme  Court 
has  for  that  reason  held  that  Congress  had  power  to  make  it  retroactive 
to  March  1,  1913.  Brushaber  v.  Union  Pacific  R.  R.  Co.,  240  U.  S.  1,  20 
[112260]. 

690  Anthony  N.  Brady  died  July  22,  1913,  and  his  executors,  in  ac- 
cordance with  the  requirement  of  the  Commissioner  of  Internal 
Revenue,  made  a return  of  the  income  received  by  him  between  March 
1,  when  the  act  went  into  effect,  and  July  22,  1913,  when  he  died.  The 
Commissioner  assessed  a tax  of  $61,654.72. 

99  TAX 


INC. 


ESTATES  AND  TRUSTS. 

691  The  case  having  come  on  for  trial  before  Grubb,  J.,  and  each  side 
having  moved  for  the  direction  of  a verdict,  he  directed  a verdict 

for  the  defendant.  This  is  a writ  of  error  to  the  judgment  entered 
thereon. 

692  The  questions  presented  are  purely  of  law,  involving  only  the 
construction  of  the  statute.  We  confine  ourselves  to  the  con- 
sideration of  the  provisions  relating  to  citizens  and  residents  of  the  United 
States. 

693  Section  II  of  the  act  reads  as  follows : 

“A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  collected  and 
paid  annually  upon  the  entire  net  income  arising  or  accruing  from^  all 
sources  in  the  preceding  calendar  year  to  every  citizen  of  the  United 
States,  whether  residing  at  home  or  abroad,  and  to  every  person  residing 
in  the  United  States,  though  not  a citizen  thereof,  a tax  of  1 per  centum 
per  annum  upon  such  income,  except  as  hereinafter  provided ; and  a like 
tax  shall  be  assessed,  levied,  collected  and  paid  annually  upon  the  entire 
net  income  from  all  property  owned  and  of  every  business,  trade,  or  pro- 
fession carried  on  in  the  United  States  by  persons  residing  elsewhere. 

“D.  The  said  tax  shall  be  computed  upon  the  remainder  of  said  net 
income  of  each  person  subject  thereto,  accruing  during  each  preceding 
calendar  year  ending  December  thirty-first : ^ Provided,  however,  That 
for  the  year  ending  December  thirty-first,  nineteen  hundred  and  thir- 
teen, said  tax  shall  be  computed  on  the  net  income  accruing  from  March 
first  to  December  thirty-first,  nineteen  hundred  and  thirteen,  both  dates 
inclusive,  after  deducting  five-sixths  only  of  the  specific  exemptions  and 
deductions  herein  provided  for.  On  or  before  the  first  day  of  March, 
nineteen  hundred  and  fourteen,  and  the  first  day  of  March  in  each  year 
thereafter,  a true  and  accurate  return,  under  oath  or  affirmation  shall 
be  made  bv  each  person  of  lawful  age,  except  as  hereinafter  provided, 
subject  to  the  tax  imposed  by  this  section,  and  having  a net  income  of 
$3,000  or  over  for  the  taxable  year,  to  the  collector  of  internal  revenue 
for  the  district  in  Avhich  such  person  resides  or  has  his  principal  place 
of  business,  or,  in  the  case  of  a person  residing  in  a foreign  country,  in 
the  place  where  his  principal  business  is  carried  on  v/ithin  the  United 
States,  in  such  form  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  shall  prescribe,  setting  forth 
specifically  the  gross  amount  of  income  from  all  separate  sources  and 
from  the  total  thereof,  deducting  the  aggregate  items  of  expenses  and 
allowances  herein  authorized ; guardians,  trustees,  executors,  adminis- 
trators, agents,  receivers,  conservators,  and  all  persons,  corporations,  or 
associations  acting  in  any  fiduciary  capacity,  shall  make  and  render 
return  of  the  net  itrcome  of  the  person  for  whom  they  act,  subject  to  this 
tax,  coming  into  their  custody  or  control  and  managernent,  and  be  sub- 
ject to  all  the  provisions  of  this  section  which  apply  to  individuals.  * * * 

“E.  * * Nothing  in  this  section  shall  be  construed  to  release  a 

taxable  person  from  liability  for  income  tax,  nor  shall  any  contract  en- 
tered into  after  this  Act  takes  effect  be  valid  in  regard  to  any  Federal 
income  tax  imposed  upon  a person  liable  to  such  peyment.  * * * 

“The  provisions  of  this  section  relating  to  the  deduction  and  pay- 
ment of  the  tax  at  the  source  of  income  shall  only  apply  to  the  normail 
tax  hereinbefore  imposed  upon  individuals. 

5i«  * * ♦ ♦ 

“G.  (a)  That  the  normal  tax  hereinbefore  imposed  upon  individuals 

100  TAX 


ING. 


ESTATES  AND  TRUSTS. 


likewise  shall  be  levied,  assessed,  and  paid  annually  upon  the  entire  net 
income  arising  or  accruing  from  all  sources  during  the  preceding  cal- 
endar year  to  every  corporation,  joint-stock  company  or  association,  and 
every  insurance  company,  organized  in  the  United  States,  no  matter 
how  created  or  organized,  not  including  partnerships ; but  if  organized, 
authorized,  or  existing  under  the  laws  of  any  foreign  countiy,  then 
upon  the  amiount  of  net  income  accruing  from  business  transacted,  and 
capital  invested  within  the  United  States  during  such  year.  ***  * 

694  plaintiffs  contend  that  the  tax  is  against  persons  who  are 
citizens  or  residents  of  the  United  States. 

695  The  Government  contends  that  the  tax  is  upon  the  property 
and  not  upon  the  persons,  which  was  the  view  taken  by  the  trial 

judge. 

696  The  plaintiffs  argue  that  as  Brady,  having  died  July  22,  was 
neither  a citizen  nor  a resident  of  the  United  States  October  3,  1913, 
at  the  time  the  act  was  passed,  its  language  does  not  authorize  collection 
of  any  tax  upon  income  received  by  him.  On  the  other  hand,  the  Gov- 
ernment says  that  as  the  tax  is  upon  the  property,  it  makes  no  difference 
whether  Brady  was  living  or  dead  at  that  time. 

697  In  our  opinion  the  tax  is  against  citizens  and  residents  of  the 
United  States  personally.  They  are  chargeable  in  respect  to 

income  received  by  them.  The  statement  that  the  tax  is  upon  this 
income  does  not  create  an  obligation  in  rem.  It  is  only  a way  of 
saying  that  the  owner  is  taxable  with  reference  to  the  income.  Taxable 
persons  are  spoken  of  throughout  the  act. 

698  The  effect  of  making  the  act  retroactive  is,  in  our  opinion,  to 
apply  it  to  Brady  exactly  as  if  it  had  been  enacted  March  1,  1913, 

and  as,  by  reason  of  his  death,  he  cannot  make  a return,  his  executors, 
into  whose  hands  his  estate  has  come,  must  do  so.  The  judgment  is 
affirmed.  (240  Fed.  665.)  [T.  D.  2494,  June  2,  1917.] 

699  Time  for  Filing  Return  Upon  Death  or  Termination  of  Trust. — 

As  soon  as  possible  after  his  appointment  and  qualification,  without 
waiting  for  the  close  of  the  taxable  year,  an  executor  or  administra- 
tor shall  file  a retutn  of  income  for  the  decedent.  Upon  the  completion  of 
the  administration  of  an  estate  and  final  accounting  an  executor  or  adminis- 
trator shall  file  a return  of  income  of  the  estate  for  the  portion  of  the  taxable 
year  in  which  the  administration  was  closed,  attaching  to  the  return  a 
certified  copy  of  the  order  for  his  discharge.  An  ancillary  administrator 
need  make  no  separate  return  if  the  domiciliary  administrator  includes  in 
his  return  the  entire  income  of  the  estate.  Similarly,  upon  the  termination 
of  any  other  trust  the  trustee  shall  make  a return  without  waiting  for  the 
close  of  the  taxable  year.  In  any  such  case  the  requirements  with  respect 
to  the  payment  of  the  tax  are  the  same  as  if  the  return  were  for  a full 
taxable  year  closing  at  the  end  of  the  month  during  which  the  decedent 
dies  or  the  estate  is  settled  or  the  trust  is  terminated,  as  the  case  may  be. 
The  payment  of  the  tax  before  the  end  of  the  taxable  year  in  such  circum- 
stances does  not  relieve  the  taxpayer  from  liability  for  any  additional  tax 
which  might  subsequently  be  imposed  upon  income  of  the  taxable  vear  I Art 
A42,  Reg.  45,  Rev.,  April  17,  1919.)  ^ ^ ' 

700  Returns  Where  Two  Trusts.— In  the  case  of  two  or  more  trusts 
the  income  of  which  is  taxable  to  the  beneficiaries,  which  were 

created  by  the  same  person  and  are  in  charge  of  the  same  trustee,  the  trustee 

INC.  101 


TAX 


ESTATES  AND  TRUSTS. 


shall  make  a single  return  on  form  1041  (revised)  for  all  such  trusts  not- 
withstanding that  they  may.arise  from  different  instruments.  When,  how- 
ever,  a trustee  holds  trusts  created  by  different  persons  for  the  beneht  ot  the 
same  beneficiary,  he  shall  make  a return  on  form 
trust  separately.  (Art.  423,  Keg.  45,  Rev.,  Ajiiil  17,  1919.) 

701  Return  by  Receiver. — A receiver  who  stands  in  the  stead  of  an 
individual  or  corporation  must  render  a return  of  income  and 'pay  the 

tax  for  his  trust,  but  a receiver  of  only  part  of  the  property  of  an  individual 
or  corporation  need  not.  If  the  receiver  acts  for  an  individual  the  return 
shall  be  on  form  1010  (revised)  or  1040A.  (revised).  When  acting  for  a 
corporation  a receiver  is  not  treated  as  a fiduciary,  and  in  such  a case  the 
return  shall  be  made  as  if  by  the  corporation  itself.  See  Section  239  of 
the  Statute  and  Article  .622  [for  returns  by  receivers  in  the  case  of  cor- 
porations. t[l786].  A receiver  in  charge  of  the  business  of  a partnership 
shall  render  a return  on  form  1065  (revised).  A receiver  of  the  rents 
and  profits  appointed  to  hold  and  operate  a mortgaged  parcel  of  real 
estate,  but  not  in  control  of  all  the  property  or  business  of  the  mort- 
p-agor  and  a receiver  in  partition  proceedings,  are  not  required  to  render 
Returns  of  income.  In  general,  statutory  receivers  and  common  law  re- 
ceivers of  all  the  property  or  business  of  an  individual  or  corporation 
must  make  returns.  See  also  section  256  of  the  statute  and  articles  1U71- 
1080  [for  returns  of  information  at  the  source,  ^1736].  (Art.  424,  Keg. 
45,  Rev.,  April  17,  1919.) 

702  Return  of  Income  of  Minor.—  An  individual  under  21  yeais  of  age 
or  under  the  statutory  age  of  majority  where  he  lives,  whatever  it 

may  be,  is  required  to  render  a return  of  income  if  be  has  a net  income  of 
his  "own  of  SOOIX)  or  o^’er  for  the  taxable  year.  If  be  is  married  see  article 
401  [lfl770i.  If  the  aggregate  of  the  net  income  of  a minor  froni  any 
property  which  he  possesses,  and  from  any  funds  held  in  trust  for  him  by 
a trustee  or  guardian,  and  from  any  earintigs  for  his  own  use,  is  at  least 
$1,000,  a return  as  in  the  case  of  any  other  individual  must  be  made  by  him 
or’bv'his  guardian  or  some  other  person  charged  with  the  care  of  hi^s 
person  or  property  for  him.  See  article  422  [for  return  by  guardian  T[703J. 
If,  however,  a minor  is  dependent  upon  his  parent,  who  appropiiates  or  may 
appropriate  his  earnings,  such  earnings  are  income  of  the  parent  and  not  of 
the  minor  for  the  purpose  of  the  normal  tax  and  surtax.  In  the  absence  of 
proof  to  the  contrary  a parent  will  be  assumed  not  to  have  emancipated 
his  minor  child  and  must  include  in  his  return  any  eainings  of  the  minor. 
(Art.  403,  Reg.  45,  Rev.,  April  17,  1919.) 

Return  by  Guardian  or  Committee. — A fiduciary  acting  as  ^the 
guardian  of  a minor  having  a net  income  of  $1,000  or  $2,000,  accord- 
ing to  the  marital  status  of  such  person,  must  make  a return  for  such  minor 
on  form  1040  (revised)  or  1040  A (revised)  and  pay  the  tax,  unless  such 
minor  himself  makes  a return  or  causes  it  to  be  made.'  A fiduciary  acting 
as  the  committee  of  an  insane  person  having  an  income  of  $1,000  or  $2,000, 
according  to  the  marital  status  of  such  person,  must  make  a return  for  such 
incompetent  on  form  1040  (revised)  or  1040  A (revised)  and  pay  the  tax. 
(Art.  422,  Reg.  45,  Rev.,  April  17,  1919.) 

102  TAX 


INC. 


ESTATES  AND  TRUSTS. 


704  Fiduciaries  acting  for  minors  or  incompetent  persons  are  permitted 
to  take  the  personal  exemption  as  to  income  derived  from  property 

of  which  they  have  charge  in  favor  of  each  ward  or  beneficiary.  (Art.  14, 
TjlSl,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

705  Return  for  Non-resident  Alien  Beneficiary. — Where  a citizen  or 
resident  fiduciary  has  the  distribution  of  trust  income  for  which 

there  is  a non-resident  alien  beneficiary,  the  fiduciary  must  make  a return 
on  form  1040  (revised)  or  1040  A (revised)  for  such  non-resident  alien  and 
pay  the  tax.  If  there  are  two  or  more  beneficiaries,  the  fiduciary  shall 
render  a return  on  form  1041  (revised)  and  also  a return  on  form  1040 
(revised)  or  1040  A (revised)  for  each  non-resident  alien  beneficiary. 
(Art.  425,  Reg.  45,  Rev.,  April  17,  1919.) 

706  Liability  of  Foreign  Fiduciaries  for  Non-resident  Alien  Benefi- 
ciaries in  Connection  with  Income  Received  from  Sources  Within 

the  United  States. — Receipt  is  acknov/ledged  of  your  letter  of  Decem- 
ber 1,  1916,  reading  as  follows: 

“A  trust  company  in  Canada  holds  certain  bonds  of  American  corpora- 
tions for  estates,  trusteeships,  etc.  Is  it  necessary  for  the  corporation  to 
file  the  annual  return  Form  No.  1041,  Revised?  If  so,  what  deductions 
will  it  be  allowed  against  income  received  from  the  United  States?  * * * 
What  form  of  ownership  certificates  shall  such  corporation  file  in  order  to 
obtain  exemption  from  deduction  at  the  source  if  it  stipulates  and  agrees 
to  file  the  annual  return  and  account  for  the  tax  annually  on  payments  made 
to  beneficiaries?” 

707  In  reply  you  are  advised  that  if  the  foreign  trust  company  has 
charge  of  an  estate  or  trust,  the  net  income  of  which  is  distributed 

annually  or  periodically  among  non-resident  alien  beneficiaries,  the  fidu- 
ciary should  execute  a return  on  Form  1011,  Revised,  covering  the  total 
income  of  the  estate  or  trust  derived  from  sources  within  the  United 
States,  and  a personal  return  on  Form  1040  ( * ^'  * * ) in  behalf  of 
each  non-resident  alien  beneficiary,  ^ =5^  * 

708  If  the  fiduciary  has  charge  of  an  estate  in  process  of  administration 
or  settlement,  or  an  estate  or  trust  the  net  income  of  which  is  held 

in  trust  for  the . benefit  of  unborn  or  unascertained  persons,  or  for 
future  distribution  under  the  terms  of  a will  or  trust,  the  estate  or  trust 
will  be  considered  a taxable  entity  and  the  fiduciary  required  to  render-  a 
return  on  Form  1040  ( * * * ) covering  so  much  of  its  total  income  as  is 
derived  from  sources'  within  the  United  States,  * * * 

709  Whether  the  return  of  the  total  income  derived  by  the  estate  or 
trust  from  sources  within  the  United  States  is  made  on  Form  1040 

(’*'**)  or  1041,  Revised,  the  benefit  of  such  of  the  deductions  enu- 
merated in  Section  6 of  the  Act  of  Sept.  8,  1916,  as  the  estate  or  trust 
is  entitled  to  may  be  claimed. 

710  No  form  of  exemption  certificate  has  been  prescribed  for  the  use  of 
a foreign  fiduciary,  as  it  is  not  permitted,  under  the  law,  that  such  a 

fiduciary  may  assume  liability  for  payment  of  the  income  tax  found 
to  be  due  on  income  derived  by  the  estate  or  trust  from  sources  within  the 
United  States  and  subject  to  withholding  of  normal  tax  at  the  source.  Inter- 
est coupons  detached  from  domestic  bonds  should  be  accompanied  by  owner- 
ship certificates,  Form  [1000],  Revised,  when  presented  for  payment  or 
collection  by  a foreign  fiduciary,  and  the  interest  paid  on  such  coupons  will 

103  TAX 


INC. 


TAX  ON  CORPORATIONS. 


be  subject  to  withholding  of  normal  tax  at  the  source,  ^ ^ ^ (L,etter  to 
The  Corporation  Trust  Company,  signed  by  Commissioner  W.  H.  Osborn, 
and  dated  Dec.  28,  1916.) 

Law  U246.  Law  Provisions  Applicable  to  Individuals  Apply  to 
Fiduciaries. — “Fiduciaries  required  to  make  returns 
under  this  Act  shall  be  subject  to  all  the  provisions  of  this  Act  which 
apply  to  individuals.” 

712  General  Law  Provisions  and  Applicable  Regulations  Relative  to 
Returns. — [Read  beginning  p808.] 


# 


713  Law  |f260.  Tax  on  Corporations. — “Sec.  230.  (a)  That,  in  lieu  of 

the  taxes  imposed  by  section  10  of  the  Revenue  Act  of 
1916,  as  amended  by  the  Revenue  Act  of  1917,  and  by  section  4 of  the 
Revenue  Act  of  1917,  there  shall  be  levied,  collected,  and  paid  for  each 
taxable  year  upon  the  net  income  of  every  corporation” 

714  Lawj[261.  Tax  Rates  Applicable  to  Corporations. — “a  tax  at  the 

following  rates :” 

% 

715  Lawjf262.  Tax  Rates  Applicable  to  Corporations  for  1918. — “(1) 

For  the  calendar  year  1918,  12  per  centum  of  the  amount 
of  the  net  income  in  excess  of  the  credits  provided  in  section  236  [p527]  ; 
and” 

716  Law  |f263.  Tax  Rates  Applicable  to  Corporations  for  Years  Sub- 

sequent to  1918. — “(2)  For  each  calendar  year  there- 
after, 10  per  centum  of  such  excess  amount.” 

717  The  statute  imposes  an  income  tax  at  a fixed  rate  on  all  corpora- 
tions not  expressly  exempt.  See  section  231  of  the  statute  [for 

exempt  corporations,  1f739].  The  tax  is  upon  net  income,  as  defined  in 
the  statute,  after  deducting  from  gross  income,  as  defined  in  the  statute, 
the  allowable  deductions.  Certain  credits  are  allowed  against  net  income 
and  against  the  amount  of  tlie  tax.  The  tax  is  payable  upon  the  basis  of 
returns  rendered  by  the  corporations  liable  thereto,  except  that  in  some 
cases  it  is  to  be  paid  at  the  source  of  the  income.  The  statute  also  im- 
poses on  corporations  a war  profits  and  excess  profits  tax.  (Art.  501,  Reg. 
45,  Rev.,  April  17,  1919.) 

718  The  income  tax  on  corporations  is  at  the  rate  of  12  per  cent,  of  the 
net  income  subject  to  tax  for  the  calendar  year  1918  and  at  the 

rate  of  10  per  cent  of  the  net  income  subject  to  tax  for  the  calendar  year 
1919  and  subsequent  years.  In  order  to  determine  the  amount  subject  to 
tax  the  net  income,  as  defined  in  section  232  of  the  statute  and  article  531 
[|[772]  of  the  regulations,  is  first  entitled  to  the  credits  specified  in  sec- 
tion 236  of  the  statute  and  article  591  [fl533].  (Art.  502,  Reg.  45,  Rev 
April  17,  1919. 

719  Application  of  the  Rates  for  Fiscal  Year  Embracing  Parts  of  Cal- 
endar Year  with  Different  Rates. — [Read  at  1[613.] 


INC. 


104  TAX 


TAX  ON  CORPORATIONS. 


720  Corporations  Liable  to  Tax. — Every  corporation,  domestic  or 
foreign,  not  exempt  under  section  231  [1[739]  of  the  statute,  is 

liable  to  the  tax.  It  makes  no  difference  that  a domestic  corporation 
may  receive  no  income  from  sources  within  the  United  States.  On  the 
other  hand,  a foreign  corporation  is  taxed  only  on  its  income  from 
sources  within  the  United  States.  See  section  233  of  the  statute  and 
article  550  tfor  gross  income  of  foreign  corporations,  p018].  For  the 
difference  between  domestic  and  foreign  corporations,  see  article  1509 
[pOlO].  (Art.  503,  Reg.  45,  Rev.,  April  17,  1919.) 

721  The  tax  imposed  by  the  Federal  income  tax  law  is  not  imposed  only 
upon  such  corporations  as  are  organized  and  operated  for  profit.  Any 

corporation,  joint-stock  company,  or  association,  and  any  insurance  com- 
pany, no  matter  how  created  or  organized,  or  what  the  purposes  of  its  or- 
ganization may  be,  unless  it  comes  within  the  class  of  organizations  spe- 
cifically enumerated  in  the  act  as  exempt,  will  be  required  to  make  returns 
of  annual  net  income  and  pay  income  tax  upon  the  net  income  which  arises 
and  accrues  to  it  during  the  year 

722  A corporation  is  not  exempt  simply  and  only  because  it  is  primar- 
ily not  organized  and  operated  for  profit.  If  income  within  the 

meaning  of  the  law  arises  and  accrues  to  a corporation  which  is  not  or- 
ganized and  operated  for  profit,  such  income  will  be  subject  to  the  tax 
imposed  by  this  act. 

723  Jt  is  therefore  held  that  commercial  men’s  associations,  ^ * 

and  like  organizations  come  within  the  requirements  of  the  law. 

(T.  D.  2152,  Feb.  12,  1915.) 

724  Corporation  Formed  to  Avoid  Selling  at  a Sacrifice  in  Order  to 
Partition. — A corporation  formed  as  a family  affair  to  hold  prop- 
erty together  and  not  to  sacrifice  in  selling  does  not  come  within  the  class 
of  corporations  specifically  enumerated  as  exempt  from  the  requirements  of 
the  Federal  income  tax  lav/,  and  is  required  to  make  a return  of  annual  net 
income  showing  therein  all  income  arising  and  accruing  to  it  front  all 
sources  and  to  pay  any  income  tax  shown  by  such  return  to  be  due.  (T.  D. 
2137,  Jan.  30,  1915.  ) 

725  Corporations  Owned  by  Exempt  Organizations. — A stock  corpo- 
ration all  of  whose  stock  is  owned  by  “a  corporation  or  association 

organized  and  operated  exclusively  for  religious,  charitable,  scientific,  or 
educational  purposes,  no  part  of  whose  net  income  inures  to  the  benefit  of 
any  member,  stockholder,  or  individual,”  is  required  under  the  provisions  of 
the  Federal  income  tax  law  to  make  a return  of  annual  net  income  and  pay 
income  tax. 

726  q^he  fact  that  all  of  the  stock  of  the  corporation,  except  shares  quali- 
fying  the  directors,  is  owned  by  a corporation  which  itself  comes 

within  the  class  specifically  enumerated  as  exempt,  does  not  relieve  the 
first-named  corporation  from  liability  under  the  income  tax  law.  The 
liability  of  a corporation  to  the  requirements  of  the  Federal  income  tax  law 
is  not  contingent  upon  the  ownership  of  its  stock.  (T.  D.  2137  Tan  30 
1915.)  ’ J ^ 

727  Public  Utility  Corporation  Intrusted  with  Use,  Merely,  of  Prop- 
erty Owned  by  State.— The  fact  that  the  plaintiff  was  a public 

utilities  corporation  which,  under  the  laws  of  the  State,  was  not  the  owner 

INC.  105  TAX 


TAX  ON  CORPORATIONS. 


of  the  property  but  merely  intrusted  with  the  use  thereof  which  it  must 
devote  to  the  public,  does  not  entitle  it  to  more  favorable  treatment  than 
other  corporations,  it  being  a corporation  organized  for  profit,  having  a 
capital  stock  represented  by  shares,  and  the  act  making  no  exceptions  in 
favor  of  public  utilities,  [Caption:  Union  Hollyv/ood  Water  Co.  vs.  John 
P.  Carter,  Collector,  case.  Act  Aug.  5,  1909  (238  Fed.  329).]  (T.  D.  2475, 

April  4,  1917.) 

728  Law  ^3.  What  Constitutes  a Corporation  Under  the  Income 
Tax  Law. — “The  term  'corporation’  includes  associations, 
joint-stock  companies,  and  insurance  companies;” 

’^29  Corporations  include  associations,  joint-stock  companies  and  in- 
surance companies,  but  not  partnerships  properly  so-called.  (Art. 
1501,  Reg.  45,  Rev.,  April  17,  1919.) 

730  Association. — Associations  and  joint-stock  companies  include  as- 
sociations, common  law  trusts  and  organizations  by  whatever  name 

known,  which  act  or  do  business  in  an  organized  capacity,  whether 
created  under  and  pursuant  to  State  laws,  agreements,  declarations 
of  trust,  or  otherwise,  the  net  income  of  which,  if  any,  is  distributed  or 
distributable  among  the  members  or  shareholders  on  the  basis  of  the  capital 
stock  which  each  holds  or,  where  there  is  no  capital  stock,  on  the  basis  of 
the  proportionate  share  or  capital  which  each  has  or  has  invested  in  the 
business  or  property  of  the  organization.  (Art.  1502,  Reg.  45,  Rev.,  April 
17,  1919.) 

731  Association  Distinguished  from  Partnership. — An  organization 
the  membership  interests  in^  which  are  transferable  without  the  con- 
sent of  all  the  members,  however  the  transfer  may  be  otherwise  restricted, 
and  the  business  of  which  is  conducted  by  trustees  or  directors  and  officers 
without  the  active  participation  of  all  the  members  as  such,  is  an  association 
and  not  a partnership  A partnership  bank  conducted  like  a corporation 
and  so  organized  that  the  interests  of  its  members  may  be  transferred  with- 
out the  consent  of  the  other  members  is  a joint-stock  company  or  associ- 
ation within  the  meaning  of  the  statute.  [Read  at  ^[842.]  A partnership 
bank  the  interests  of  whose  members  can  not  be  so  transferred  is  a 
partnership.  (Art.  1503,  Reg.  45,  Rev.,  April  17,  1919.) 

732  Association  Distinguished  from  Trust. — Where  trustees  hold  real 
estate  subject  to  a lease  and  collect  the  rents,  doing  no  business  other 

than  distributing  the  income  less  taxes  and  similar  expenses  to  the  holders 
of  their  receipt  certificates,  who  have  no  control  except  the  right  of  filling 
a vacancy  among  the  trustees  and  of  consenting  to  a modification  of  the 
terms  of  the  trust,  no  association  exists  and  the  cestuis  que  trust  are  liable 
to  tax  as  beneficiaries  of  a trust  the  income  of  which  is  to  be  distributed 
periodically,  whether  or  not  at  regular  intervals.  But  in  such  a trust  if  the 
trustees  pursuant  to  the  terms  thereof  have  the  right  to  hold  the  income 
for  future  distribution,  the  net  income  is  taxed  to  the  trustees  instead  of 
to  the  beneficiaries  See  .section  219  of  the  statute  and  articles  341-346  [for 
estates  and  trusts,  1[636].  If,  however,  the  cestuis  que  trust  have  a voice 
in  the  conduct  of  the  business  of  the  trust,  whether  through  the  right  peri- 
odically to  elect  trustees  or  otherwise,  the  trust  is  an  association  within  the 
meaning  of  the  statute.  (Art.  1504,  Reg.  45,  Rev.,  April  17,  1919.) 

106  TAX 


INC. 


TAX  ON  CORPORATIONS. 


733  A Certain  Massachusetts  Trust  Held  Not  to  Be  an  Association 
Under  the  Act  of  October  3,  1913. — [Read  at  ^399.] 

734  Limited  Partnership  as  Partnership. — So-called  limited  partner- 
ships of  the  type  authorized  by  the  statutes  of  New  York  and  most 

of  the  States  are  partnerships  and  not  corporations  within  the  meaning  of 
the  statute.  Such  limited  partnerships,  which  can  not  limit  the  liability  of 
the  general  partners,  although  the  special  partners  enjoy  limited  liability 
so  long  as  they  observe  the  statutory  conditions,  which  are  dissolved  by  the 
death  or  attempted  transfer  of  the  interest  of  a general  partner,  and  which 
can  not  take  real  estate  or  sue  in  the  partnership  name,  are  so  like  common 
law  partnerships  as  to  render  impracticable  any  differentiation  in  their 
treatment  for  tax  purposes.  Michigan  and  Illinois  limited  partnerships 
are  partnerships.  A California  special  partnership  is  a partnership. 
[For  partnerships,  see  11546.]  (Art.  1505,  Reg.  45,  Rev.,  April  17,  1919.) 

735  Limited  Partnership  as  Corporation. — On  the  other  hand,  lim- 
ited partnerships  of  the  type  of  partnerships  with  limited  liability  or 

partnership  associations  authorized  by  the  statutes  of  Pennsylvania  and  of  a 
few  other  States  are  only  nominally  partnerships.  Such  so-called  limited 
partnerships,  offering  opportunity  for  limiting  the  liability  of  all  the  mem- 
bers, providing  for  the  transferability  of  partnership  shares,  and  capable  of 
holding  real  estate  and  bringing  suit  in  the  common  name,  are  more  truly 
corporations  than  partnerships  and  must  make  returns  of  income  and  pay  the 
tax  as  corporations.  The  income,  received  by  the  members  out  of  the  earn- 
ings of  such  limited  partnerships  will  be  treated  in  their  personal  returns  in 
the  same  manner  as  distributions  on  the  stock  of  corporations.  In  all 
doubtful  cases  limited  partnerships  will  be  treated  as  corporations  unless 
they  submit  satisfactory  proof  that  they  are  not  in  effect  so  organized.  A 
Michigan  partnership  association  is  a corporation.  Such  a corporation  may 
or  may  not  be  a personal  service  corporation.  See  sections  200  and  218  of 
the  statute  and  articles  1523-1532  [for  personal  service  corporations, 
^[573].  (Art.  1506,  Reg.  45,  as  amended  by  T.  D.  2943,  November  6, 
1919.) 

736  Joint  Ownership  and  Joint  Adventure. — Joint  investment  in  and 
ownership  of  real  and  personal  property  not  used  in  the  operation  of 

any  trade  or  business  and  not  covered  by  any  partnership  agreement  does 
not  constitute  a partnership.  Co-owners  of  oil  lands  engaged  in  the  joint 
enterprise  of  developing  the  property  through  a common  agent  are  not  nec- 
essarily partners.  In  the  absence  of  special  facts  affirmatively  showing  an 
association  or  partnership,  where  a vessel  is  owned  by  several  individuals 
and  operated  by  a managing  owner  or  agent  for  the  account  of  all,  the 
relation  does  not  constitute  either  a joint-stock  association  or  a partnership. 
The  participation  of  two  United  States  corporations  in  a joint  enterprise 
or  adventure  does  not  constitute  them  partners  [see  iy550].  (Art.  1507, 
Reg.  45,  Rev.,  April  17,  1919.) 

737  Law  jf264.  Funds  from^Which  Taxes  Imposed  on  Railroads  Un- 

der Government  Control  Are  to  Be  Paid. — “(b)  For  the 
purposes  of  the  Act  approved  March  21,  1918,  entitled  ‘An  Act  to  provide 
for  the  operation  of  transportation  systems  while  under  Federal  control, 
for  the  just  compensation  of  their  owners,  and  for  other  purposes,'  five- 

107  TAX 


INC. 


TAX  ON  CORPORATIONS. 


sixths  of  the  tax  imposed  by  paragraph  (1)  of  subdivision  (a)  and  foui- 
fifths  of  the  tax  imposed  by  paragraph  (2)  of  subdivision  (a)  shall  be 
treated  as  levied  by  an  Act  in  amendment  of  Title  I of  the  Revenue  Act 
of  1917.’^ 

738  The  Act  to  provide  for  the  operation  of  transportation  systems 
while  under  federal  control,  for  the  just  compensation  of  their  own- 
ers, and  for  other  purposes,  of  March  21,  1918,  authorizes  the  President 
to  agree  with  carriers  for  their  just  compensation  and  provides. 

Every  such  agreement  shall  provide  that  any  Federal  taxes  under  the  Act 
of  October  third,  nineteen  hundred  and  seventeen,  or  Acts  in  addition  thereto 
or  in  amendment  thereof,  commonly  called  war  taxes,  assessed  for  tlie  period 
of  Federal  control  beginning  January  first,  nineteen  hundred  and  eighteen,  or 
any  part  of  such  period,  shall  be  paid  by  the  easier  out  of  its  own  funds,  or 
shall  be  charged  against  or  deducted  from  the  just  compensation;  that  other 
taxes  assessed  under  Federal  or  any  other  government  authority  for  the 
period  of  Federal  control  or  any  part  thereof,  either  on  the  property  used 
under  such  Federal  control  or  on  the  right  to  operate  as  a carrier,  or  on  the 
revenues  or  any  part  thereof  derived  from  operation  (not  including,  however, 
assessments  for  public  improvements  or  taxes  assessed  on  property  imder 
construction,  and  chargeable  under  the  classification  of  the  Interstate  Com- 
merce Commission  to  investment  in  road  and  equipment),  shall  be  paid  out 
of  revenues  derived  from  railway  operations  while  under  Federal  control; 
that  all  taxes  assessed  under  Federal  or  any  other  governmental  authority 
for  the  period  prior  to  January  first,  nineteen  hundred  and  eighteen,  when- 
ever levied  or  pavable,  shall  be  paid  by  the  carrier  out  of  its^  own  funds,  or 

shall  be  charged  against  or  deducted  from  the  just  compensation. 

(Art.  504,  Reg.  45,  Rev.,  April  17,  1919.) 

739  Law  11265.  Corporations  That  Are  Exernpt  from  Tax.— “Sec.  231. 

That  the  following  organizations  shall  be  exempt  from 
taxation  under  this  title — 

740  Law1[266.  (1)  Labor,  agricultural,  or  horticultural  organizations; 

[See  1(755.] 

741  Law  1(267.  (2)  Mutual  savings  banks  not  having  a capital  stock 

represented  by  shares;  [See  1(756.] 

742  Law  1(268.  (3)  Fraternal  beneficiary  societies,  orders,  or  associa- 

tions, (a)  operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a fraternity  itself  operating  under  the 
lodge  system,  and  (b)  providing  for  the  payment  of  life,  sick,  accident  or 
other  benefits  to  the  members  of  such  society,  order,  or  association  or 
their  dependents;  [See  757.] 

743  Law  1(269.  (4)  Domestic  building  and  loan  associations  and  co- 

operative banks  without  capital  stock  organized  and  op- 
erated for  mutual  purposes  and  without  profit;  [See  1(758.] 

744  Law  1(270.  (5)  Cemetery  companies  owned  and  operated  exclu- 

sively for  the  benefit  of  their  members;  [See-  1(759.] 

745  Law  1(271.  (6)  Corporations  organized  and  operated  exclusively 

for  religious,  charitable,  |cientific,  or  educational  pur- 
poses, or  for  the  prevention  of  cruelty  to  children  or  animals,  no  part  of 
the  net  earnings  of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual;  [See  1(760.] 


0 

0 


INC 


108  TAX 


TAX  ON  CORPORATIONS. 


746  Law  1f272.  (7)  Business  leagues,  chambers  of  commerce,  or  boards 

of  trade,  not  organized  for  profit  and  no  part  of  the  net 
earnings  of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual;  [See  |[764.] 

747  Law  j[273.  (8)  Civic  leagues  or  organizations  not  organized  for 

profit  but  operated  exclusively  for  the  promotion  of 
social  welfare;  [See  1[765.] 

748  Law  |[274.  (9)  Clubs  organized  and  operated  exclusively  for  pleas- 

ure, recreation,  and  other  nonj)rofitable  purposes,  no  part 
of  the  net  earnings  of  which  inures  to  the  benefit  of  any  private  stockholder 
or  member;  [See  1[766.] 


749  Law|[275.  (10  Farmers  or  other  mutual  hail,  cyclone,  or  fire  in- 

surance companies,  mutual  ditch  or  irrigation  companies, 
mutual  or  cooperative  telephone  companies,  or  like  organizations  of  a purely 
local  character,  the  income  of  which  consists  solely  of  assessments,  dues, 
and  fees  collected  from  members  for  the  sole  purpose  of  meeting  expenses  ; 
[See  11767.] 

750  Law1f276.  (11)  Farmer’s,  fruit  growers’,  or  like  associations,  or- 

ganized and  operated  as  sales  agents  for  the  purpose  of 
marketing  the  products  of  members  and  turning  back  to  them  the  proceeds 
of  sales,  less  the  necessary  selling  expenses,  on  the  basis  of  the  quantity  of 
produce  furnished  by  them;  [See  1f768.] 

751  Law1f277.  (12)  Corporations  organized  for  the  exclusive  purpose 

of  holding  title  to  property,  collecting  income  therefrom, 
and  turning  over  the  entire  amount  thereof,  less  expenses,  to  an  organiza- 
tion which  itself  is  exempt  from  the  tax  imposed  by  this  title; 

7o2  Law1f278.  (p)  Federal  land  bands  and  national  farm-loan  asso- 

ciations as  provided  in  section  26  of  the  act  approved 
July  17,  1916,  entitled  “An  Act  to  provide  capital  for  agricultural  develop- 
ment, to  create  standard  forms  of  investment  based  upon  farm  mortgage, 
to  equalize  rates  of  interest  upon  farm  loans,  to  furnish  a market  for  United 
States  bonds,  to  create  Government  depositaries  and  financial  agents  for  the 
United  States,  and  for  other  purposes ;” 


753 


Law  1[279. 
1[573.]” 


(14)  Personal  service  corporations.  [For  definition  see 


754  Proof  of  Exemption. — In  order  to  establish  its  exemption,  and 
thus  be  relieved  of  the  duty  of  filing  returns  of  income  and  paying 
the  tax,  it  is  necessary  that  every  organization  claiming  exemption, 
except  personal  service  corporations,  file  an  affidavit  with  the  col- 
lector of  the  district  in  which  it  is  located,  showing  the  character  of  the 
organization,  the  purpose  for  which  it  was  organized,  the  sources  of  its 
income  and  its  disposition,  whether  or  not  any  of  its  income  is  credited  to 
surplus  or  may  inure  to  the  benefit  of  any  private  stockholder  or  individual, 
and  m general  all  facts  relating  to  its  operations  which  affect  its  right  to 
exemption.  To  such  affidavit  should  be  attached  a copy  of  the  charter  or 

109  TAX 


INC. 


TAX  ON  CORPORATIONS. 


articles  of  incorporation  and  by-laws  of  the  organization.  Upon  leceipt  of 
the  affidavit  and  other  papers  by  the  collector,  he  will  inform  the  organization 
whether  or  not  it  is  exempt.  If,  however,  the  collector  is  in  doubt  as  to  the 
taxable  status  of  the  organization,  he  will  refer  the  affidavit  and  accompany- 
ing papers  to  the  Commissioner  for  decision.  When  an  organization  has 
established  its  right  to  exemption,  it  need  not  thereafter  make  a return;  of 
income  or  any  further  showing  with  respect  to  its  status  under  the  law, 
unless  it  changes  the  character  of  its  organization  or  operations  or  the  pur- 
pose for  which  it  was  originally  created.  Collectors  will  keep  a list  of  all 
exempt  corporations,  to  the  end  that  they  may  occasionally  inquire  into  their 
status  and  ascertain  whether  or  not  they  are  observing  the  conditions  upon 
which  their  exemption  is  predicated.  As  to  personal  service  corporations 
see  section  218  of  the  statute  and  articles  328-335.  [Tf593].  (Art.  511, 
Reg.  45,  Rev.,  April  17,  1919.) 

755  Agricultural  and  Horticultural  Organizations.— Agricultural  or 
horticultural  organizations  exempt  from  tax  do  not  include  corpora- 
tions engaged  in  growing  agricultural  or  horticultural  products  or  raipng 
live  stock  or  similar  products  for  profit,  but  include  only  those  organizations 
which,  having  no  net  income  inuring  to  the  benefit  of  their  members,  are 
educational  or  instructive  in  character  and  have  for  their  purpose  the  bet- 
terment of  the  conditions  of  those  engaged  in  these  pursuits,  the  improve- 
ment of  the  grade  of  their  products,  and  the  encouragement  and  promotion 
of  these  industries  to  a higher  degree  of  efficiency.  Included  m this  class 
as  exempt  are  organizations  such  as  county  fairs  and  lixe  associations  ot  a 
quasi-public  character,  which  through  a system  of  awards,  prizes  or  premi- 
ums are  designed  to  encourage  the  production  of  better  live  stock  better  agri- 
cultural and  horticultural  products,  and  whose  income,  derived  from  gate 
receipts,  entry  fees,  donations,  etc.,  is  used  exclusively  to  meet  the  necessary 
expenses  of  upkeep  and  operation.  Societies  or  associations  which  have  for 
their  purpose  the  holding  of  annual  or  periodical  race  meets,  irom  which 
profits  inure  or  may  inure  to  the  benefit  of  the  members  or  stockholders, 
do  not  come  within  the  terms  of  this  exemption.  ^ A corporation  engaged 
in  the  business  of  raising  stock  or  poultry,  or  growing  grain,  fruits  or  othei 
products  of  this  character,  as  a means  of  livelihood  and  for  the  purpose  of 
gain,  is  an  agricultural  or  horticultural  society  only  in  the  sense  that  its 
name  indicates  the  kind  of  business  in  which  it  is  engaged,  and  it  is  not 
exempt  from  tax.  (Art.  512,  Reg.  45,  Rev.,  April  17,  1919.) 

756  Mutual  Savings  Banks.— A Massachusetts  savings  bank,  other- 
wise exempt,  which  establishes  an  insurance  department  under  the 

statutes  of  that  State,  does  not  thereby  become  subject  to  tax  upon  the 
income  received  by  such  department.  (Art.  513,  Reg.  4o,  Rev.,  April  17, 
1919.) 

757  Fraternal  Beneficiaty  Societies. — A fraternal  beneficiary  society 
is  exempt  from  tax  only  if  operated  under  the  ‘dodge  systei^  or 

for  the  exclusive  benefit  of  the  members  of  a society  so  operating.  Oper- 
ating under  the  lodge  system”  means  carrying  on  its  activities  under  a form 
of  organization  that  comprises  local  branches,  chartered  by  a parent  organi- 
zation and  largely  self-governing,  called  lodges,  chapters,  or  the  like.  In 
order  to  be  exempt  it  is  also  necessary  that  the  society  have  an  established 
system  for  the  payment  to  its  members  or  their  dependents  of  life,  sick, 
accident  or  other  benefits.  (Art.  514,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  110  TAX 


TAX  ON  CORPORATIONS. 


Building  and  Loan  Associations. — A building  and  loan  association 
entitled  to  exemption  is  one  organized  pursuant  to  the  laws  of  the 
United  States  or  of  some  State  or  I'erritory  thereof,  which  accumulates 
funds  to  be  loaned  to  its  members  and  to  be  repaid  in  small  periodical  in- 
stallments. The  statute  requires  that  the  members  of  the  association  shall 
share  in  its  profits  on  substantially  the  same  footing.  Subject  to  this  require- 
ment, it  does  not  prevent  exemption  that  the  association  issues  prepaid  stock 
entitled  to  a specified  percentage  of  the  profits.  Where,  however,  the 
association  issues  paid  up  stock,  the  holders  of  which  are  entitled  to  a 
fixed  diAudend  and  also  to  share  in  the  profits  with  all  the  other  holders 
of  stock,  it  is  not  exempt.  (Art.  515,  Reg.  45,  Rev.,  April  17,  1919.) 

759  Cemetery  Companies. — A cemetery  company  having  a capital 
stock  represented  by  shares,  or  which  is  operated  for  profit  or  for 
the  benefit  of  others  than  its  members,  does  not  come  within  the  exempted 
class.  A cemetery  company  of  which  all  lot  owners  are  members,  issuing 
preferred  stock  entitling  the  holder  to  a semi-annual  dividend  of  4 per  cent, 
and  whose  articles  of  incorporation  provide  that  the  preferred  stock  shall 
be  retired  at  par  as  soon  as  sufficient  funds  are  realized  from  sales  and  that 
all  funds  realized  in  addition  thereto  shall  be  used  by  the  company  for  the 
care  and  improvement  of  the  cemetery  property,  is  within  the  exemption. 
(Art.  516,  Reg.  -15,  Rev.,  April  17,  1919.) 

Religious,  Charitable,  Scientific  and  Educational  Corporations. — 
The  exemption  applies  only  to  a corporation  or  association.  It  does 
not  include  the  case  of  a trust,  under  which  the  trustee  is  authorized  to  use 
the  trust  property  for  religious  purposes.  In  order  to  be  exempt  the  cor- 
poration or  association  must  meet  three  tests*  fa)  it  must  be  organized 
and  operated  for  one  or  more  of  the  specified  purposes;  (b)  it  must  be 
organized  and  o])erated  exclusively  for  such  purposes ; and  (c)  no  part 
tjf  its  income  must  inure  to  the  benefit  of  private  stockholders  or  indi- 
viduals. 

761  (1)  Charitable  corporations  include  an  association  for  the  relief  of 
the  families  of  clergymen,  even  though  the  latter  make  a contribution 

to  the  fund  established  for  this  purpose;  or  for  furnishing  the  services;  of 
trained  nurses  to  persons  unable  to  pay  for  them;  or  for  aiding  the  general 
body  of  litigants  by  improving  the  efficient  administration  of  justice.  Edu- 
cational corporations  may  include  an  association  Avhose  sole  purpose  is'  the 
instruction  of  the  public.  This  is  true  of  an  association  to  promote  ac- 
quaintance with  the  Spanish  language  and  literature,  although  it  has  incid- 
ental amusement  features ; of  an  association  to  increase  knowledge  of  the 
ciAulization  of  another  country;  and  of  a Chautauqua  association  whose 
primary  purpose  is  to  give  lectures  on  subjects  useful  to  the  individual  and 
beneficial  to  the  community  and  whose  amusement  features  are  incidental  to 
this  purpose.  But  associations  formed  to  disseminate  controversal  or  parti- 
san propaganda  are  not  educational  within  the  meaning  of  the  statute.  .So- 
cieties designed  to  encourage  the  performance  of  first  class  orchestral  music 
are  not  exempt,  the  purpose  being  merely  to  provide  a high  grade  of  enter- 
tainment. Sciciitific  corporations  include  an  association  for  the  scientific 
study  of  law,  to  the  end  of  imjirovement  in  its  administration. 

762  (2)  Where  a religious  corporation  owns  a large  quantity  of  farm 
land  and  works  it,  and  also  manufactures  and  sells  clothing  and  other 

articles  for  profit,  it  is  not  operated  exclusively  for  religious  purposes  and  is 

111 


INC. 


TAX 


TAX  ON  CORPORATIONS. 


not  exempt,  even  though  its  property  is  held  in  common  and  its  profits  dO; 
not  inure  to  the  benefit  of  individual  members  of  the  society. 

(3)  It  does  not  prevent  exemption  that  private  individuals,  for  whose 
benefit  a charity  is  organized,  receive  the  income  of  the  corporation  or 
association.  The  statute  refers  to  individuals  having  a personal  and  private 
interest  in  the  activities  of  the  corporation,  such  as  stockholders.  If,  how- 
ever, a corporation  issues  “voting  shares,”  which  entitle  the  holders  upon  the 
dissolution  of  the  corporation  to  receive  the  proceeds  of  its  property,  includ- 
ing accumulated  income,  the  right  to  exemption  does  not  exist,  even  though 
the  by-laws  provide  that  the  shareholders  shall  not  receive  any  dividend  or 
other  return  upon  their  shares.  (Art.  517,  Reg.  45,  Rev.,  April  17,  1919.) 

'3^64  Business  Leagues. — A business  league  is  an  association  of  persons 
having  some  common  business  interest,  which  limits  its  activities  to 
work  for  such  common  interest  and  does  not  engage  in  a regular  business  of 
a kind  ordinarily  carried  on  for  profit.  Its  work  need  not  be  similar  to  that 
of  a chamber  of  commerce  or  board  of  trade.  An  association  engaged  in 
furnishing  information  to  prospective  investors,  to  enable  them  to  make 
sound  investments,  is  not  such  a league,  since  its  members  have  no  common 
business  interest,  and  it  is  not  exempt,  even  though  all  of  its  income  is  de- 
voted to  the  purpose  stated.  A clearing  house  association,  not  organized 
for  profit,  no  part  of  the  net  income  of  which  inures  tO  any  private  stock- 
holder or  individual,  is  exempt  provided  its  activities  are  limited  to  the  ex- 
change of  checks  and  similar  work  for  the  common  benefit  of  its  members. 
An  association  of  persons  who  are  engaged  in  the  business  of  carrying 
freight  and  passengers  by  boats  propelled  by  steam,  which  is  designed  to 
promote  the  legitimate  objects  of  such  business,  and  all  of  the  income  of 
which  is  derived  from  membership  dues  and  is  expended  for  office  expenses 
and  the  salary  of  a secretary-treasurer,  is  exempt  from  tax.  An  incorporated 
cotton  exchange,  whose  shares  carry  the  right  to  dividends,  is  organized 
for  profit  and  is  not  exempt.  (Art.  518,  Reg.  45,  Rev.,  April  17,  1919.) 

765  Civic  Leagues. — A corporation  having  capital  stock  and  possess- 
ing a charter  which  authorizes  it  to  buy,  improve  and  sell  real  estate 

is  organized  for  profit  within  the  meaning  of  the  statute  and  is  not  exempt 
from  tax  as  a civic  league  or  organization,  even  though  it  no  longer  ex- 
ercises such  powers  for  profit  and  is  operated  exclusively  for  the  promotion 
of  social  welfare.  (Art.  519,  Reg.  45,  Rev.,  April  17,  1919.) 

766  Social  Clubs.— The  exemption  applies  to  practically  all  social  and 
recreation  clubs  which  are  supported  by  membership  fees,  dues  and 

assessments.  If  a club,  by  reason  of  the  comprehensive  powers  granted  in 
its  charter,  engages  in  traffic,  in  agriculture  or  horticulture,  or  in  the  sale  of 
real  estate,  timber,  etc.,  for  profit,  such  club  is  not  organized  and  operated 
exclusively  for  pleasure,  recreation  or  social  purposes,  and  any  profit  real- 
ized from  such  activities  is  subject  to  tax.  (Art.  520,  Reg-  45  Rev  Anril 
17,  1919.)  " ^ 

767  Mutual  Insurance  Companies  and  Like  Organizations. It  is  nec- 

essary to  exemption  that  the  income  of  the  company  be  derived  solely 

from  assessments,  dues  and  fees  collected  from  members.  If  income  is 
received  from  other  sources,  the  corporation  is  not  exempt,  even  thout^h  its 
additional  income  is  tax  exempt.  Income,  however,  from  sources  other  than 

112  TAX 


INC 


NET  INCOME. 


those  specified  does  not  prevent  exemption  where  its  receipt  is  a mere 
incident  of  the  business  of  the  company.  Thus  the  receipt  of  interest  upon 
a working  bank  balance,  or  of  the  proceeds  of  the  sale  of  badges,  office 
supplies  or  equipment,  will  not  defeat  the  exeiuption.  The'  same  is  true  of 
the  receipt  of  interest  upon  liberty  bonds,  where  they  were  purchased  as 
a patriotic  duty  and  were  afterwards  sold.  Where,  however,  such  bonds 
are  bought  as  a permanent  investment,  the  receipt  of  the  interest  destroys 
the  exemption.  Ihe  receipt  of  what  is  in  substance  an  entrance  fee, 
charged  by  a mutual  fire  insurance  company  as  a condition  of  membership, 
does  not  render  the  company  taxable,  although  this  fee  is  called  a premium. 
But  the  issuance  of  policies  for  stipulated  cash  premiums  prevents  exemp- 
tion. A local  exchange  or  association  to  insure  the  owners  of  automobiles 
against  fire,  theft,  collision,  public  liability  and  property  damage,  is  exempt, 
since  it  performs  functions  of  the  same  character  as  a mutual  fire  insurance 
company,  and  is  a like  organization  within  the  meaning  of  the  statute.  A 
local  reservoir  and  ditch  company  may  likewise  be  exempt  from  tax.  The 
exemption  does  not  include  a telephone  clearing  association,  whose  business 
is  to  apportion  toll  rates  between  independent  telephone  companies  handling 
the  same  calls  and  whose  income  consists  of  compensation  paid  by  such 
companies  and  receipts  from  the  sale  of  form  blanks.  The  phrase  “of  a 
purely  local  character”  qualifies  only  “like  organizations.”  (Art.  521,  Re?.  45 
Rev.,  April  17,  1919.) 


Cooperative  Associations.— (a)  Cooperative  associations,  acting 
as  sales  agents  for  farmers  or  others,  in  order  to  come  within  the  ex- 
e^mption  must  establish  that  for  their  own  account  they  have  no  net  income. 
Cooperative  dairy  companies  which  are  engaged  in  collecting  milk  and  dis- 
posing of  it  or  the  products  thereof  and  distributing  the  proceeds,  less  nec- 
essary operating  expenses,  among  their  members  upon  the  basis  of  the  quan- 
tit}  of  milk  or  of  butter  fat  in  the  milk  furnished  by  such  members,  are 
exempt  from  the  tax.  If  the  proceeds  of  the  business  are  distributed  in'  any 
other  way  than  on  such  a proportionate  basis,  the  company  will  be  subject 
to  tax.  farmers’  association  is  not  exempt  from  taxation  where  in  ac- 
counting to  farmers  furnishing  produce  for  the  proceeds  of  sales  it  deducts 
^^j^cue  than  the  necessary  selling  expenses  incurred;  (t*)  Cooperative  asso- 
ciations acting  as  purchasing  agents  are  not  exj^fessly  exempt  from  tax  and 
must  make  returns  of  income,  but  rebates  made  to  purchasers,  whether  or 
not  members  of  the  association,  in  proportion  to  their  purchases  may  be 
excluded  from  gross  income  in  computing  the  net  income  subject  to^  tax. 
Any  profits  made  from  non-members  and  distributed  to  members  in  the 
guise  of  rebates  are,  of  course,  subject  to  tax.  (Art.  522  Re?  4S  Rev 
April  17,  1919.)  ’ ’ ’ 


Law]f83.  Net  Income  of  An  Individual  Defined.— “Sec.  212.  (a) 

That  in  the  case  of  an  individual  the  term  ‘net  income’ 
means  the  gross  income  as  defined  in  section  213  ri[8021,  less  the  deduc- 
tions allowed  by  section  214  [Ifll79].” 

770  Lawjf280.  Net  Income  of  a Corporation  Defined.— “Sec.  232. 

That  in  the  case  of  a corporation  subject  to  the  tax  im- 
posed  by  section  230  \pl?>]  the  term  “net  income”  means  the  gross  income 
as  defined  m section  233  fjfSOS]  less  the  deductions  allowed  by  section  234 

INC.  113  TAX 


net  income. 


Hi  11 801  and  the  net  income  shall  be  computed  on  the  same  basis  as  is  Pro- 
lided  in  subdivision  (b)  of  section  212  [11778]  or  in  section  266  [retuins 
when  accounting  period  is  changed,  p855J. 

7T1  Meaning  of  Net  Income.— The  tax  imposed  by  the  statute  is  upon 
income  ^ In  the  computation  of  the  tax  various  classes  of  income 
must  be  considered:  (a)  Income  (in  the  broad  sense),  meaning  all 
wealth  which  flows  in  to  the  taxpayer  other  than  as  a mere  ^ 

capital.  It  includes  the  forms  of  income  specifically  described  as  gams  and 
prhts  including  gains  derived  from  the  sale  or  other  disposition  o-  capit 
Lsets  ’ It  is  not  hmited  to  cash  alone,  for  the  statute  recognizes  as  income- 
determining  factors  other  items,  among  which  are  inventories,  accounts  re 
leihble  property  exhaustion  and  accounts  payable  for  expenses  incurred 
(blGro.^  income,  meaning  income  (in  the  broad  sense)  less  income  wmch 
is  bv  statutorv  provision  or  otherwise  exempt  from  the,  tax  imposed  by  the 
Statute.  tcIIsTt  income,  meaning  gross  income  less  statutory  deductions. 
The  statutory  deductions  are  in  general,  though  not_  excxusively,  expendi 
tures,  other  dian  capital  expenditures,  connected  with  the  production  o 
income,  (d)  Net  income  less  credits.  The  surtax  is  imposed  upon  pet 
income;  the  normal  tax  upon  net  income  less  credits.  Though  taxable  net 
income  is  vvhoUy  a statutory  conception  it  follows,  subject  to  certain  modih- 
cations  as  to  exemptions  and  as  to  some  of  the  deductions,  the  lines  ot  com- 
mercial usage.  Subject  to  these  modifications  statutory  ‘T.et  income ^ is 
commercial  “net  income.”  This  appears  from  the  fact  that  ordinarily  it  is 
to  b^  computed  in  accordance  with  the  m.ethod  of  accounting  regularly  em- 
ployed in  heepiup-  the  books  of  the  taxpayer.  As  to  net  income  of  corpora- 
rions  see  section  232  f^770]  and  article  531  [^772].  (Art.  21,  Reg.  45, 
Rev.,  A.pril  17,  1919.) 

Net  Income  of  Corporations. — Net  income  is  that  portion  of  the 
cross  income  w'hich  remains  after  all  proper  deductions  have  been 
taken  into  account.  The  net  income  of  corporations  is  determined  in 
<rencral  in  the  same  manner  as  the  net  income  of  individuals,  but 
tiie  deductions  allowed  corporations  are  not  precisely  the  same  as  those  al- 
loAved  individuals.  The  neUncome  of  corporations  is  to  be  computed  on  the 
same  basis  as  to  accountingf^periods  as  the  net  income  of  individuals.  (Art. 
531,  Reg.  45,  Rev.,  April  17,  1919.) 

773  Law  pO.  “Revenue  Act  of  1916”  Identified.— “The  term,  ‘Reve- 

nue Act  of  1916’  means  the  Act  entitled  ‘An  Act  to  in- 
crease the  revenue,  and  for  other  purposes,’  approved  September  8,  1916;” 

774  Lawp66.  “Sec.  1403.  That  the  Revenue  Act  of  1916  is  hereby 

amended  by  adding  at  the  end  thereof  a section  to  read  as 

follows  r M 

.“Sec.  903.  That  this  Act  may  be  cited  as  the  Revenue  Act  of  1916  . 

775  Law  pi.  “Revenue  Act  of  1917”  Identified.— “The  term  ‘Reve- 

nue Act  of  1917’  means  the  Act  entitled  ‘An  Act  to 
provide  revenue  to  defray  war  expenses,  and  for  other  purposes,’  approved 
October  3,  1917 


INC. 


114  TAX 


NET  INCOME. 


776  Law1[467.  “Sec.  1404.  That  the  Revenue  Act  of  1917  is  hereby 

amended  by  adding  at  the  end  thereof  a section  to  read 

as  follows 

“Sec.  1303.  That  this  Act  may  be  cited  as  the  ‘Revenue  Act  of  1917’.” 

777  LawT[468.  “Revenue  Act  of  1918”  Identified.— “Sec.  1405.  That 

this  Act  may  be  cited  as  the  ‘Revenue  Act  of  1918’.” 


778  Law1[84.  Net  Income  to  Be  Based  on  Taxpayer’s  Annual  Ac- 

counting Period. — “(b)  The  net  income  shall  be  com- 
puted upon  the  basis  of  the  taxpayer’s  annual  accounting  period  (fiscal  year 
or  calendar  year,  as  the  case  may  be)  in  accordance  with  the  method  of 
accounting  regularly  employed  in  keeping  the  books  of  such  taxpayer;” 

779  Law  ]f85.  Basis  of  Computation  to  Reflect  Income  Clearly. — “but 

if  no  such  method  of  accounting  has  been  so  employed, 
or  if  the  method  employed  does  not  clearly  reflect  the  income,  the  compu- 
tation shall  be  made  upon  such  basis  and  in  sucW  manner  as  in  the  opinion 
of  the  Commissioner  does  clearly  reflect  the  income.” 

780  Computation  of  Net  Income. — Net  income  must  be  computed  with 
respect  to  a fixed  period.  Usually  that  period  is  twelve  months  and 

is  known  as  the  taxable  year.  Items  of  income  and  of  expenditures  which 
as  gross  income  and  deductions  are  elements  in  the  computation  of  net  in- 
come need  not  be  in  the  form  of  pash.  It  is  sufficient  that  such  items,  if 
otherwise  properly  included  in  the  computation,  can  be  valued  in  terms  of 
money.  The  time  as  of  which  any  item  of  gross  income  or  any  deduction 
is  to  be  accounted  for  must  be  determined  in  the  light  of  the  fundamental 
rule  that  the  computation  shall  be  made  in  such  a manner  as  clearly  reflects 
the  taxpayer’s  income.  If  the  method  of  accounting  regularly  employed  by 
him  in  keeping  his  books  clearly  reflects  his  income,  it  is  to  be  followed  with 
respect  to  the  time  as  of  which  items  of  gross  income  and  deductions  arei  to 
be  accounted  for.  If  the  taxpayer  does'  not  regularly  employ  a method  of 
accounting  which  clearly  reflects  his  income,  the  computation  shall  be  made 
in  such  manner  as  in  the  opinion  of  the  Commissioner  clearly  reflects  it. 
(Art.  22,  Reg.  45,  Rev.,  April  17,  1919.) 

781  Law  j[28.  “Paid  or  Incurred”  and  “Paid  or  Accrued”  Construed. 

— “The  term  “paid,”  for  the  purpose  of  the  deductions 
and  credits  under  this  title,  means  “paid  or  accrued”  or  “paid  or  incurred,” 
and  the  terms  “paid  or  incurred”  and  “paid  or  accrued”  shall  be  construed 
according  to  the  method  of  accounting  upon  the  basis  of  which  the  net 
income  is  computed  under  section  212  [|[778].” 

782  “Paid”  is  to  be  construed  in  each  instance  in  the  light  of  the  method 
used  in  computing  net  income,  whether  on  an  accrual  or  a receipt 

basis.  See  article  23  [for  bases  of  computing  income,  |f783].  (Art.  1533, 
Reg.  45,  Rev.,  April  17,  1919.) 

78:^  Bases  of  Computation. — (1)  Approved  standard  methods  of  ac- 
counting will  ordinarily  be  regarded  as  clearly  reflecting  income.  A 
method  of  accounting  will  not,  however,  be  regarded  as  clearly  reflecting 

115  TAX 


INC. 


NET  INCOME. 


income  unless  all  items  of  gross  income  and  all  deductions  are  treated  with 
reasonable  consistency.  See  Section  200  [11781]  of  the  statute  for  defini- 
tions of  “paid,”  “paid  or  accrued,”  and  “paid  or  incurred.”  All  items  of 
gross  income  shall  be  included  in  the  gross  income  for  the  taxable  year  in 
which  they  are  received  by  the  taxpayer,  and  deductions  taken  accordingly, 
unless  in  order  clearly  to  reflect  income  such  amounts  are  to  be  properly 
accounted  for  as  of  a different  period.  For  instance,  in  any  case  in  which 
it  is  necessary  to  use  an  inventory,  no  accounting  in  regard  to  purchases 
and  sales  will  correctly  reflect  income  except  an  accrual  method.  See  Sec- 
tion 213  (a)  [1f807]  of  the  statute.  A taxpayer  is  deemed  to  have  re- 
ceived items  of  gross  income  which  have  been  credited  to  or  set  apart 
for  him  without  restriction.  See  Article  53  [1[946].  On  the  other  hand, 
appreciation  in  value  of  property  is  not  even  an  accrual  of  income  to  a 
taxpayer  prior  to  the  realization  of  such  appreciation  through  con- 
version of  the  property. 

784  (2)  For  the  taxable  year  1918  the  true  income,  computed  under  the 

revenue  Act  of  1918  and — where  the  taxpayer  keeps  books  of  account 
■ — in  accordance  with  the 'method  of  accounting  regularly  employed  in  keep- 
ing such  books,  shall  in  all  cases  be  entered  in  the  return,  even  though  this 
results  in  apparent  omissions  or  duplications  of  particular  items  of  income 
or  expense.  In  the  ordinary  case  such  omissions  and  duplications  are  more 
apparent  than  real  and  are  likely  to  counterbalance  one  another,  so  that  the 
change  in  the  basis  of  reporting  calls  for  no  material  adjustment.  Where, 
however,  the  method  previously  employed  by  the  taxpayer  in  determining 
his  income 'subject  to  the  tax,  is  materially  different  from  the  method  regu- 
larly used  by  the  taxpayer  in  keeping  his  accounts,  or  where  for  any  reason 
the  basis  of  reporting  income  subject  to  tax  is  changed  the  taxpayer  should 
attach  to  his  return  a separate  statement  setting  forth  for  the  taxable  year 
and  for  the  preceding  year  the  classes  of  items  differently  treated  under  the 
tv/o  systems,  specifying  in  particular  all  amounts  duplicated  or  entirely  omit- 
ted as  the  result  of  such  change  Where  for  example  a taxpayer  who,  prior 
to  1918,  has  reported  on  the  so-called  receipts  basis,  is  compelled  under  the 
above  rule  to  report  on  the  so-called  accrual  basis,  he  should  include  in  the 
separate  statement  the  following  information : 

First,  (a)  expenses  paid  before  the  end  of  the  taxable  year  1917  but  not 
accrued  at  that  date ; (b)  income  accrued  at  the  end  of  the  taxable  year  1917 
but  not  received  at  that  date;  (c)  expenses  accrued  at  the  end  of  the  taxable 
year  1917  but  not  paid  at  that  date;  (d)  income  received  before  the  end  of 
the  taxable  year  1917  but  not  accrued  at  that  date ; and 

Second,  similar  items  as  of  the  end  of  the  taxable  year  1916. 

If  in  the  opinion  of  the  Commissioner  such  information  indicates 
that  the  returns  for  any  previous  years  did  not  reflect  the  true 
income,  amended  returns  for  such  years  will  be  required. 

786  (3)  A taxpayer  who  changes  the  method  of  accounting  employed  in 

keeping  his  books  for  the  taxable  year  1919  or  thereafter,  shall  before 
computing  his  income  upon  such  new  basis  for  purposes  of  taxation  secure 
the  consent  of  the  Commissioner.  Application  for  permission  to  change  the 
basis  of  the  return  shall  be  made  at  least  30  days  in  advance  of  the  date 
of  filing  return  and  shall  be  accompanied  by  a statement  specifying  the 
classes  of  items  differently  treated  under  the  two  systems  and  specifying  all 
amounts  which  would  be  duplicated  or  entirely  omitted  as  a result  of  the 
proposed  change. 


INC. 


116  TAX 


NET  INCOME. 


787  (4^  Bank  discounts. — Banks  which  in  the  past  have  treated  discount 
as  income  before  it  was  actually  earned  and  during'  the  taxable  year 

1918  have  placed  the  discount  account  upon  an  accrual  basis,  will  be  re- 
quired to  submit  the  information  called  for  in  paragraph  2 above  and  submit 
an  amended  return  for  the  taxable  year  1917,  and  will  be  permitted  to'  sub- 
mit (or  the  Commissioner  may  require)  amended  returns  for  all  prior  years 
during  which  the  taxpayer  was  subject  to  tax.  Additional  taxes  for  prior 
years  found  to  be  due  upon  such  reexamination  will  be  paid  upon  the  basis 
of  the  amended  returns  in  the  ordinary  way.  Where  it  appears  that  prior 
taxes  have  been  paid  in  excess  of  the  amount  properly  due,  such  excess  will 
to  the  extent  possible  be  credited  against  future  income  and  profits  taxes 
under  the  provisions  of  Section  252  [jf2121]  of  the  Revenue  Act  of  1918. 
(T.  D.  2873,  June  24,  1919,  amending  Art.  23  of  Reg.  45,  Rev.) 

788  Methods  of  Accounting. — It  is  recognized  that  no  uniform  method 
of  accounting  can  be  prescribed  for  all  taxpayers,  and  the  law 

contemplates  that  each  taxpayer  shall  adopt  such  forms  and  systems  of 
accounting  as  are  in  his  judgment  best  suited  to  his  purpose.  Each  tax- 
payer is  required  by  law  to  make  a return  of  his  true  income.  He  must, 
therefore,  maintain  such  accounting  records  as  wall  enable  him  to  do  so. 
See  section  1305  of  the  statute  and  article  1711  [for  general  provisions  of 
law  as  aids  to  collection  of  the  tax,  ^[1999].  Among  the  essentials  are  the 
following : 

789  (1)  In  all  cases  in  which  the  production,  purchase  or  sale  of  mer- 
chandise of  any  kind  is  an  income-producing  factor  inventories  of 

the  merchandise  on  hand  (including  finished  goods,  work  in  process,  raw 
materials  and  supplies)  should  be  taken  at  the  beginning  and  end  of  the  year 
and  used  in  computing  the  net  income  of  the  year;  [for  “inventories,”  see 
P090.] 

790  (2)  Expeditures  made  during  the  year  should  be  properly  classi- 
fied as  between  capital  and  income,  that  is  to  say,  that  expenditures 

for  items  of  plant,  equipment,  etc.,  which  have  a useful  life  extending  sub- 
stantially beyond  the  year  should  be  charged  to  a capital  account  and  not 
to  an  expense  account;  and 

791  (3)  In  any  case  in  which  the  cost  of  capital  assets  is  being  recov- 
ered through  deductions  for  wear  and  tear,  depletion  or  obsolescence 

any  expenditure  (other  than  ordinary  repairs)  made  to  restore  the  property 
or  prolong  its  useful  life  should  be  charged  against  the  property  account 
or  the  appropriate  reserve  and  not  against  current  expenses.  (Art.  24, 
Reg.  45,  Rev.,  April  17,  1919.) 

792  When  Charges  Deductible. — Each  year’s  return,  so  far  as  prac- 
ticable, both  as  to  gross  income  and  deductions  therefrom,  should 

be  complete  in  itself,  and  taxpayers  are  expected  to  make  every  reasonable 
effort  to  ascertain  the  facts  necessary  to  make  a correct  return.  See  articles 
21  [for  meaning  of  net  income  Tf771  ],  22  [for  computation  of  net  income, 
^1780],  23  [for  bases  of  computation,  |f783] , 24  [for  methods  of  account- 
ing, lf788]  and  52  [for  when  items  are  included  in  gross  income,  1[945]. 
The  expenses,  liabilities,  or  deficit  of  one  year  can  not  be  used  to  reduce  the 
income  of  a subsequent  year.  A person  making  returns  on  an  accrual  basis 
has  the  right  to  deduct  all  authorized  allowances,  whether  paid  in  cash  or 
set  up  as  a liability,  and  it  follows  that  if  he  does  not  within  anv  vear  nav 

1 1 7 TAX 


INC. 


NET  INCOME. 


or  accrue  certain  of  his  expenses,  interest,  taxes  or  other  charges,  and 
makes  no  deduction  therefor,  he  can  not  deduct  from  the  income  of  the 
next^  or  any  subsequent  year  any  amounts  then  paid  in  liquidation  of  the 
previous  year’s  liabilities.  A loss  from  theft  or  embezzlement  occurring  in 
one  year  and  discovered  in  another  is  deductible  only  for  the  year,  of  its 
occurrence.  Any  amount  paid  pursuant  to  a judgment  or  otherwise  on  ac- 
count of  damages  for  personal  injuries,  patent  infringement  or  otherwise, 
is  deductible  from  gross  income  when  the  claim  is  put  in  judgment  or  paid, 
less  any  amount  of  such  damages  as  may  have  been  compensated  for  by 
insurance  or  otherwise.  If  subsequently  to  its  occurrence,  however,  a tax- 
payer first  ascertains  the  amount  of  a loss  sustained  during  a prior  taxable 
year  which  has  not  been  deducted  from  the  gross  income,  he  may  render 
an  amended  return  for  such  preceding  taxable  year,  including  such  amount 
of  loss  in  the  deductions  from  gross  income,  and  may  file  a claim  for  refund 
of  the  excess  tax  paid  by  reason  of  the  failure  to  deduct  such  loss  in  the 
original  return.  See  section  252  of  the  statute  and  articles  1031-1038  [for 
refund  claims,  beginning  at  pilS].  (Art.  Ill,  Reg.  45,  Rev.,  April  17, 

1919.)  8 , , F , 

793  Law  ^86.  Basis  of  Computation  to  be  the  Calendar  Year  in  Cer- 

tain Instances. — “If  the  taxpayer’s  annual  accounting 
period  is  other  than  a fiscal  year  as  defined  in  section  200  [T[797]  or  if  the 
taxpayer  has  no  annual  accounting  period  or  does  not  keep  books,  the  net 
income  shall  be  computed  on  the  basis  of  the  calendar  year.” 

794  Law  ^17.  “Taxable  Year”  Defined. — “Sec.  200.  That  when  used 

in  this  title — ” 

795  LawjflS.  “The  term  'taxable  year’  means  the  calendar  year,  or 

the  fiscal  year  ending  during  such  calendar  year,  upon 
the  basis  of  which  the  net  income  is  computed  under  section  212  [individuals, 
T[778]  or  section  232  [corporations,  1f770].” 

796  The  taxable  year  is  the  time  unit  for  the  purpose  of  the  tax.  See 
section  212  of  the  statute  and  article  22,  [for  computation  of  net 

income  with  respect  to  a fixed  period,  p80].  (Art.  1533,  Reg.  45,  Rev 
April  17,  1919.)  ^ s » 

797  Lawj[19.  “Fiscal  Year”  Defined. — “The  term  'fiscal  year’  means 

an  accounting  period  of  twelve  months  ending  on  the 
last  day  of  any  month  other  than  December.” 

798  Law  ][20.  The  Taxable  Year  1918. — “The  first  taxable  year,  to  be 

called  the  taxable  year  1918,  shall  be  the  calendar  year 
1918  or  any  fiscal  year  ending  during  the  calendar  year  1918;” 

799  Accounting  Period. — The  return  of  a taxpayer  is  made  and  his 
income  computed  for  his  taxable  year,  which  means  his  fiscal  year, 

or  the  calendar  year  if  he  has  not  established  a fiscal  year.  The  term!  “fiscal 
year”  means  an  accounting  period  of  12  months  ending  on  the  last  day  of 
any  month  other  than  December.  No  fiscal  year  will,  however,  be  recognized 
unless  before  its  close  it  was  definitely  established  as  an  accounting  period 
by  the  taxpayer  and  the  books  of  such  taxpayer  were  kept  in  accordance 
therewith.  The  taxable  year  1918  is  the  calendar  year  1918  or  any  fiscal 

INC.  118  TAX 


GROSS  INCOME. 


year  ending  during  the  calendar  year  1918.  A taxpayer  having  an  existing 
accounting  period  which  is  a fiscal  year  within  the  meaning  of  the  statute 
not  only  needs  no  permission  to  make  his  return  on  the  basis  of  such  a*  tax- 
able year,  but  is  required  to  do  so,  regardless  of  the  former  basis  of  render- 
ing returns.  A person  having  no  such  fiscal  year  must  make  return  on  the 
basis  of  the  calendar  year.  The  first  return  under  the  present  statute  of  a 
taxpayer  who  has  heretofore  made  return  on  a basis  different  from  his 
accounting  period  will  necessarily  overlap  his  next  previous  return.  For 
the  method  of  adjusting  the  tax  in  such  a case,  see  section  205  [11613]  of 
the  statute  and  articles  1621-1624  [1[621].  Section  226  [Return  when 
accounting  period  is  changed,  p855]  has  no  application  to  this  situation. 
Except  in  the  cases  of  a return  for  the  taxable  year  1918  and  of  a first 
return  for  income  tax  a taxpayer  shall  make  his  return  on  the  basis  (fiscal 
or  calendar  year)  upon  which  he  made  his  return  for  the  taxable  year*  im- 
mediately preceding  unless,  with  the  approval  of  the  Commissioner,  he  has 
changed  the  basis  of  computing  his  net  income.  (Art.  25,  Reg”.  45.  Rev 
April  17,  1919;) 

Law  1[87.  Changing  from  One  Accounting  Period  to  Another.— 

“If  a taxpayer  changes  his  accounting  period  from  fiscal  year  to  cal- 
endar year,  from^  calendar  year  to  fiscal  year,  or  from  one  fiscal  year  to 
another,  the  net  income  shall,  with  the  approval  of  the  Commissioner,  be 
cornputed  on  the  basis  of  such  new  accounting  period,  subject  to  the  pro- 
visions of  section  226  [p855].” 

801  If  a taxpayer  changes  his  accounting  period,  and  not  merely  his  tax- 
able year  to  conform  with  his  existing  accounting  period,  he  shall  as 
soon  as  possible  give  to  the  collector  for  transmission  to  the  Commissioner 
written  notice  of  such  change  and  of  his  reasons  therefor.  The  Commissioner 
will  not  approve  a change  of  the  basis  of  computing  net  income  unless  such 
notice  is  given  at  a time  which  is  both  (a)  at  least  30  days  before  the  due 
date  of  the  taxpayer’s  return  on  the  basis  of  his  existing  taxable  year  and 
(b)  at  least  30  days  before  the  due  date  of  his  return  on  the  basis  of  the 
proposed  taxable  year.  If  the  change  in  the  basis  of  computing  the  net 
income  of  the  taxpayer  is  approved  by  the  Commissioner,  the  taxpayer  shall 
thereafter  make  his  returns  upon  the  basis  of  the  new  accounting  period  in 
accordance  with  the  requirements  of  section  226  of  the  statute  and  his 
net  income  shall  be  computed  as  therein  provided.  See  article  431  1111862  1 
(Art.  26,  Reg.  45,  Rev.,  April  17,  1919.)  *•* 


803 

233 


Law]f88.  Gross  Income  Defined.— “Sec.  213.  That  for  the  pur- 
poses  of  this  title  (except  as  otherwise  provided  in  section 
[see  ]f809]),  the  term  ‘gross  income’” — 


8^3  Lawj[89.  “(a)  Includes  gains,  profits,  and  income  derived  from 
salaries,  wages,  or  compensation  for  personal  service 
(including  m the  case  of  the  President  of  the  United  States,  the  judges  of 
the  Supreme  and  inferior  courts  of  the  United  States,  and  all  other  officers 
and  employees,  whether  elected  or  appointed,  of  the  United  States,  Alaska, 
Hawaii,  or  any  political  subdivision  thereof,  or  the  District  of  Columbia' 
the  compensation  received  as  such),  of  whatever  kind  and  in  whatever  form' 
paid,” 

[For  salaries  of  officials  of  a State  or  political  subdivision  thereof  see 
1fll67.] 


INC.  119 


TAX 


GROSS  INCOME— DIVIDENDS. 


804  Law  ^90.  “or  from  professions,  vocations,  trades,  businesses, 

commerce,  or  sales,  or  dealings  in  property,  whether 
real  or  personal,  growing  out  of  the  ownership  or  use  of  or  interest  in 
such  property;” 

805  Law]|91.  “also  from  interest,  rent,  dividends,  securities,  or  the 

transaction  of  any  business  carried  on  for  gain  or 

profit,” 

806  Lawlj92.  “or  gains  or  profits  and  income  derived  from  any 

source  whatever.” 

807  Law  j[93.  “The  amount  of  all  such  items  shall  be  included  in 

the  gross  income  for  the  taxable  year  in  which  received 
by  the  taxpayer,  unless,  under  methods  of  accounting  permitted  under  sub- 
division (b)  of  section  212  [|[778],  any  such  amounts  are  to  be  properly 
accounted  for  as  of  a different  period;  but”  [“Gross  income  does  not 
include,”  for  which  see  pi09.] 

808  Lawji281.  Gross  Income  of  a Corporation  Defined. — “Sec.  233, 

(a)  That  in  the  case  of  a corporation  subject  to  the  tax 
imposed  by  section  230  [11713]  the  term  “gross  income”  means  the  gross 
income  as  defined  in  section  213  [1[802],” 

809  The  gross  income  of  a corporation  for  the  purpose  of  the  tax 
in  general  includes  and  excludes  the  same  things  as  the  gross  in- 
come of  an  individual.  It  embraces  not  only  the  operating  revenues,  but 
also  gains,  profits  and  income  from  all  other  sources,  such  as  rentals, 
royalties,  interest,  dividends  from  stock  in  other  corporations,  and  profits 
from  the  sale  of  capital  assets.  The  proceeds  of  life  insurance  policies  paid 
upon  the  death  of  the  insured  to  a corporation  beneficiary  less  any  premiums 
paid  by  the  corporation  and  not  deducted  from  gross  income,  are  to  be 
included  in  its  gross  income.  [See  1|1197.]  But  in  the  case  of  life_  [11986] 
and  mutual  marine  insurance  [1|996]  companies  and  of  foreign  corporations 
[p017]  there  are  special  provisions.  (Art.  541,  Reg.  45,  Rev.,  April  17, 
1919.) 

810  What  Included  in  Gross  Income  Generally. — Gross  income  in- 
cludes in  general  compensation  for  personal  and  professional  ser* 

vices,  business  income,  profits  from  sales  of  and  dealings  in^  property, 
interest,  rent,  dividends,  and  gains,  profits  and  income  derived  from 
any  source  whatever  unless  exempt  from  tax  by  law.  Profits  derived  from 
sales  in  foreign  commerce  are  taxable.  Income  may  be  in  thei  form  of  cash 
or  of  property.  (Art.  31,  Reg.  45,  Rev.,  April  17,  1919.) 


811  Law1[29.  “Dividends”  Defined.— “Sec.  201.  (a)  That  the  term 

‘dividend’  when  used  in  this  title  (except  in  paragraph 
(10)  of  subdivision  (a)  of  section  234  [11991]  means” 

812  Law  1[30.  Distribution  by  Corporations  in  General. — “(1)  any 

distribution  made  by  a corporation,  other  than  a personal 
service  corporation,  to  its  shareholders  or  members,  whether  in  cash  or  in 
other  property  or  in  stock  of  the  corporation,  out  of  its  earnings  or  profits 
accumulated  since  February  28,  1913,  or” 

120  TAX 


INC. 


GROSS  INCOME-DIVIDENDS. 

Law|[31.  Distribution  by  Personal  Service  Corporations. — “(2) 
any  such  distribution  made  by  a personal  service  corpora- 
tion out  of  its  earnings  or  profits  accumulated  since  February  28,  1913,  and 
prior  ito  January  1,  1918.’' 

]vjo  Withholding  on  Dividends  in  Any  Event. — [Read  at  p594]. 

8io  Dividends  Generally. — Dividends  for  the  purpose  of  the  statute 
comprise  any  distribution  in  the  ordinary  course  of  business,  even 
though  extraordinary  in  amount,  made  by  a domestic  or  foreign  cor- 
poration to  its  shareholders  out  of  its  earnings  or  profits  accumulated 
since  February  28,  1913,  and  in  the  case  of  a personal  service  corporation 
prior  to  January  1,  1918.  The  mere  declaration  of  a dividend  is  not  a dis- 
tribution. [For  constructive  receipt  of  dividends  see  t[947.]  Although 
irvterest  on  state  bonds  and  certain  other  obligations  is  not  taxable  when 
received  by  a corporation,  upon  amalgamation  with  the  other  funds  of 
the  corporation  such  income  loses  its  identity  and  when  distributed  to 
stockholders  in  dividends  is  taxable  to  the  same  extent  as  other  divi- 
dends. (Art.  1541,  Reg.  45,  Rev.,  April  17,  1919.) 

816  Dividends  Are  Income  and  Are  Taxed  at  Rates  for  Year  Paid. — 

Dividends  are  income  and  are  taxed  at  the  rates  for  the  year  in 
which  paid,  regardless  of  when  the  earnings  or  profits  out  of  which  they 
were  paid  were  accumulated.  As  to  certain  stock  dividends  see,  however, 
artjcle  1546  [1[859].  (Art.  1541,  Reg.  45,  Rev.,  April  17,  1919.) 

817  Dividends  (other  than  stock  dividends  declared  before  November 
1,  1918,  and  received  before  March  27,  1919)  [see  11856]  are  taxed 

at  the  rates  for  the  year  in  which  paid.  (Art.  31,  Reg.  45,  Rev.,  April 
17,  1919.) 

818  Lawl|32.  Presumption  as  to  Source  of  Distribution. — “(b)  Any 

distribution  shall  be  deemed  to  have  been  made  from 
earnings  or  profits  unless  all  earnings  and  profits  have  first  been  distributed.” 

819  Law  1f33.  “Any  distribution  made  in  the  year  1918  or  any  year 

thereafter  shall  be  deemed  to  have  been  made  from  earn- 
ings or  profits  accumulated  since  February  28,  1913,  or,” 

820  Law  1[34.  “in  the  case  of  a personal  service  corporation,  from 

the  most  recently  accumulated  earnings  or  profits ;” 

./T  I J tft 

821  LawU41.  “(e)  Any  distribution  made  during  the  first  sixty  days 

of  any  taxable  year  shall  be  deemed  to  have  been  made 
from  earnings  or  profits  accumulated  during  preceding  taxable  years ;” 

822  Law  1[42.  “but  any  distribution  made  during  the  remainder  of 

the  taxable  year  shall  be  deemed  to  have  been  made  from 
earnings  or  profits  accumulated  between  the  close  of  the  preceding  taxable 
year  and  the  date  of  distribution,  to  the  extent  of  such  earnings  or  profits, 
and  if  the  books  of  the  corporation  do  not  show  the  amount  of  such  earnings 
or  profits,  the  earnings  or  profits  for  the  accounting  period  within  which  the 
distribution  was  made  shall  be  deemed  to  have  been  accumulated  ratably 
during  such  period.” 


INC. 


121  TAX 


GROSS  INCOME— DIVIDENDS. 


S23  In  the  case  of  a corporation  other  than  a personal  service  corporation 
any  distribution  to  stockholders  is  deemed  to  have  been  made  so  far 
as  possible  (a)  from  earnings  or  profits;  (b)  during  the  year  1918  or 
thereafter  from  earnings  or  profits  accumulated  since  February  28,  1913; 
(c),  if  during  the  first  sixty  days  of  a taxable  year,  from  earnings  or  profits 
accumulated  during  preceding  taxable  years;  and  (d),  if  during  the  re- 
mainder of  a taxable  year  after  the  first  sixty  days,  from  earnings  or 
profits  accumulated  during  the  taxable  year  up  to  the  date  of  distribution. 
The  presumption  contained  in  clauses  (c)  and  (d)  affects  the  determination 
of  invested  capital  for  the  purpose  of  the  war  profits  and  excess  profits  tax, 
but  has  no  effect  upon  the  rates  at  which  dividends  paid  in  1918  and  subse- 
quent years  are  taxed.  In  ascertaining  whether  or  not  a distribution  was 
made  out  of  earnings  or  profits  of  the  taxable  year  there  should  first  be  set 
aside  a proper  reserve  for  the  payment  of  accrued  income  and  war  profits 
and  excess  profits  taxes.  In  the  case  of  a personal  service  corporation  any 
distribution  is  deemed  to  have  been  made  so  far  as  possible  (a)  from  earn- 
ings or  profits;  (b)  during  the  year  1918  or  thereafter  from  earnings  or 
profits  accumulated  since  February  28,  1913;  (c)  if  during  the  first  sixty 
days  of  a taxable  year,  from  the  most  recently  accumulated  earnings  or 
profits  of  preceding  taxable  years ; and  (d)  if  during  the  remainder  of  the 
taxable  year  after  the  first  sixty  days,  from  earnings  or  profits  accumulated 
during  the  taxable  year  up  to  the  date  of  distribution.  (Art.  1542,  Reg. 
45,  Rev.,  April  17,  1919.) 

824  Reference  is  made  to  your  letter  of  April  22,  1918,  relative  to  the 
following : “Assuming  a corporation  to  have  undivided  surplus  or 

profits  of  $500,000 ; to  have  revalued  its  assets,  resulting  in  an  increase  of 
$1,000,000;  and  to  have  declared  a stock  dividend  amounting  to  $750,000— 
said  by  the  corporation  to  have  been  out  of  the  revaluation  increase,  will 
the  Treasury  Department  accept  the  statement  of  the  corporation  or  will  it 
insist  on  $500,000  (or  two-thirds  of  the  stock  dividend)  as  representing  the 
undivided  surplus  or  profits — and  hence  taxable — and  the  balance  of  $250,- 
000  (or  one-third  out  of  the  increase)  due  to  the  revaluation  and  hence  not 
taxable?”  Pn  reply,  you  are  advised  that  if  the  undistributed  surplus  or 
profits  of  the  corporation  accumulated  since  March  1,  1913,  are  sufficient 
to  pay  the  $750,000  dividend,  then  all  of  such  dividend  will  be  taxable. 
If  only  $500,000  surplus  is  on  hand  on  the  date  of  payment  of  the  dividend, 
the  amount  of  the  dividend  that  is  over  and  above  such  surplus  on  hand 
will  be  exempt,  pf  there  is  no  surplus  on  hand  on  the  date  of  payment 
of  the  dividend,  then  all  of  the  dividend  will  be  tax  exempt.  In  short,  the 
dividend  is  taxable  to  the  extent  of  the  undivided  profits  (accumulated 
since  March  1,  1913)  on  hand  on  the  date  of  payment  of  such  dividend 
[Read  11848].  (Letter  to  Hornblower  and  Weeks,  Boston,  Mass.,  signed 
by  Deputy  Commissioner  L.  F.  Speer,  and  dated  May  14,  1918.) 

825  The  Most  Recently  Accumulated  Undivided  Profits  and  Surplus 
Shall  Be  Deemed  to  Have  Been  Distributed  on  Payment  of  a 

Dividend  Even  Though  Such  Funds  Are  Invested  in  United  States 
Bonds. — In  reply  you  are  advised  that  in  accordance  with  Treasury 
Decision  2700  investments  in  obligations  of  the  United  States  issued  after 
September  1,  1917,  may  be  treated  as  made  from  any  earnings  which  the 
corporation  may  designate ; but,  as  the  investment  of  earnings  does  not  pre- 
vent them  from  being  distributed  as  dividends,  earnings  used  in  the  pur- 

122  TAX 


INC. 


GROSS  INCOME— DIVIDENDS. 


chase  of  such  obligations  will  not  be  relieved  from  taxation  as  dividends. 
][In  the  case  cited  by  you,  if  the  corporation  distributed  a dividend  in  the 
year  1918,  as  it  would  appear  is  contemplated,  and  it  has  no  undistributed 
earnings  for  the  year  1918,  at  the  time  of  payment,  the  dividend  will  be 
deemed  to  have  been  paid  from  the  undistributed  earnings  of  the  year 
1917,  regardless  of  the  fact  that  such  earnings  have  been  invested  in  obli- 
gations of  the  United  States  issued  after  September  1,  1917.  (Letter  to 
Arthur  Young  & Company,  Kansas  City,  Mo.,  signed  by  Deputy  Commis- 
sioner L.  F.  Speer,  and  dated  May  27,  1918.) 

826  Lawp5.  Earnings  and  Profits  Prior  to  March  1,  1913,  Distrib- 

uted Tax  Free. — ''but  any  earnings  or  profits  accumu- 
lated prior  to  March  1,  1913,  may  be  distributed  in  stock  dividends  or 
otherwise,  exempt  from  the  tax,  after  the  earnings  and  profits  accumu- 
lated since  February  28,  191v3,  have  been  distributed.'’ 

827  Distributions  Which  Are  Not  Dividends. — A distribution  by  a 
corporation  out  of  earnings  or  profits  accumulated  prior  to  March  1, 

1913,  or  out  of  any  assets  except  earnings  or  profits  accumulated  since 
February  28,  1913,  is  not  a dividend  within  the  meaning  of  thej  statute.  A 
distribution  by  a personal  service  corporation  out  of  earnings  or  profits 
accumulated  since  December  31,  1917,  is  not  a dividend.  A distribution 
out  of  earnings  or  profits  accumulated  before  March  1,  1913,  is  free  from 
tax  as  a dividend;  out  of  assets  other  than  earnings  or  profits  accumulated 
since  February  28,  1913,  may  or  may  not  be  free  from  tax,  according  as 
each  stockholder  receives  more  or  less  than  he  paid  for  his  stock  or  its 
fair  market  value  as  of  March  1,  1913 ; and,  in  the  case  of  a personal  service 
corporation,  out  of  earnings  or  profits  accumulated  since  December  31,  1917, 
is  taxed  to  the  stockholders  as  though  they  were  partners.  See  section  218 
[jf593]  of  the  statute  and  articles  328-335.  In  determining  whether  a dis- 
tribution is  made  out  of  earnings  or  profits  accumulated  after  or  before 
March  1,  1913,  due  consideration  must  be  given  to  the  facts  and  mere  book 
entries  increasing  or  decreasing  the  surplus  will  not  be  conclusive.  (Art. 
1543,  Reg.  45,  Rev.,  April  17,  1919.) 

828  Dividends  Paid  in  Property. — Dividends  paid  in  securities  or  other 
property  (other  than  its  own  stock),  in  which  the  earnings  of  a 

corporation  have  been  invested,  are  income  to  the  recipients  to  the 
amount  of  the  fair  market  value  of  such  property  when  receivable  by 
the  stockholders.  A dividend  paid  in  stock  of  another  corporation  is 
not  a stock  dividend.  Where  a corporation  declares  a dividend  payable  in 
stock  of  another  corporation,  setting  aside  the  stock  to  be  so  distributed 
and  notifying  the  stockholders  of  its  action,  the  income  arising  to  the  re- 
cipients of  such  stock  is  its  fair  market  value  at  the  time  the  dividend  be- 
comes payable.  See  article  53  [1[946].  Scrip  dividends  are  subject  to  tax 
in  the  vear  in  which  the  warrants  are  issued.  (Art.  1544,  Reg.  45,  Rev., 
April  17,  1919.) 

829  Dividends  Paid  in  Liberty  Bonds. — The  appended  opinion  of  the 
Attorney  General  (m  the  question  of  exemption  from  income 

tax  of  corporation  dividends  paid  in  the  form  of  Liberty  Loan  bonds  is 
published  for  the  information  of  internal-revenue  officers  and  others 
concerned.  (T.  D.  2512,  June  8,  1917.) 

123  TAX 


INC. 


GROSS  INCOME— DIVIDENDS. 

830  The  Secretary  of  the  Treasury.  Sir : Pursuant  to  section  356  of 
the  Revised  Statutes  you  ask  my  opinion  upon  the  following 

questions  arising  under  the  administration  of  your  department.  ^ 

831  (1)  Whether  the  stockholders  of  a corporation  receiving  a divi- 
dend declared  payable  and  distributable  in  bonds  issued  under 

the  act  of  Congress  approved  April  24,  1917,  will  have  to  pay  an  income 

832’  (2)  Whether  a corporation  owning  these  bonds  would  be  to  that 

extent  exempt  from  excise  taxes,  franchise  taxes,  and  other  cor- 
poration taxes  of  the  United  States  and  of  the  several  States. 

833  I am  of  the  opinion  that  an  affirmative  answer  must  be  returned 
to  the  first  question  and  a negative  answer  to  the  second. 

834  The  Act  of  April  24,  1917,  provides  as  to  the  bonds  thereby 

authorized  that 

The  principal  and  interest  thereof  * * * shall  be  exempt,  both 

as  to  principal  and  interest,  from  all  taxation,  except  estate  or  inheri- 
tance taxes,  imposed  by  authority  of  the  United  States,  or  i^  posses- 
sions, or  by  any  State  or  local  taxing  authority. 

835  Like  every  exemption  from  taxation,  this  provision  must  be  liter- 
ally construed  and  can  not  be  extended  beyond  its  precise  terms. 

It  protects  an  owner  of  these  bonds  from  any  tax  of  whatever  character, 
except  estate  or  inheritance  taxes,  levied  upon  them  by  reason  of  his 
possession  and  ownership  but  a tax  levied  upon  one  s net^  income  or 
annual  gain  can  not  be  evaded  because  the  income  or  gain  happens 
to  be  liquidated  by  the  delivery  of  a certain  number  of  these  bonds  or 
other  nontaxable  securities.  Such  a tax  is  upon  the  income  itself  as  an 
entirety  and  not  upon  the  specific  articles  into  which  this  income  is 
finally  transmuted.  When  these  bonds,  therefore,  are  used  as  a medium 
of  payment,  whether  in  the  discharge  of  a private  debt  or  a corporate 
dividend,  the  profit  or  gain  to  the  recipient  is  nevertheless  subject  to 
income  tax. 

836  Similar  principles  control  in  answering  your  second  question.  I 
assume  that  in  speaking  of  “excise  taxes,  franchise  taxes,  and 

other  corporation  taxes’"  you  refer  to  those  taxes  which  are  laid,  not 
upon  the  property  of  a corporation  by  reason  of  possession  or  ownership, 
but  upon  the  value  of  the  exercise  of  corporate  privileges — a value  which 
may  be  measured  by  the  size  of  its  annual  income,  the  amount  of  its 
capital  stock,  or  such  other  standard  of  measurement  as  the  taxing 
power  may  select. 

837  Such  a tax,  for  instance,  was  the  special  excise  tax  upon  cor- 
porations under  the  act  of  August  5,  1909  (36  Stat.,  11,  112), 

discussed  by  the  Supreme  Court  of  the  United  States  in  the  case  of 
Flint  V.  Stone  Tracy  Co.  (220  U.  S.,  107),  in  which  the  court  said: 

838  It  is  therefore  well  settled  by  the  decisions  of  this  court  that  when  the 
sovereign  authority  has  exercised  the  right  to  tax  a legitirnate  subject 

of  taxation  as  an  exercise  of  a franchise  or  privilege,  it  is  no  objection  that 
the  measure  of  taxation  is  found  in  the  income  produced  in  part  from 
property  which  of  itself  considered  is  non-taxable.  Applying  that  doctrine  to 
this  case,  the  measure  of  taxation  being  the  income  of  the  corporation  from 
all  sources,  as  that  is  but  the  measure  of  a privilege  tax  within  the  lawful 
authority  of  Congress  to  impose,  it  is  no  valid  objection  that  this  measuie 
includes  in  part  at  least,  property  which  as  such  could  not  be  directly  taxed 
(p.  165). 


W 


# 


INC. 


124  TAX 


GROSS  INCOME-DIVIDENDS. 

839  The  special  excise  tax  levied  upon  corporations  by  the  act  of  Sep- 
tember 8,  1916  (39  Stat,  756,  789),  and  measured  by  the  fair  value 

of  their  capital  stock  is  a tax  of  the  same  general  character,  imposed  with 
respect  to  the  carrying  on  or  doing  business  by  such  corporations,  and  the 
rule  laid  down  in  the  case  of  Flint  v.  Stone  T racy  Co.  applies  equally  to  it. 
Quoting  again  from  that  decision:  * * * The  distinction  lies  between  the 
attempt  to  tax  the  property  as  such  and  to  measure  a legitimate  tax  upon  the 
privileges  involved  in  the  use  of  such  property  (p.  163). 

Respectfully, 

T.  W.  Gregory,  Attorney  General.  (T.  D.  2512,  June  8,  1917.) 

8-10  Determination  of  Cash  Value  to  the  Shareholder  of  a Dividend 
Paid  in  Liberty  Bonds. — Acknowledgment  is  made  of  your  letter 
of  October  23,  1918,  reading  in  part  as  follows : 

“Where  a corporation  distributed  Liberty  Bonds  among  its  stock- 
holders as  a dividend : 

1.  Should  an  individual  stockholder  make  return  of  that  dividend 

for  surtax  purposes  at  the  par  value  or  at  the  market  value  of  the 
Liberty  Bonds?  - ' - ' 

2.  If  the  corporation  bought  the  Liberty  Bonds  at  99.25  and  the 
market  value  thereof  when  received  by  the  stockholder  was  94.25, 
should  the  stockholder  make  return  of  the  dividend  at  99.25  or  at  94.25  ?” 

841  In  reply  you  are  advised  that,  for  the  purposes  of  the  income  tax, 
income,  m both  instances,  should  be  predicated  on  the  cash  value 

of  the  Liberty  Bonds  at  the  time  of  their  receipt  by  the  stockholders. 
(Letter  to  Ropes,  Gray,  Boyden  & Perkins,  Boston,  Mass.,  signed  by 
Deputy  Commissioner  L.  F.  Speer,  and  dated  November  12,  1918.) 

842  Income  from  Private  Banks  Considered  as  Dividends.— In  the 
case  of  private  banks  which  have  the  form  of  corporations  and 

which  are  held  to  be  associations  within  the  meaning  of  the  Federal 
income-tax  law,  it  is  not  the  purpose  of  this  office  to  assess  the  income 
tax  against  such  banking  associations  and  then  also  against  the  individ- 
ual members  of  the  association.  [See  t[731.] 

843  Income  which  the  members  of  the  association  receive  from^  the 
bank  because  of  their  investment  therein  will  be  considered  divid- 
ends, * * * . (T.  D.  2152,  Feb.  12,  1915.) 

844  Private  banks  which  have  the  form  of  corporate  organizations, 
elect  officers  and  a board  of  managers,  have  a distinctive  name, 

a fixed  situs,  and  distribute  their  net  earnings  upon  the  basis  of  the 
amount  of  capital  invested  by  the  members  or  owners,  are  held  to  be 
associations  within  the  meaning  of  the  Federal  income  tax  law,  and  in 
their  organized  capacity  should  make  returns  of  annual  net  income  and 
pay  any  income  tax  thereby  shown  to  be  due.  [See  1[731.] 

845  The  holders  of  the  stock  or  the  owners  of  the  bank  will  be 
exempt  from  the  normal  tax  to  the  extent  of  the  dividends,  or 

earnings  which  they  receive  from  such  private  banks  as  make  returns 
in  their  organized  capacity  and  pay  income  tax  in  accordance  therewith. 
(T.  D.  2137,  Jan.  30,  1915.) 

840  Profits  of  Limited  Partnerships  Considered  as  Dividends.' — [Read 
at  11735.] 

847  Dividends  Paid  on  Life  Insurance  Policies. — [Read  at  11938.] 

125  TAX 


INC. 


GROSS  INCOME— DIVIDENDS. 


848  Lawjf36.  Stock  Dividends. — ‘‘(c)  A dividend  paid  in  stock  of 

the  corporation  shall  be  considered  income  to  the 
amount  of  the  earnings  or  profits  distributed."' 

849  A dividend  paid  in  stock  of  the  corporation  is  income  to  the 
amount  of  the  earnings  or  profits  distributed,  as  shown  by  the 

transfer  of  surplus  to  capital  account  on  the  books  of  the  corpora- 
tion, usually  equal  to  the  par  value  of  the  stock  distributed.  But 
stock  distributions  made  out  of  surplus  other  than  earnings  or 
profits  accumulated  since  February  28,  1913,  when  there  are  no  such 
earnings  or  profits,  are  not  dividends  within  the  meaning  of  the  statute 
and  are  free  from  tax  as  dividends.  Stock  dividends  paid  from  earnings 
or  profits  accumulated  after  February  28,  1913,  received  by  a fiduciary 
and  retained  as  an  accretion  to  the  estate  under  the  terms  of  the  will  or 
trust,  are  income  to  the  estate.  (Art.  1545,  Reg.  45,  Rev.,  April  17, 
1919.) 

850  Stock  Dividends  Under  the  Act  of  Oct.  3,  1913. — Misapprehension 
exists  as  to  the  effect  of  the  decision  of  the  Supreme  Court  in 

the  case  of  Towne  vs.  Eisner  [(245  U.  S.  418)  see  |[2313],  handed 
down  January  7,  1918.  In  this  opinion  it  was  held  that  under  the 
Act  of  October  3,  1913,  a stock  dividend  declared  by  a corporation 
January  2,  1914,  was  not  properly  regarded  as  income.  It  does  not  nec- 
essarily follow,  however,  that  no  stock  dividends  are  to  be  held  taxable 
under  the  provisions  of  the  Acts  of  September  8,  1916,  and  October  3, 
1917. 

851  The  Act  of  October  3,  1913,  which  was  the  only  Act  before  the 
Court  in  the  case,  contained  no  provision  expressly  providing  for 

treating  stock  dividends  as  income,  and  the  decision  of  the  Court  was 
to  the  effect  that  the  Act  was  not  to  be  construed  as  taxing  such  divid- 
ends. The  Court  did  not  decide  that  such  dividends  cannot  be  income 
within  the  meaning  of  the  Sixteenth  Amendment,  but  expressly  recog- 
nized that  the  word  “income”  may  have  a different  meaning  in  the 
Statute  from  the  meaning  in  the  Constitution. 

852  q^he  Act  of  September  8,  1916,  contains  an  express  provision  tax- 
ing stock  dividends  declared  and  paid  out  of  earnings  accrued 

since  March  1,  1913.  In  the  absence  of  a decision  as  to  the  legal  effect 
of  these  express  provisions  contained  in  the  later  Acts,  the  Bureau  of 
Internal  Revenue  naturally  will  continue  to  be  governed  by  the  express 
provisions  of  the  later  Acts  in  reference  to  stock  dividends.  (Statement 
issued  to  Collectors  and  Agents,  signed  by  Commissioner  Daniel  C. 
Roper,  and  dated  Jan.  10,  1918.) 

853  Stock  Dividends  Under  the  Act  of  September  8,  1916. — (Decision. 
Macomber  v.  Eisner,  Collector,  U.  S.  District  Court,  Southern 

District  of  New  York,  Jan.  23,  1919.)  Comment:  This  is  a suit  for 
the  recovery  of  tax  paid  under  the  Act  of  September  8,  1916,  on  a “stock 
dividend”  received  by  the  plaintiff.  The  contention  of  counsel  for  the 
plaintiff,  Murray,  Prentice  & Howland,  of  New  York,  is  that  the  pro- 
vision of  the  taxing  Act  by  which  so-called  “stock  dividends”  are  in 
terms  stated  to  be  income,  to  be  taxable  as  such  to  the  same  extent  as 
are  cash  dividends,  is  unconstitutional,  because  to  tax  “stock  dividends” 
is  to  tax  capital  or  principal,  and  such  a tax  may  not  be  imposed  except 
as  other  direct  taxes  are  laid,  that  is,  by  apportionment  among  the 

INC.  126  TAX 


GROSS  INCOME— DIVIDENDS. 

several  states  according  to  population.  Judge  Mayer,  of  the  United 
States  District  Court,  Southern  District  of  New  York,  on  January  23, 
1919,  overruled  the  demurrer  of  the  Government  to  the  complaint  upon 
the  authority  of  Towne  v.  Eisner,  245  U.  S.  418  [112313];  and  Peabody 
V.  Eisner,  247  U.  S.  347  [1[2378].  Mr.  Charles  E.  Hughes  and  Mr. 
George  Welwood  Murray  presented  the  case  for  the  plaintiff.  Inasmuch 
as  a like  provision  relative  to  “stock  dividends’’  appears  in  the  Act  of 
September  8,  1916,  as  amended  by  the  Act  of  October  3,  1917,  and  also 
in  the  Revenue  Act  of  1918,  the  final  judgment  in  Macomber  v.  Eisner 
will  be  controlling  for  the  Revenue  Acts  of  1916,  1917  and  1918.  The 
question  as  to  the  liability  of  “stock  dividends”  to  tax  under  the  Act 
of  October  3,  1913,  was  disposed  of  in  Towne  v.  Eisner  above  cited, 
where  the  decision  by  the  Supreme  Court  on  January  7,  1918,  was 
against  the  Government’s  contention.  Counsel  in  the  Macomber  case 
were  also  counsel  in  the  Towne  case. 

T he  opinion  in  the  above  case  consists  merely  of  an  endorsement 
on  the  demurrer,  as  follows : 

“Demurrer  overruled  on  the  authority  of  Towne  v.  Eisner,  245  U.  S. 
418.  See  also  Peabody  v.  Eisner,  247  U.  S.  347.” 

Julius  M.  Mayer, 

January  23,  1919.  U, 

Note:  Ihe  above  case,  Macomber  v.  Eisner,  was  argued  in  the  Supreme 
Court  April  14,  1919;  was  restored  to  the  docket  for  further  argument  May  19 
1919,  and  was  reargued  October  17  and  October  20,  1919.  ’ 

855  Note:  In  reading  at  112129  (Refund  of  taxes  paid  on  “stock  dividends” 
under  Act  of  October  3,  1913)  and  1[2132  (Refund  of  taxes  paid  on 
account  of  “stock  dividends”  under  Revenue  Act  of  1916  and  1917,  in 

event  such  taxes  are  hereafter  held  to  have  been  erroneously  assessed),  it  is 
to  be  borne  in  mind  that  until  the  Supreme  Court  has  affirmed  the  decision  of 
the  lower  court  the  status  of  “stock  dividends”  received  since  December  31 
19D,  remains  unchanged,  officially.)  ’ 

856  Lawp8.  Certain  Stock  Dividends  Apportionable.— “(d)  If  any 

stock  dividend  (1)  is  received  by  a taxpayer  between 
January  1 and  November  1,  1918,  both  dates  inclusive,  or” 

857  Lawp9.  “(2)  is  during  such  period  bona  fide  authorized  or  de- 

clared, and  entered  on  the  books  of  the  corporation,  and 
IS  received  by  a taxpayer  after  November  1,  1918,  and  before  the  expira- 
tion of  thirty  days  after  passage  of  this  Act,” 

8->8  Law  T[40.  “then  such  dividend  shall,  in  the  manner  provided  in 
Section  206  [lf628],  he  taxed  to  the  recipient  at  the  rates 
prescribed  by  law  for  the  years  in  which  the  corporation  accumulated  the 
earnings  or  profits  from  which  such  dividend  was  paid,  but  the  dividend 
shall  be  deemed  to  have  been  paid  from  the  most  recently  accumulated 
earnings  or  profits.” 

85®  By  a special  exception  to  the  general  rule  any  stock  dividend  received 
by  a taxpayer  between  January  1 and  November  1,  1918,  or  declared 
and  credited  tc^  a stockholder  during  such  period  and  received  by  him 
before  March  27,  1919,  is  deemed  to  have  been  paid  from  the  most  recently 
accumulated  earnings  or  profits  and  shall  be  taxed  to  the  recipient  at  the 

127  TAX 


INC. 


GROSS  INCOME— DIVIDENDS. 

rates  prescribed  for  the  years  in  which  the  corporation 

earnings  or  profits  so  distributed.  Thus,  such  a stock  dividend  will  be 

deemed  to  have  been  paid  from  the  earnings  of  1918 

the  first  sixty  days  of  1918),  and  the  recipient,  if  an  individual,  will  be 
lUlle  to  ^v  surtlx  at  the  rates  for  the  year  W18,  unless  at  the  time  such 
dividend  was  paid  or  credited  the  current  earnings  up  to  that  time  were  not 
sufficient  to  cover  the  distribution,  in  which  case  the  excess  over  the  earn- 
ings of  the  taxable  year  will  be  deemed  to  have  been  paid 
recently  accumulated  surplus  of  prior  years  and  will  be  taxed  at  the  rate 
or  rates  for  the  year  or  years  in  which  earned.  A "“--f  “ f 

paving  such  a stock  dividend  out  of  earnings  accumulated  over  a period  of 
ULs^should  make  a record  in  its  books  of  the  amount  of  the  d'vidend  paid 
^u?  of  each  year’s  undistributed  profits  and  adv  se  the  stockholders  ac- 
cordingly. [Read  at  11863.]  (Art.  1546,  Reg.  45,  Rev.,  April  17,  1919.) 

800  The  method  of  ascertaining  the  precise  rate  applicable  to  such  por- 
tions of  stock  dividends  received  or  credited  in  1918  as  aie  taxab 
at  rates  prescribed  for  previous  years  is  as  follows:  The  amount  ot 
the  income  of  the  recipient  to  which  the  1918  rates  are  applicable  is 
first  ascertained.  To  such  amount;  is  then  added  the  amount  of  ^ 

the  recipient  liable  to  tax  at  the  1917  rates  and  the  table  of  19  .7  fates 
applied  to  see  in  which  brackets  such  income  falls.  The  income  liable  to 
1916  rates  is  then  added  and  the  table  of  1916  rates  apphed  to  it  For 
instance  an  individual  has  $20,0(»  of  income  bab  e ^ 918  rates  and 

$25,000  of  dividends  liable  to  1917  rates  The  total  woiiM  be  $45  (»0  o 
which  $20,000  would  be  taxable  at  the  1918  rates  and  $20,000  to  $4^0  at 
the  surtax  rates  under  the  1917  table  applying  to  income  over  $20,000.  In 
order  that  the  correctness  of  the  rates  may  be  verified,  taxpayers  reporting 
stock  dividends  at  other  than  1918  rates  will  be  required  to  render  a state- 
ment at  the  time  of  filing  their  returns  showing  the  corporations  from  which 
dividends  taking  other  than  1918  rates  were  received,  with  the  P^'^ulais 
of  the  dividends  received  from  each  [For  the  TLo 

parts  of  income  subject  to  rates  for  different  years,  all  T[628.]  (Art.  1642, 
Reg:  45,  Rev.,  April  17,  1919.) 

861  Surtax  Rates  for  1913,  1914  and  1915.— No  super  tax  or  surtax  on 
net  incomes  of  $20,000  or  less. 

Over  $20,000  to  $50,000 

Over  $50,000  to  $75,000 2% 

Over  $75,000  to  $100,000 3 /o 

Over  $100,000  to  $250,000 4% 

Over  $250,000  to  $500,000 5% 

Over  $500,000  


862  Surtax  Rates  for  1916  and  1917. — 

Amount  subject  to  tax.  1916.  191/. 

Per  cent.  Per  cent. 

$5,000  to  $7,500. \ 

$7,500  to  $10, 000 2 

$10,000  to  $12,500 3 

$12,500  to  $15,000 4 

$15,000  to  $20,000 5 

INC.  128  TAX 


GROSS  INCOME—DIVIDENDS. 


Surtax  Rates  for  1916  and  1917.— Concluded. 

Amount  subject  to  tax.  1916.  1917. 

Per  cent.  Per  cent. 


$20,000  to  $40,000 

1 

8 

$40,000  to  $60,000 

2 

12 

$60,000  to  $80,000 

3 

17 

$80,000  to  $100,000 

4 

22 

$100,000  to  $150,000. . . . 

5 

27 

$150,000  to  $200,000. . . . 

6 

31 

$200,000  to  $250,000 

7 

37 

$250,000  to  $300,000 

8 

42 

$300,000  to  $500,000 

9 

46 

$500,000  to  $750,000 

10 

50 

$750,000 to $1, 000,000.. . . 

10 

55 

$1,000,000  to  $1,500,000. . 

11 

61 

$1,500,000  to  $2,000,000. . 

12 

62 

On  excess  $2,000,000.  . . 

13 

63 

(For  1918  and 

1919  see  pSS.) 

The  Taxpayer  Is  to  Ascertain  in  What  Year  or  Years  Stock  Divi- 
dends Are  Deemed  to  Have  Been  Earned. — Will  it  be  the  tax- 
payer’s duty  to  advise  himself  what  proportion  of  a [stock]  dividend  re- 
ceived by  him  is  properly  chargeable,  * * * , to  the  corporate  earnings 
or  profits  for  each  tax  year?  (Answer.)  Yes.  [Read  last  sentence  of 
T[859.]  (Question  43>4,  1918  Income  Tax  Primer.) 

Stock  Dividends  of  Foreign  Corporations  Received  in  1918  Are  to 
Be  Apportioned  to  Prior  Years. — Supplementing  office  letter  of 
February  13,  1918,  and  in  further  reference  to  your  communication  of  Feb- 
ruary 6,  1918,  requesting  that  you  be  advised  whether  dividends  paid  on 
stock  of  a foreign  corporation  should  be  shown  on  Form  1040,  Revised,  as 
apportioned  to  the  year  or  years  in  which  the  earnings  from  which  such 
dividends  were  distributed,  accrue  to  the  corporation,  you  are  advised  that 
it  is  held  by  this  office  that  the  provisions  of  Section  31  (b)  added  to  the 
Act  of  September  8,  1916,  by  Section  1211  of  the  Act  of  October  3,  1917, 
apply  equally  to  dividends  paid  by  a foreign  corporation.  (Letter  to  The 
Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  March  14,  1918.) 

Sale  of  Stock  Received  as  Dividend.— As  stock  dividends  were 
taxable  income  under  the  Revenue  Act  of  1916,  as  well  as  the  present 
statute,  but  were  not  under  the  Act  of  October  3,  1913,  different  considera- 
tions may  apply  to  the  sale  of  stock  received  as  a dividend  before  1916  and 
stock  so  received  thereafter.  See  article  39  [tf911].  For  the  purpose  of 
ascertaining  the  gain  or  loss  derived  from  the  sale  of  stock  of  a corporation 
received  as  a dividend,  or  from  the  sale  of  the  stock  in  respect  of  which 
such  dividend  was  paid,  the  cost  (used  to  include  also,  where  required,  fair 
market  price  or  value  as  of  March  1,  1913)  of  such  stock  is  to  be  deter- 
mined in  accordance  with  the  following  rules : 

(1)  In  the  case  of  stock  (a)  received  as  a dividend  in  1913,  1914  or 
1915  out  of  surplus  however  created,  or  (b)  received  as  a dividend  in  1916 
or  subsequent  years  out  of  surplus  other  than  earnings  or  profits  accumu- 
lated since  February  28,  1913,  the  cost  of  each  share  of  new  stock  is  the 
quotient  of  the  cost  of  the  old  stock  divided  by  the  number  of  old  and  new 
shares  added  together. 

INC.  129  TAX 


GROSS  INCOME— DIVIDENDS. 

(2)  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was 
paid  as  described  under  (1),  the  cost  of  each  share  of  old  stock  is  similarly 
the  quotient  of  the  cost  of  the  old  stock  divided  by  the  number  of  old 

(3)  In  the  case  of  stock  received  as  a dividend  in  1916  or  subsequent 

years  out  of  earnings  or  profits  accumulated  since  February  28,  1913,  the 
cost  of  each  share  of  new  stock  is  the  quotient  of  the  sum  of  (a)  the  cost 
of  the  old  stock  plus  (b)  the  valuation  at  which  the  new  stock  was  re- 
turnable as  income  (as  shown  by  the  transfer  of  surplus  to  capital  ac- 
count on  the  books  of  the  corporation,  usually  its  par  value),  divided  by 
the  number  of  old  and  new  shares  added  togeuher.  , j-  -j  j 

(4)  In  the  case  of  the  stock  in  respect  of  which  any  stock  dividend  was 
paid  as  described  under  (3),  the  cost  of  each  share  of  old  stock  is  similarly 
*e  quotient  of  the  sum  of  (a)  the  cost  of  the  old  stock  P'us  (b)  valu- 
ation at  which  the  new  stock  was  enable  as  income,  divided  by  the 

number  of  old  and  new  shares.  (Art.  1547,  Reg.  45,  Rev.,  Apri  , 
1919.) 

860  Law  1137.  “Liquidating  Dividends.” — Amounts  distributed  in  the 
liquidation  of  a corporation  shall  be  treated  as  payments 
in  exchange  for  stock  or  shares,  and  any  pin  or  profit  _ realized  thereby 
shall  be  taxed  to  the  distributee  as  other  gams  or  profits. 

867  So-called  liquidation  or  dissolution  dividends  are  not  dividends 
within  the  meaning  of  the  statute,  and  amounts  so  distributed,  wheth- 
er or  not  including  any  surplus  earned  sinp  February  28,  1913,  are  to 
L regarded  as  payments  for  the  stock  of  the  dissolved  corporation. 
Anv  excess  so  received  over  the  cost  of  his  stock  to  the  stockholder,  or  over 
its  fair  market  value  as  of  March  1,  1913,  if  acquired  prior  thereto,  is  a 
taxable  profit.  A distribution  in  liquidation  of  the  assets  and  business  of 
a corporation,  which  is  a return  to  the  stockholder  of  the  value  of  his  stock 
upon  a surrender  of  his  interest  in  the  corporation,  is  distinguishable  from  a 
dividend  paid  by  a going  corporation  out  of  current  earnings  or  accumu- 
lated surplus  when  declared  by  the  directors  in  their  discretion  which  is 
in  the  nature  of  a recurrent  return  upon  the  stock.  (Art.  1548,  Reg.  4b, 
Rev.,  April  17,  1919.) 

868  Distribution  from  Depletion  or  Depreciation  Reserve.— A reserve 
set  up  out  of  gross  income  by  a corporation  and  maintained  for 

the  purpose  of  making  good  any  loss  of  capital  assets 
of  depletion  or  depreciation  is  not  a part  of  its  surplus  out  of  whic 
ordinary  dividends  may  be  paid.  A^  distribution  made  from  such  a 
reserve  will  be  considered  a liquidating  dividend  and  will  constitute 
^Sable  income  to  a stockholder  only  to  the  extent  that  the  amount 
so  received  is  in  excess  of  the  cost  or  fair  market  value  of  March  , 
1913  of  his  shares  of  stock.  No  distribution,  however,  will  be  deenied 
to  have  been  made  from  such  a reserve  except  to  the  extent  that  the 
amount  paid  exceeds  the  surplus  and  undivided  profits  of  the  corpora- 
tion. In  general,  any  distribution  made  ^ 

out  of  earnings  or  profits  accumulated  since  February  28,  1913,  s to  be 
regarded  as  a return  to  the  stockholder  of  part  of  the  capital  repre- 
sented by  his  shares  of  stock,  and  upon  a subsequent  sale  of  such  stock 
his  profit  will  be  the  excess  of  the  selling  price  over  the  cost  of  the  stock 
or  its  fair  market  value  as  of  March  1,  1913,  after  applying  on  such 

130  TAX 


INC. 


GROSS  INCOME. 


cost  or  value  the  amount  of  any  such  capital  distribution.  [For  notili- 
cation  to  stockholders  of  distributions  from  depletion  or  depreciation 
reserves  see  ][1423.]  (Art.  1549,  Reg.  45,  Rev.,  April  17,  1919.) 


8«9  Federal  Income  Tax  Paid  by  Obligor  on  Tax-Free  Covenant  Bond 
Interest. — The  amount  of  income  tax  paid  for  a bondholder  by  an 
obligor  pursuant  to  a tax-free  covenant  in  its  bonds  is  in  the  nature  of 
additional  interest  paid  the  bondholder  and  must  be  included  in  his 
gross  income.  He  is  not  however,  entitled  to  deduct  such  income  tax 
paid  on  his  behalf.  [For  credit  for  taxes  withheld  at  the  source  see 
P719.]  See  sections  214  (a)  (3)  and  221  (b)  of  the  statute  and  articles 
565  [P280]  and  566  [P256].'  (Art.  31,  Reg.  45,  Rev.,  April  17,  1919.) 

Receipt  is  acknowledged  of  your  letter  of  June  20,  1919,  asking 
for  advice  in  regard  to  the  office  ruling  which  authorizes  in- 
crease of  the  income  by  the  2%  normal  tax  paid  by  the  debtor  cor- 
poration on  bonds  containing  a tax-free  covenant  clause.  Pn  reply  you 
are  informed  that  this  office  holds  that  the  obligor,  in  pursuance  of  a 
contract  voluntarily  entered  into,  guaranteed  to  pay  a direct  liability 
of  the  taxpayer  which  consisted  in  paying  a certain  amount  of  normal 
tax  for  him  to  the  Government.  The  reduction  of  the  payment  of  his 
tax  liability  under  such  a contract  constitutes  income  to  him  by  reduc- 
ing his  expenditures  in  that  amount.  The  fact  that  the  amount  of  the 
the  liability  was  paid  direct  to  the  Government  instead  of  to  the  tax- 
payer and  by  him  to  the  Government,  does  not  preclude  such  an  amount 
from  constituting  income  to  the  taxpayer.  (Letter  to  Hugh  W.  Martin, 
Secretary,  Northwestern  Trust  Company,  St.  Paul,  Minnesota,  signed 
by  J.  H.  Callan,  Assistant  to  the  Commissioner,  by  Geo.  V.  Newton, 
Head  of  Division,  and  dated  September  13,  1919.) 

Taxes,  on  Profits  on  Sale  of  Property,  Paid  by  Vendee  for  the 
Vendor. — A vendee  of  a business  agrees  that  in  addition  to  the 
purchase  price  of  the  business  he  will  pa)^  the  income  and  excess 
profit  taxes  of  the  vendor  arising  from  the  sale  of  said  business.  Queiy. 
Does  the  payment  of  the  said  taxes  by  the  vendee  constitute  income  to 
the  vendor  v/hich  the  vendor  would  have  to  report  on  his  income  tax 
statement  and  pay  a tax  thereon  ? As  extremely  urgent  please  reply  by 
telegram  as  promptly  as  possible.  (Answer.)  Your  telegram  April 
30.  Income,  excess  i)rofits  and  war  profits  taxes  paid  by  vendee  for 
vendor  on  profits  from  sale  of  property  to  vendee  constitute  additional 
taxable  income  to  vendor.  (Telegram  of  inquiry  from  The  Corporation 
Trust  Company,  and  the  reply  thereto  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  May  2,  1919.) 

872  Payments  of  Income  Made  in  Liberty  Loan  Bonds. — Various 
questions  have  arisen  as  to  the  taxable  status  of  payments  of 
income  made  in  the  form  of  Liberty  Loan  bonds  and  it  was  thought, 
in  fairness  to  all  concerned,  that  inquiries  of  this  nature  should  be  sub- 
mitted by  the  Department  to  the  Attorney  General  for  his  opinion.  This 
has  been  done  and,  * ♦ the  Attorney  General  holds,  in  part,  that: 

[Read  ^[829]  : (Part  of  letter  to  Kenefick,  Cooke,  Mitchell  & Bass,  Buf- 
falo, signed  by  Deputy  Commissioner  L.  F.  Speer,  dated  June  22,  1917.) 

131  TAX 


INC. 


GROSS  INCOME. 


873  Compensation  for  Personal  Services. — Where  no  determination  of 
compensation  is  had  until  the  completion  of  the  services,  the 

amount  received  is  income  for  the  calendar  year  of  its  determination. 
Commissions  paid  salesmen,  compensation  for  services  on  the  basis  of 
a percentage  of  profits,  commissions  on  insurance  premiums,  tips,  re- 
tired pay  of  federal  and  other  officers,  and  pensions  or  retiring  allow- 
ances paid  by  the  United  States  or  private  persons,  are  income  to  the 
recipients ; as  are  also  marriage  fees,  baptismal  offerings,  sums  paid  for 
saying  masses  for  the  dead,  and  other  gifts  and  contributions  received 
by  a clergyman,  evangelist  or  religious  worker  for  services  rendered. 
The  salaries  of  federal  officers  and  employees  are  subject  to  tax.  But  see 
article  86  [P176].  (Art.  32,  Reg.  45,  Rev.,  April  17,  1919.) 

874  Compensation  for  Services  as  Trustees. — If  no  determination  was 
made  of  the  amount  due  the  trustee  of  an  estate  as  cornpensation 

for  his  services  over  a period  of  years  until  the  trust  was  terminated,  the 
amount  allowed  him  should  be  returned  in  full  subject  to  allowable  deduc- 
tions, as  income  for  the  year  in  which  paid;  and  should  not  be  prorated 
over  the  length  of  time  during  which  he  served  as  trustee.  (T.  D.  2135, 
Jan.  23,  1915.) 

875  Commission  Determined  and  Credited  But  Not  Drawn. — Refer- 
ence is  made  to  your  letter  of  March  14,  1918,  relating  to  an  in- 
dividual, paid  on  a commission  basis,  who  during  1917  earned  about 
$20,000  against  which  earnings  but  $4,000  has  been  withdrawn.  You 
request  to  be  advised  whether  the  individual  must  account  for  the  full 
amount  of  his  income  for  the  year  1917.  Pn  reply  you  are  advised  that 
under  the  regulations  it  is  held  that  income  credited  to  or  made  avail- 
able to  the  recipient  is  a constructive  receipt  and  the  amount  is  to  be 
returned  for  income  tax  purposes  for  the  year  in  which  such  income 
was  credited  or  made  available.  Accordingly  the  salesman  must  include 
in  his  return  the  $20,000  commission  earned  by  him  during  the  year 
1917.  (Letter  to  Certified  Audit  Company  of  America,  New  York, 
N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  April 
30,  1918.) 


4 


% 


876  When  Special  Compensation  (Bonus)  is  Considered  Taxable  In- 
come.— Special  payments  made  by  a corporation  as  extra  com- 
pensation to  certain  of  its  employees  may  be  deducted  from  gross  in- 
come if  it  is  clearly  shown  that  such  payments  are  made  as  compensa- 
tion for  services  rendered  and  are  paid  in  pursuance  of  a contract  ex- 
pressed or  implied. 

877  If  such  so-called  '‘compensation”  is  a gratuity  or  voluntary 
payment,  for  which  no  service  is  rendered,  the  amount  so  paid  are 

not  deductible.  In  cases  wherein  the  payments,  are  made  as  compensa- 
tion for  services  rendered,  the  employee  receiving  the  same,  if  he  be  a 
“taxable  person,”  will  be  required  to  include  the  amount  of  such  com- 
pensation in  his  personal  income  tax  return. — [Read  discussion  of  sub- 
ject at  paragraph  1209.]  (T.  D.  2152,  Feb.  12,  1915.) 


878  Salaries  Paid  by  Exempt  Organizations. — Salaries  paid  by  cor- 
porations, which  corporations  have  been  held  to  be  exempt  from 
the  income  tax  under  [the  provisions]  of  the  income  tax  law,  are  subject 
to  the  income  tax  and  should  be  returned  as  income  by  the  individual  * * * % 

(T.  D.  2090,  Dec.  14,  1914.) 


INC. 


132  TAX 


gross  income. 

Quarters,  Mileage,  Expenses  of  Government  Officers  and  Em- 
ployees.  Quarters:  Commutation  of  quarters  and  the  monev 
equivatet  of  quarters  furnished  in  kind  shall  be  returned  as  income  ^ 
When  quarters  are  furnished  in  kind,  of  a less  number  of  rooms 
flip  a*!owed  by  law,  the  money  equivalent  only  of 

wCn  actually  assigned  shall  be  returned  as  income 

ton  th^number'^a^l/^  ® "“mber  of  rooms 

than  the  number  allowed  by  law,  it  is  to  be  assumed  that  the  excess 

number  is  assigned  or  the  convenience  of  the  Government  an^the 

be  TeLrnTas“income.'’^  ^^all 

Jf  hepr^nd?  the  money  equivalent,  as  fixed  by  the  Government 

8S2  Mifeaee  P«blic  quarters, 

fi-i  between  the  amount  received  as  mile- 

1 amount  of  actual  necessary  expenses  incurred  on  a 
journey  shall  be  returned  as  income.  mcurrea  on  a 

Mileage,  as  such,  is  not  gain,  profit,  or  income  to  the  officer  as 

milpp  ^ P^y  h'®  actual  expenses  while  traveling  under 

mileage  orders.  The  gam,  profit,  or  income  is  the  difference  between  the 
amount  received  as  mileage  and  the  amount  properly  expended  by  the 

toonm  on^.'sho^l^b'e  retSrSid  as 

The  actual  expenses  to  be  deducted  by  the  individual  before  as- 
the  e bis  gam,  profit,  or  income  on  account  of  mileage  are 

he  expenses  for  which  reimbursement  would  be  made  by  the  Govern- 
bas"s  traveled  on  an  actual  e.xpense  basis  instead  of  a mileage 

Reimbursement  for  actual  expenses : Amounts  paid  by  the  Gov- 

items  0f"TcTual”e  n ®«b®i®tence^and  otor 

Items  of  actual  expenses  incurred  while  absent  on  business  for  the 

Nov  2Tl91Tr  be  returned  as  income.  (T.  D.  2079, 

OTders‘^'the'lZl""ll  .of.  subsistence  while  under  traveling 

, .m.1  fbe  total  allowance  is  income  and  there  may  be  taken  as 

a deduction  for  expense  the  amount  actually  expended  from  such  al 

R^,"jln.°2,'‘l918 traveling  expenses.  (Art.  4,  1[5S,  Reg.  33, 

Commissions  on  Renewal  Premium.-Commissions  on  renewal 
„ foi  insurance  received  by  agents  on  account  of  business 

rtavibi  r .accounted  for  as  such  and  for  the  calento 

[taxable]  year  of  its  receipt.  (Art.  4,  ^.S6,  Reg.  33,  Rev.,  Jan.  2,  1918  ) 

A commission  retained  by  a life  insurance  agent  on  his  own  life 
ti  *"®”(ance  policy  is  held  to  be  income  accruing  to  the  ag-ent  and 
should  be  me  uded  in  his  return  of  income  for  the  assessmenrof  the 
income  tax.  (T.  D.  2137,  Jan.  30,  1915.)  assessment  ot  the 

Compensation  Paid  Other  Than  in  Cash.-Where  services  are 

of  the  ®°'”®fbing  other  than  money,  the  fair  market  value 

of  the  thing  taken  in  payment  is  the  amount  to  be  included  as  income 
If  the  services  were  rendered  at  a stipulated  price,  in  the  aLence  of 
evidence  to  the  contrary  such  price  will  be  presumed  to  be  the  fair 

INC.  133 


TAX 


GROSS  INCOME. 


value  of  the  compensation  received.  Compensation  paid  an  employee  of 
a corporation  in  its  stock  is  to  be  treated  as  if  the  corporation  sold  the 
stock  for  its  market  value  and  paid  the  employee  in  cash  When  living 
quarters  such  as  camps  are  furnished  to  employees  for  the  convenience 
of  the  employer,  the  ratable  value  need  not  be  added  to  the  cash  compensa- 
tion of  the  employee,  but  where  a person  receives  as  compensation  for  serv- 
ices rendered  a salary  and  in  addition  thereto  living  quarters,  the  value 
to  such  person  of  the  quarters  furnished  constitutes  income  subject  to 
tax  [For  information  at  the  source  in  connection  with  the  foregoing 
sentence  see  0739.]  Premiums  paid  by  an  employer  on  life,  accident  or 
health  policies  in  favor  of  his  employees  as  additional  compensatn^  o 
such  employees  are  income  to  the  employees.  (Art.  33,  Reg.  4d,  Rev., 
April  17,  1919.) 


890  Compensation  Paid  in  Notes.— Promissory  notes  received  ra  pay- 
ment for  services,  and  not  merely  as  security  for  such  payment, 
constitute  income  to  the  amount  of  their  fair  market  value.  A taxpayer 
receiving  as  compensation  a note  regarded  as  good  for  its  face  value  at 
maturity,  but  not  bearing  interest,  may  properly  treat  as  income  as  ot 
the  time  of  receipt  the  fair  discounted  value  of  the  note  at  such  time. 
Thus,  if  it  appears  that  such  a note  is  or  could  be  discounted  on  a six  or 
seven  per  cent  basis,  the  recipient  may  include  such  note  in  his  gross 
income  to  the  amount  of  its  face  value  less  discount  computed  at  the 
prevailing  rate  for  such  transactions.  If  the  payments  due  on  a note 
so  accounted  for  are  met  as  they  become  due,  there  should  be  included 
as  income  in  respect  of  each  such  payment  so  much  thereof  as 
sents  recovery  for  the  discount  originally  deducted.  (Art.  34,  Keg.  4a, 
Rev.,  April  17,  1919.) 


891  Gross  Income  from  Business. — In  the  case  of  a manufacturing, 
merchandising  or  mining  business  “gross  income  ^ means  the 
total  sales,  less  the  cost  of  goods  sold,  plus  any  income  from  investments 
and  from  incidental  or  outside  operations  or  sources.  In  determining 
the  gross  income  subtractions  should  not  be  made  for  depreciation,  de- 
pletion, selling  expenses  or  losses,  or  for  items  not  ordinarily  used  in 
computing  the  cost  of  goods  sold.  Gross  income  includes  all  amounts 
received  by  the  taxpayer  as  allowances  for  amortization,  from  what- 
ever  source  and  by  whatever  name  called.  The  allowance  for  amortiza- 
tion authorized  by  the  statute  must  be  taken  by  way  of  explicit  deduc- 
tion  from  gross  income.  [For  “Amortization  see  ][1376.]  See  also 
article  52  [1f945].  (Art.  35,  Reg.  45,  Rev.,  April  17,  1919.) 


893  Long  Term  Contracts. — Persons  engaged  in  contracting  opera- 
tions, who  have  uncompleted  contracts,  in  some  cases  perhaps 
running  for  periods  of  several  years,  will  be  allowed  to  prepare  their 
returns  so  that  the  gross  income  will  be  arrived  at  on  the  basis  of  com- 
pleted work;  that  is,  on  j*obs  which  have  been  finally  completed  any 
and  all  moneys  received  in  payment  will  be  returned  as  incorne  for  the 
year  in  which  the  work  was  completed.  If  the  gross  income  is  arrived 
at  by  this  method,  the  deduction  from  gross  income  should  be  limited 
to  the  expenditures  made  on  account  of  such  completed  contracts.  Or 
the  percentage  of  profit  from  the  contract  may  be  estimated  on  the  basis 
of  percentage  of  completion,  in  which  case  the  income  to  be  returned 
each  year  during  the  performance  of  the  contract  will  be  computed  upon 


INC.  134  TAX 


GROSS  INCOME. 


the  basis  of  the  expenses  incurred  on  such  contract  during  the  year; 
that  is  to  say,  if  one-half  of  the  estimated  expenses  necessary  to  the  full 
performance  of  the  contract  are  incurred  during  one  year,  one-half  of 
the  gross  contract  price  should  be  returned  as  income  for  that  year. 
Upon  the  completion  of  a contract  if  it  is  found  that  as  a result  of  such 
estimate  or  apportionment  the  income  of  any  year  or  years  has  been 
overstated  or  understated,  the  taxpayer  should  file  amended  returns 
for  such  year  or  years.  (Art.  36,  Reg.  45,  Rev.,  April  17,  1919.) 

893  State  Contracts. — Any  profit  received  from  a State  or  political 
subdivision  thereof  by  an  independent  contractor  is  taxable  in- 
come. Where  warrants  are  issued  by  a city,  town  or  other  political 
subdivision  of  a State,  and  are  accepted  by  the  contractor  in  payment 
for  public  work  done,  the  face  value  of  such  warrants  must  be  returned 
as  income.  If  for  any  reason  the  contractor  upon  conversion  of  the 
warrants  into  cash  does  not  receive  and  can  not  recover  the  full  face 
value  of  the  warrants  so  returned,  he  may  allowably  deduct  from  gross 
income  for  the  year  in  which  the  warrants  are  converted  into  cash  any 
loss  sustained.  (Art.  37,  Reg.  45,  Rev.,  April  17,  1919.) 

894  Private  Bank  Owned  by  an  Individual  or  by  a Partnership. — 
When  it  can  be  clearly  shown  that  a private  bank  is  owned  by  one 

man,  it  is  evident  that  such  bank  is  not  an  association  within  the  meaning  of 
the  Federal  income  tax  law,  and  that  therefore  such  bank  will  not  be  re- 
quired to  make  a return  such  as  corporations  and  associations  are  required 
to  make,  but  the  individual  owner,  will  be  required  to  make  a return 

on  form  1040,  showing  in  such  return  tlie  income  which  he  receives  not  only 
from  the  bank  but  from  all  other  sources.  (T.  D.  2137,  Jan.  30,  1915.) 

895  Private  banks  which  do  not  have  this  formal  organization  [para- 
graph 844],  but  which  transact  business,  not  in  the  name  of  the 

bank,  but  in  the  name  of  the  individuals  who  compose  the  firm,  as  John 
Smith  & Co.,  are  held  to  be  co-partnerships  and,  as  such,  are  not  required  to 
[pay  tax].  In  such  cases  the  individuals  who  compose  the  firm,  if  they 
have  net  incomes  in  excess  of  [$1,000  or  $2,000]  will  be  required  to  make 
individual  returns  of  Form  1040,  accounting  for  therein  their  respective 
incomes  arising  and  accruing  from  the  earnings  of  the  bank.  (Mimeograph 
letter  No.  1271  to  Collectors,  Oct.  19,  1915.) 

896  Gross  Income  of  Farmers. — All  gains,  profits  and  income  derived 
from  the  sale  or  exchange  of  farm  products,  whether  produced  on 

the  farm  or  purchased  and  resold,  shall  be  included  in  the  return  of  income 
for  the  year  in  which  the  products  were  actually  marketed  and  sold,  unless 
an  inventory  is  used.  In  case  of  the  sale  of  machinery,  and  of  animals 
purchased  as  draft  or  work  animals  or  solely  for  breeding  purposes  and 
not  for  resale,  any  excess  over  the  cost  thereof  reduced  by  all  sums  there- 
tofore deducted  for  depreciation  shall  be  included  as  gross  income  in  pre- 
paring the  taxpayer’s  return.  Where  farm  produce  is  exchanged  for  mer- 
chandise, groceries  or  mill  products,  the  market  value  of  the  article  or 
product  received  in  exchange  is  to  be  returned  as  income.  Rents  received 
in  crop  shares  shall  be  returned  as  of  the  year  in  which  the  crop  shares 
are  reduced  to  money  or  a money  equivalent.  If  a farmer  is  engaged  in 
producing  crops  which  take  more  than  a year  from  the  time  of  planting  to 
the  time  of  gathering  and  disposing,  the  income  therefrom  may  be  com- 

INC.  135  TAX 


GROSS  INCOME. 


puted  upon  the  crop  basis ; but  in  any  such  case  the  entire  cost  of  producing 
the  crop  must  be  taken  as  a deduction  in  the  year  in  which  the  gross  income 
from  the  crop  is  realized.  When  live  stock  purchased  is  sold,  its  cost  is  to 
be  deducted  from  the  sales  price  in  ascertaining  the  amount  of  gain  or 
profit  to  be  returned  for  tax  purposes.  If,  however,  an  inventory  is  used, 
the  cost  price  of  the  article  sold  must  not  be  taken  as  an  additional  deduc- 
tion in  the  return  of  income,  as  such  cost  price  will  be  reflected  in  the  in- 
ventory. As  herein  used  the  term  “farm”  embraces  the  farm  in  the  ordi- 
narily accepted  sense,  and  includes  stock,  dairy,  poultry,  fruit  and  truck 
farms,  also  plantations,  ranches  and  all  land  used  for  farming  operations. 
All  individuals,  partnerships  or  corporations  that  cultivate,  operate  or  man- 
age farms  for  gain  or  profit,  either  as  owners  or  tenants,  are  designated 
farmers.  A person  cultivating  or  operating  a farm  for  recreation  or  pleas- 
ure, the  result  of  which  is  a continual  loss  from  year  to  year,  is  not  re- 
garded as  a farmer.  (Art.  38,  Reg.  45,  Rev.,  April  17,  1919.) 

897  Expenses  of  Farmers. — A farmer  who  operates  a farm  for  profit 
is  entitled  to  deduct  from  gross  income  as  necessary  expenses  all 

amounts  actually  expended  in  the  carrying  on  of  the  business  of 
farming.  The  cost  of  ordinary  tools,  of  short  life  or  small  cost,  such  as 
hand  tools,  including  shovels,  rakes,  etc.,  may  be  included.  The  cost  of 
feeding  and  raising  live  stock  may  be  treated  as  an  expense  deduction,  in 
so  far  as  such  cost  represents  actual  outlay,  but  not  including  the  value 
of  farm  produce  grown  upon  the  farm  or  the  labor  of  the  taxpayer.  Where 
a farmer  is  engaged  in  producing  crops  which  take  more)'  than  a year  from 
the  time  of  planting  to  the  process  of  gathering  and  disposal,  expenses 
deducted  may  be  determined  upon  the  crop  basis,  and  such  deductions  must 
be  taken  in  the  year  in  which  the  gross  income  from  the  crop  has  been 
realized.  If  a farm  is  operated  for  recreation  or  pleasure  and  not  on  a 
commercial  basis,  and  if  the  expenses  incurred  in  connection  with  the  farm 
are  in  excess  of  the  receipts  therefrom,  the  entire  receipts  from  the  sale 
of  products  may  be  ignored  in  rendering  a return  of  income,  and  the  ex- 
penses incurred,  being  regarded  as  personal  expenses,  will  not  constitute 
allowable  deductions  The  cost  of  farm  machinery  and  farm  buildings 
represents  a capital  investment  and  is  not  an  allowable  deduction  as  an 
item  of  expense.  Amounts  expended  in  the  development  of  farms,  or- 
chards and  ranches  prior  to  the  time  when  the  productive  state  is  reached 
may  be  regarded  as  investments  of  capital.  The  amount  expended  in  pur- 
chasing draft  or  work  animals  or  live  stock  either  for  resale  or  for  breed- 
ing purposes  is  regarded  as  an  investment  of  capital.  The  purchase  price 
of  an  automobile,  even  when  wholly  used  in  carrying  on  farming  operations, 
is  not  deductible,  but  it  is  regarded  as  an  investment  of  capital.  The  cost 
of  gasoline,  repairs  and  upkeep  of  an  automobile  if  used  wholly  in  the 
business  of  farming  is  deductible  as  an  expense;  if  used  partly  for  busi- 
ness purposes  and  partly  for  the  pleasure  or  convenience  of  the  taxpayer  or 
his  family,  such  cost  may  be  apportioned  according  to  the  extent  of  the 
use  for  purposes  of  business  and  pleasure  or  convenience,  and  only  the 
proportion  of  such  cost  justly  attributable  to  business  purposes  is  deductible 
as  a necessary  expense.  (Art.  110,  Reg.  45,  Rev.,  April  17,  1919.) 

898  Losses  of  Farmers. — Losses  incurred  in  the  operation  of  farms 
as  business  enterprises  are  deductible  from  gross  income.  If  farm 

products  are  held  for  favorable  markets,  no  deduction  on  account 

INC.  136  TAX 


GROSS  INCOME. 


of  shrinkage  in  weight  or  physical  value  or  by  reason  of  deterioration  in 
storage  shall  be  allowed.  The  total  loss  by  frost,  storm,  flood  or  fire  of  a 
prospective  crop,  or  of  a crop  which  has  not  been  sold,  is  not  a deductible 
loss  in  computing  net  income.  A farmer  engaged  in  raising  and  selling 
stock,  cattle,  sheep,  horses,  etc.,  is  not  entitled  to  claim  as  a loss  the  value 
of  animals  that  perish  from  among  those  animals  that  were  raised  on  the 
farm.  If  live  stock  has  been  purchased  for  any  purpose,  and  afterwards 
dies  from  disease,  exposure  or  injury,  or  is  killed  by  order  of  the  authori- 
ties of  a State  or  the  United  States,  the  actual  purchase  price  of  such  stock, 
less  any  depreciation  which  may  have  been  previously  claimed  with  respect 
to  such  perished  live  stock,  and  less  also  any  insurance  or  indemnity  recov- 
ered, may  be  deducted  as  a loss.  The  actual  cost  of  other  property,  less 
depreciation  already  allowed,  destroyed  by  order  of  the  authorities  of  a 
State  or  of  the  United  States  may  in  like  manner  be  claimed  as  a loss;  but 
if  reimbursement  is  made  by  a State  or  the  United  States  in  whole  or  in 
part  on  account  of  stock  killed  or  property  destroyed,  the  amount  received 
shall  be  reported  as  income  for  the  year  in  which  reimbursement  is  made. 
In  determining  the  cost  of  stock  for  the  purpose  of  ascertaining  the  de- 
ductible loss  there  shall  be  taken  into  account  only  the  purchase  price,  and 
not  the  cost  of  any  feed,  pasturage  or  care  which  has  been  deducted  as  an 
expense  of  operation.  If  gross  income  is  ascertained  by  inventories,  no 
deduction  can  be  made  for  live  stock  or  products  lost  during  the  year, 
whether  purchased  for  resale  or  produced  on  the  farm,  as  such  losses  will 
be  reflected  in  the  inventory  by  reducing  the  amount  of  live  stock  or 
products  on  hand  at  the  close  of  the  year.  If  an  individual  owns  and  op- 
erates a farm,  in  addition  to  being  engaged  in  another  trade,  business  or 
calling,  and  sustains  a loss  from  such  operation  of  the  farm,  then  the  amount 
of  loss  sustained  may  be  deducted  from  gross  income  received  from  all 
sources,  provided  the  farm  is  not  operated  for  recreation  or  pleasure. 
(Art.  145,  Reg.  45,  Rev.,  April  17,  1919.) 

899  Depreciation  in  the  Case  of  Farmers. — A reasonable  allowance 
for  depreciation  may  be  claimed  on  farm  buildings  (other  than  a 
dwelling  occupied  by  the  owner),  farm  machinery  and  other  phys- 
ical property,  including  live  stock  purchased  for  draft,  dairy  or  breeding 
purposes,  but  no  claim  for  depreciation  on  live  stock  raised,  or  purchased 
for  resale,  will  be  allowed.  Live  stock  purchased  for  draft,  breeding  or 
dairy  purposes,  or  for  any  purpose  other  than  resale,  may  be  included  in 
the  inventory  for  each  year  at  a figure  which  will  reflect  the  reduction  in 
value  estimated  to  have  occurred  during  the  year  through  increase  of  age 
or  other  causes.  .Such  a reduction  in  value  should  be  based  on  the  cost  and 
estimated  life  of  the  live  stock.  If  an  inventory  is  not  used,  a reasonable 
allowance  for  depreciation  may  be  claimed  based  upon  the  cost  of  draft 
and  work  animals  and  animals  kept  solely  for  breeding  purposes  and  not 
for  resale.  (Art.  171,  Reg.  45,  Rev.,  April  17,  1919.) 


900  Prevailing  Rates  of  Exchange  at  Time  Income  on  Foreign  In- 
vestments was  Credited  to  Govern  in  Computing  Tax  Liability  on 
Such  Income. — This  office  acknowledges  receipt  of  your  letter  of  Jan- 
uary 4,  1916,  wherein  you  cite  the  case  of  a resident  American  citizen  who 
had  accruing  to  him  from  time  to  time  income  from  foreign  investments 
which  was  not  remitted  to  the  United  States  but  was  placed  to  his  credit  in 

INC.  137  TAX 


GROSS  INCOME. 


different  foreign  countries,  and  request  to  be  advised  whether  in  computing 
income  tax  liability  it  will  be  proper  to  use  the  rates  of  exchange  prevailing 
at  the  time  the  amounts  were  credited  abroad. 

901  In  reply  you  are  advised  that,  in  the  case  cited,  it  will  be  proper 
for  the  individual  to  return  each  item  of  income  at  the  rate  of  ex- 
change which  prevailed  on  the  date  it  was  credited  to  his  account.  (Let- 
ter to  Herbert  M.  Teets,  New  York,.  N.  Y.,  signed  by  Deputy  Commis- 
sioner L.  F.  Speer,  and  dated  January  11,  1916.) 

902  Sinking  Funds  Invested  In  Bonds  of  Corporation. — If  the  trustees 
of  a sinking  fund  established  by  a corporation  have  invested  the 

amount  of  the  sinking  fund  reserve  or  any  portion  of  it  in  the  bonds  of  the 
corporation  and  such  corporation  pays  to  the  trustees  the  interest  on  these 
bonds,  such  corporation  will  be  permitted  to  deduct  such  interest  from  its 
gross  income,  ^ ^ The  interest  paid  to  the  trustees,  together  with 

all  other  earnings  on  investments  made  by  the  trustees  of  the  sinking  fund, 
must  be  included  in  the  gross  income  of  the  corporation.  (Art.  189,  T1577, 
Reg.  33,  Rev.,  Jan.  2,  1918.) 

903  Accrued  Interest  on  Bonds  Purchased  Between  Interest  Dates. — 
Interest  accrued  to  the  time  of  purchase  (advanced  by  purchaser)  is 

not  to  be  accounted  for  as  income  by  the  purchaser  Only  the  amount  of 
interest  assignable  to  the  portion  of  the  interest  period  subsequent  to  the 
purchase  has  a status  of  income  for  the  purposes  of  return  and  tax  by 
purchaser. 

904  The  amount  of  accrued  interest  so  advanced  by  the  purchaser  is 
taxable  income  to  be  accounted  for  in  the  return  of  the  vendor. 

(Art.  4,  1115-16,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

905  Interest  Received  and  Paid  by  Brokers  in  Connection  with  Pur- 
chase and  Carrying  of  Securities  for  Customers. — The  appended 

decision  [captions  only]  of  the  United  States  Circuit  Court  of  Appeals,  in 
the  case  of  Altheimer  & Rawlings  Investment  Co.  v.  Allen,  collector,  is  pub- 
lished for  the  information  of  internal -revenue  officers  and  other  concerned. 

(U.  S.  Circuit  Court  of  Appeals,  Eighth  Circuit.  248  Fed.  688.) _ 

.906  1.  Gross  income.  A corporation  which  did  a brokerage  business 

and  bought  securities  for  its  customers,  who  paid  only  a part  of  the 
purchase  price,  paying  interest  on  balances,  the  corporation  also 
paying  for  the  securities  purchased  only  part  of  the  purchase  price  and 
owing  balances  on  which  it  paid  interest,  including  in  return  of  gross  income 
the  difference  between  the  interest  received  and  the  interest  paid,  made 
incorrect  return. 

907  2.  Interest.  The  interest  received  by  plaintiff  from  its  customers 
should  be  included  in  gross  income.  In  determining  net  income, 

interest  can  be  deducted  only  to  an  amount  not  exceeding  the  paid-up 
capital  stock  outstanding  at  the  close  of  the  year  (i.  e.,  under  Act  of  Aug. 
5,  1909). 

908  3.  Judgment  Affirmed.  The  judgment  of  the  United  States  Dis- 
trict Court  (246  Fed.,  270;  T.  D.  2441)  is  affirmed.  (248  Fed.  688.) 

(T.  D.  2686,  April  1,  1918.) 

909  Discount  for  Cash  in  Relation  to  Income  and  Capital  Account. — 
Reference  is  made  to  your  letter  of  the  15th  instant,  in  which  you 

state  that  a corporation  has  purchased  a large  quantity  of  equipment  and  in 

138  TAX 


INC. 


GROSS  INCOME. 


consideration  of  making  a prompt  payment  therefor  has  been  allowed  a 
cash  discount.  You  ask  to  be  advised  whether  or  not  this  discount  should 
be  reported  as  income,  pn  reply  you  are  informed  that  the  discount 
allowed  to  the  corporation  purchasing  this  new  equipment  need  not  be 
reported  as  income,  but  the  cost  of  the  equipment  as  charged  to  capital  must 
represent  only  the  net  cost  after  m.aking  allowance  for  the  discount  in  ques- 
tion. (lyetter  to  E.  G.  Shorrock  & Co.,  Seattle,  Washington,  signed  by 
Deputy  Commissioner  E.  F.  Speer,  and  dated  November  26,  1918.) 

910  Payments  Made  to  Holders  of  Stock  Trust  Certificates. — Stock 
trust  certificates  or  leased  line  certificates,  as  the  case  may  be,  issued 
by  the  lessee  for  the  purpose  of  securing  or  holding  control  of  the  stock  of 
the  lessor  are  held  to  be  issued  in  lieu  of  the  certificates  of  capital  stock,  and 
for  the  purpose  of  this  tax  will  be  treated  as  capital  stock  and  the  amounts 
received  by  the  holders  of  these  certificates  are  dividends  to  the  holders  to 
be  treated  as  rentals  by  both  lessee  and  lessor  and  constitute  an  allowable 
deduction  in  the  one  case  and  an  item  of  income  in  the  other,  accordingly 
as  they  are  paid  and  received.  (Art.  104,  p71,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

Sale  of  Stock  and  Rights. — When  shares  of  stock  in  a corpora- 
tion are  sold  from  lots  purchased  at  different  times  and  at  different 
prices  and  the  identity  of  the  lots  can  not  be  determined,  the  stock  sold 
shall  be  charged  against  the  earliest  purchases  of  such  stock.  The  excess 
of  the  amount  realized  on  the  sale  over  the  cost  of  the  stock,  of  its  fair 
market  value  [see  p063]  as  of  March  1,  1913,  if  purchased  before  that 
date,  will  be  the  profit  to  be  accounted  for  as  income.  In  the  case  of  stock 
received  as  a stock  dividend,  whether  or  not  paid  out  of  earnings  or  profits 
accrued  since  February  28,  1913,  and  in  the  case  of  stock  in  respect  of 
which  any  such  dividend  was  paid,  the  cost  of  each  share  of  such  stock 
shall  be  ascertained  as  specified  in  article  1547  [i[865].  Where  common 
stock  is  received  as  a bonus  with  the  purchase  of  preferred  stock  or  bonds, 
the  total  purchase  price  shall  be  fairly  apportioned  between  the  stock  and 
securities  purchased  for  the  purpose  of  determining  the  portion  of  the  con- 
sidemtion  attributable  to  each  class  of  stock  or  securities  and  so  represent- 
ing its  cost,  but  if  that  should  be  impracticable  in  any  case,  no  profit  on 
any  subsequent  sale  of  any  part  of  the  stock  or  securities  will  be  realized 
until  out  of  the  proceeds  of  sales  shall  have  been  recovered  the  total  cost. 
See  article  1565  [^[1079].  The  entire  amount  realized  from  the  sale  of 
rights  to  subscribe  for  stock  is  income.  (Art.  39,  Reg.  45,  Rev..  April  17 
1919.)  ^ 

012  Sale  of  Patents  and  Copyrights. — A taxpayer  disposing  of  patents 
or  copyrights  by  sale  should  determine  the  profit  or  loss  arising 
therefrom  by  computing  the  difference  between  the  selling  price  and  the 
value  as  of  March  1,  1913,  if  acquired  prior  to  that  date," or  between  the 
selling  price  and  the  cost,  if  acquired  subsequently  to  that  date.  The  profit 
or  loss  thus  ascertained  should  be  increased  or  decreased,  as  the  case 
may  be,  by  the  amounts  deducted  on  account  of  depreciation  of  such  patents 
or  copyrights  since  February  28,  1913,  or  since  the  date  of  acquisition  if 
subsequently  thereto.  See  article  167  [for  depreciation  1[13611.  (Art  40 
Reg.  45,  Rev.,  April  17,  1919.)  j v • » 

Sale  of  Good  Will. — Any  profit  or  loss  resulting  from  an  invest- 
ment in  good  will  can  be  taken  only  when  the  business,  or  a part  of 
it,  to  which  the  good  will  attaches  is  sold,  in  which  case  the  profit  or  loss 

INC,  139  TAX 


GROSS  INCOME. 


will  be  determined  upon  the  basis  of  the  cost  of  the  assets,  including  good 
will,  or  their  fair  market  value  as  of  March  1,  1913,  if  acquired  prior  thereto. 

If  nothing  was  paid  for  good  will  acquired  after  February  28,  1913,  no 
ductible  loss  is  possible,  although,  on  the  other  hand,  upon  the  sale  of  the 
business  tliere  may  be  a profit.  It  is  immaterial  that  good  will  may  never 
have  been  carried  on  the  books  as  an  asset,  but  the  burden  of  proof  is  on 
the  taxpayer  to  establish  the  cost  or  fair  market  value  on  March  1,  1913, 
of  the  good  will  sold.  (Art.  41,  Reg.  45,  Rev.,  April  17,  1919.) 

914  Sale  of  Personal  Property  on  Installment  Plan.— Dealers  in  per- 
sonal property  ordinarily  sell  either  for  cash,  or  on  the  personal 
credit  of  the  buyer,  or  on  the  installment  plan.  Occasionally  a fourth  type 
of  sale  is  met  with,  in  which  the  buyer  makes  an  initial  payment  of  such  a 
substantial  nature  (for  example,  a payment  of  more  than  25  per  cent)  that 
the  sale,  though  involving  deferred  payments,  is  not  one  on  the  installment 
plan.  In  sales  on  personal  credit,  and  in  the  substantial  payment  type  just 
mentioned,  obligations  of  purchasers  are  to  be  regarded  as  the  equivalent 
of  cash,  but  a different  rule  applies  to  sales  on  the  installment  plan.  Dealers 
in  personal  property  who  sell  on  the  installment  plan  usually  adopt  one  of 
four  ways  of  protecting  themselves  in  case  of  default:  (a)  through  an  agree- 
ment that  title  is  to  remain  in  the  seller  until  the  buyer  has  completely  per- 
formed his  part  of  the  transaction;  (b)  by  a form  of  contract  in  which 
title  is  conveyed  to  the  purchaser  immediately,  but  subject  to  a lien  for  the 
unpaid  portion  of  the  purchase  price;  (c)  by  a present  transfer  of  title  to 
the  purchaser,  who  at  the  same  time  executes  a reconveyance  in  the  form 
of  a chattel  mortgage  to  the  seller;  or  (d)  by  conveyance  to  a trustee  pend- 
ing performance  of  the  contract  and  subject  to  its  provisions.  The  general 
purpose  and  effect  being  the  same  in  all  of  these  plans,  it  is^  desirable  that 
a uniformly  applicable  rule  be  established.  .Fhe  lule  pi  escribed  is  that  in 
the  sale  or  contract  for  sale  of  personal  property  on  the  installment  plan, 
whether  or  not  title  remains  in  the  vendor  until  the  property  is^  fully  paid 
for,  the  income  to  be  returned  by  the  vendor  will  be  that  proportion  of  each 
installment  payment  which  the  gross  profit  to  be  realized  when  the  property 
is  paid  for  bears  to  the  gross  contract  price.  Such  income  may  be  ascer- 
tained by  taking  that  proportion  of  the  total  payments  received  in  the  tax- 
able year  from  installment  sales  (always  including  payments  received  in 
the  taxable  year  on  account  of  sales  effected  in  earlier  years  as  well  as 
those  effected  in  the  taxable  year)  which  the  gross  profit  to  be  realized  on 
the  total  installment  sales  made  during  the  taxable  year  bears  to  the  gross 
contract  price  of  all  such  sales  made  during  the  taxable  year.  Where  a 
change  is  made  to  this  method  of  computing  net  income  the  taxpayer  s bal- 
ance sheet  should  be  adjusted  conformably  as  of  the  date  when  the  change 
is  effected.  If  for  any  reason  the  vendee  defaults  in  any  of  his  installment 
payments  and  the  vendor  repossesses  the  property,  the  entire  amount  re- 
ceived on  installment  payments,  less  the  profit  already  returned,  will  be 
income  of  the  vendor  for  the  year  in  which  the  property  was  repossessed, 
and  the  property  repossessed  must  be  included  in  the  inventory  at  its 
original  cost  to  himself,  less  proper  allowance  for  damage  and  use,  if 
any.  If  the  vendor  chooses  as  a matter  of  consistent  practice  to  treat 
the  obligations  of  purchasers  as  the  equivalent  of  cash,  such  a course  is 
permissible.  (Art.  42,  Reg.  45,  Rev.,  April  17,  1919.) 

915  Reference  is  made  to  your  letters  dated  March  6,  April  21  and  July 
7,  1919,  relative  To  the  proper  treatment  of  amounts  owing  on  in- 
INC.  140  TAX 


GROSS  INCOME. 


stallment  accounts  in  connection  with  income  tax  returns  under  the  pro- 
visions of  the  Revenue  Act  of  1918. 

916  You  state  that  the  amounts  owing  on  installment  accounts  are,  in 
the  case  of  many  concerns,  made  up  from  retail  sales  of  various 
articles  of  merchandise,  and  that  you  wish  to  be  advised  “if  the  average 
per  cent  of  profit  marked  on  the  retail  will  be  sufficient  information  tq  the 
Government  in  ascertaining  the  unearned  profit”  or  whether  “it  will  be 
necessary  to  dig  out  the  actual  cost  on  each  and  every  article  which  remains 
unpaid  in  order  to  show  the  unearned  profit  in  a manner  which  will  be 
acceptable  to  the  Government.” 

From  the  statements  made  it  is  assumed  that  you  have  reference 
to  cases  in  which  the  taxpayer  has  been  treating  the  obligations  of 
purchasers  as  the  equivalent  of  cash  and  has  been  treating  as  gross  profit 
for  each  year  the  difference  between  the  total  amount  of  contract  sales 
made  during  the  year  and  the  cost  of  goods  sold,  and  that  you  wish  to  be 
advised  whether  in  such  a case  it  would  now  be  acceptable  to  the  Depart- 
ment to  treat  as  gross  profit  for  each  taxable  year  the  amount  of  profit  as 
shown  by  the  books  (kept  on  the  basis  of  treating  each  sale  as,  a completed 
transaction)  less  the  unrealized  profits  included  in  the  Accounts  Receivable 
at  ffie  close  of  the  taxable  year,  such  unrealized  profits  to  be  determined  by 
taking  the  same  per  cent  of  gross  profit  it  has  been  decided  is  to  be  made  on 
sales. 


In  this  connection  you  are  advised  that  it  will  not  be  acceptable  to 
this  office  for  a taxpayer  to  arrive  at  his  taxable  profits  merely  by 
attempting  to  eliminate  the  unearned  profits  included  in  his  Accounts  Re- 
ceivable at  the  beginning  and  end  of  his  taxable  year. 

The  following  plan  has  been  outlined  for  use  in  cases  where  the  tax- 
payer has  heretofore  made  returns  upon  the  basis  of  treating  the 
profit  from  installment  sales  as  realized  as  at  the  date  of  sale  and  now 
wishes  to  change  to  the  basis  of  reporting  the  profit  as  being  realized  as 
at  the  date  of  collection  of  the  outstanding  accounts. 

(1)  In  accordance  with  provisions  of  Article  42  [1[914]  of  Regu- 
lations No.  45,  the  first  step  to  be  taken  by  the  taxpayer  is  to  pre- 
pare and  file  as  part  of  his  return  an  amended  balance  sheet  as  at  the  date 
of  the  beginning  of  the  taxable  year,  in  which  there  shall  be  excluded  from 
the  surplus  the  unrealized  gross  profits  upon  the  outstanding  installment 
sales  contracts  at  that  date.  Such  amended  balance  sheet  would  be  in 
substantially  the  following  form  : 

Balance  Sheet  as  at  Opening  of  Fiscal  Year. 


Assets. 

Plant  and  Equipment.  . $. 

Dess  Depreciation 

Current  Assets: 
Merchandise,  as  per 

inventory  

Installment  sales  con- 
tracts   

Notes  Receivable 

Accounts  Receivable. . 

Cash  $ . 

Deferred  Debit  Items : 
Insurance  Prems.  paid 

in  advance 

Other  items 

Total  Assets $. 


Riabilities 

Capital  stock  (or  indi- 
viduaks  or  partner’s 
capital)  $. 

Mortgage  indebtedness.  . 
Current  liabilities: 

Bills  Payable $. 

Accounts  Payable 

Wages  or  other  accrued 

items  

Deferred  Credit  Items : 

Unrealized  gross  profits 
upon  installment  sales 
contracts  

Surplus  

Total  liabilities $. 


INC.  141 


TAX 


GROSS  INCOME. 


921 


922 


(2)  As  from  the  beginning  of  the  taxable  year  the  following  ac- 
counts should  be  set  up:  , 

(a)  Goods  Purchased,  which  will  be  charged  with  the  amount  ot 
inventory  of  the  goods  on  hand  at  the  beginnmg  of  the  taxable  year 
and  with  the  expenditures  for  goods  purchased  during  the  year ; 

923  (b)  Goods  Sold  (cost  value),  which  will  be  credited  with  the  cost 
value  of  all  goods  sold  during  the  year; 

924  (c)  Installment  Sales  Contracts,  which  will  be  charged  with  the 
amount  of  the  outstanding  installment  sales  contracts  at  the  beginning  o 
the  year  and  with  the  amount  of  installment  sales  contracts  made  during 
the  year.  This  account  will  be  credited  with  all  cash  collected  during  the 
year  upon  installment  sales  contracts  and  with  the  unpaid  installments  ot 

defaulted  or  canceled  contracts.  ^ ^ i u 

925  (d)  Unrealized  Gross  Profits  on  Installment  Sales  Contracts,  which 
will  be  credited  with  the  amount  of  unrealized  gross  profit  upon  the 

outstanding  installment  sales  contracts  at  the  beginning  of  the  year,  and 
with  the  amount  of  such  unrealized  gross  profit  upon  installment  sales  con- 
tracts made  during  the  year.  This  amount  will  be  computed  upon  the  basis 
of  the  total  installment  sales  contracts  reduced  by  the  cost  or  inventory 
value  of  the  goods  covered  by  the  contracts,  the  remaining  balance  being 
the  amount  of  the  unrealized  gross  profits. 

920  (e)  RealizedProfits  on  Installment  Sales  Contracts,  which  will  be 

credited  from  month  to  month,  or  at  least  at  the  end  of  the  year,  with 
the  profits  realized  by  collection  upon  installment  sales  contracts.  Such 
profits  should  be  computed  by  taking  the  same  percentage  of  the  total 
cash  collections  upon  installment  sales  contracts  during  the  period  as  the 
total  unrealized  profits  on  installment  sales  contracts  bears  to  the  total  in- 
stallment sales  during  the  same  year.  Corresponding  debits  should  be  made 
to  unrealized  gross  profits  on  installment  sales  contracts.  Any  necessary 
corrections  to  produce  a more  accurate  result  can  be  made  as  at  the  end  of 
the  fiscal  year. 

927  If  for  any  reason  the  vendee  defaults  in  any  of  his  installment  pay- 
ments and  the  property  is  repossessed  by  the  vendor,  the  unpaid 

installments  should  be  credited  to  “installment  sales  contracts”  account;  the 
cost  to  the  vendor  of  the  property  repossessed  (less  a reasonable  allowance 
for  damage  and  use,  if  any)  should  be  charged  to  “goods  purchased  • ac- 
count* the  proportionate  amount  of  unrealized  profit  included  m the  de- 
faulted installments  should  be  charged  to  “unrealized  gross  profits  on 
installment  sales  contracts”  account,  and  the  difference  between  these 
debits  and  credits  should  be  charged  or  credited,  as  the  case  may  be,  to 
“realized  profits  on  installment  sales  contracts”  account.  ^ 

928  It  is  believed  that  sufficient  has  been  said  above  to  indicate  the  use 
that  is  to  be  made  of  these  special  accounts  and  it  is  not  necessary 

to  discuss  any  of  the  other  accounts  which  would  normally  be  maintained. 

929  It  will  be  noted  that  the  foregoing  plan  which  will  be  permitted 
upon  an  explicit  statement  of  facts  made  to  the  Commissioner  of 

Internal  Revenue  by  a taxpayer  engaged  in  merchandising  upon  the  in- 
stallment plan  is  not  a change  from  an  accrual  basis  to  a cash  received 
and  paid  basis.  In  the  opinion  of  this  office  the  income  of  a merchan- 
dising concern  cannot  be  correctly  reflected  upon  the  latter  basis,  as  the 
use  of  inventories  is  absolutely  essential-  The  plan  herein  outlined  is, 
therefore  merely  a modification  or  adaptation  of  the  ordinary  accrual 
method  of  accounting  as  in  the  opinion  of  this  office  will  enable  the 
accounts  of  the  taxpayer  to  clearly  reflect  his  net  income.  Where  m the 

INC  142  TAX 


GROSS  INCOME. 


past  another  method  has  been  used  that  has  failed  to  reflect  the  tax- 
payer’s net  income  an  amended  return  or  returns  for  such  year  may^  be 
made.  For  further  information  as  to  the  proper  method  of  computing’ 
annual  net  income  your  attention  is  invited  to  Article  23  of  Regulations 
No.  45,  as  amended  by  Treasury  Decision  2873  []f783].  (Letter  to  The 
Corporation  Trust  Company  signed  by  Commissioner  Daniel  C.  Ropei, 
and  dated  August  6,  1919.) 

980  Installment  Sales:  Default  and  Inability  to  Repossess. — Your 
telegram  April  23.  When  vendee  defaults  in  installments  payments 
and  vendor  is  unable  to  recover  personal  property  sold,  the  vendor 
should  report  as  loss  on  the  return  for  that  year  the  difference  between  the 
total  amount  actually  received  and  the  cost  plus  amounts  returned  as  profits 
from  sale  during  former  years.  (Telegram  to  Grcenbaum,  Wolff  & Ernst, 
New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April 
26,  1919.) 

Sale  of  Real  Estate  in  Lots. — Where  a tract  of  land  is  purchased 
with  a view  to  dividing  it  into  lots  or  parcels  of  ground  to  be 
sold  as  such,  the  entire  fair  market  value  as  of  March  1,  1913,  or  tlie  cost,  if 
acquired  subsequently  to  that  date,  shall  be  equitably  apportioned  to  the 
several  lots  or  parcels  and  made  a matter  of  ixcord  in  the  books  of  the 
taxpayer,  to  the  end  that  any  gain  derived  from  the  sale  of  any  such  lots 
or  parcels  may  be  returned  as  income  for  the  year  in  which  tlie  sale  was 
made.  This  rule  contemplates  that  there  will  be  a measure  of  gain  or  loss 
in  every  lot  or  parcel  sold,  and  not  that  the  capital  invested  in  the  entire 
tract  shall  be  extinguished  before  any  taxable  income  shall  be  returned. 
The  sale  of  each  lot  or  parcel  will  be  treated  as  a separate  transaction  and 
the  gain  or  loss  will  be  accounted  for  accordingly.  (Art.  43,  Reg.  45,  Rev., 
April  17,  1919.) 

Sale  of  Real  Estate  Involving  Deferred  Payments. — Deferred  pay- 
ment sales  of  real  estate  ordinarily  fall  into  two  classes  when  con- 
sidered with  respect  to  the  terms  of  sale,  as  follows : 

(1)  Installment  transactions,  in  which  the  initial  payment  is  rela- 
tively small  (generally  less  than  one-fourth  of  the  purchase  price) 
and  the  deferred  payments  usually  numerous  and  of  small  amount.  They  in- 
clude (a)  sales  where  there  is  immediate  transfer  of  title  when  a small 
initial  payment  is  made,  the  seller  being  protected  by  a mortgage  or  other 
lien  as  to  deferred  payments,  and  (b)  agreements  of  purchase  and  sale 
which  contemplate  that  a conveyance  is  not  to  be  made  at  the  outset,  but 
only  after  all  or  a substantial  portion  of  the  agreed  installments  have  been 
paid. 

934  C2)  Deferred  payment  sales  not  on  the  installment  plan,  in  which 
there  is  a substantial  initial  payment  (ordinarily  not  less  than  one- 

fourth  of  the  purchase  price),  deferred  payments  being  secured  by  a mort- 
gage or  other  lien.  Such  sales  are  distinguished  from  sales  on  the  install- 
ment plan  by  the  substantial  character  of  the  initial  payment  and  also  usu- 
ally by  a relatively  small  number  of  deferred  payments. 

935  In  determining  how  these  classes  shall  be  treated  in  levying  the 
income  tax,  the  question  in  each  case  is  whether  the  income  to  be 

reported  for  taxation  shall  be  based  only  on  amounts  actually  received  in  a 
taxing  year,  or  on  the  entire  consideration  made  up  in  part  of  agreements 
to  pay  in  the  future.  (Art.  44,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  143  TAX 


GROSS  INCOME. 


936  Sale  of  Real  Estate  on  Installment  Plan. — In  the  two  kinds  of 
transactions  included  in  class  (1)  in  the  foregoing  article,  install- 
ment obligations  assumed  by  the  buyer  are  not  ordinarily  to  be  regarded  as 
the  equivalent  of  cash,  and  the  vendor  may  report  as  his  income  from  such 
transactions  in  any  year  that  proportion  of  each  payment  actually  received 
in  that  year  which  the  gross  profit  to  be  realized  when  the  property  is  paid 
for  bears  to  the  gross  contract  price.  If  the  return  is  made  on  this  basis  and 
the  vendor  repossesses  the  property  after  default  by  the  buyer,  retaining 
the  previous  payments,  the  entire  amount  of  such  payments  less  the  profit 
previously  returned,  will  be  income  to  the  vendor  and  will  be  so  returned 
for  the  year  in  which  the  property  was  repossessed,  and  the  property  re- 
possessed must  be  included  in  the  inventory  at  its  original  cost  to  himself 
(less  any  depreciation  as  defined  in  articles  161  [^{1330]  and  162  [P331]). 
If  the  taxpayer  chooses  as  a matter  of  settled  practice  consistently  followed 
to  treat  the  obligations  of  the  purchaser  as  equivalent  to  cash  and  to  report 
the  profit  derived  from  the  entire  consideration,  cash  and  deferred  pay- 
ments, as  income  for  the  year  when  the  sale  is  made,  this  is  permissible.  If 
so  treated  the  rule  prescribed  in  article  46  [937]  will  apply.  (Art.  45, 
Reg.  45,  Rev.,  April  17,  1919.) 

937  Deferred  Payment  Sales  of  Real  Estate  Not  on  Installment  Plan. 
— In  class  (2)  in  the  next  to  the  last  article  [][934]  the  obligations 

assumed  by  the  buyer  are  much  better  secured  because  of  the  margin 
afiforded  by  the  substantial  first  payment,  and  experience  shows  that  the 
greater  number  of  such  sales  are  eventually  carried  out  according  to  their 
terms.  These  obligations  for  deferred  payments  are  therefore  to  be  re- 
garded as  equivalent  to  cash,  and  the  profit  indicated  by  the  entire  con- 
sideration is  taxable  income  for  the  year  in  which  the  initial  payment  was 
made  and  the  obligations  assumed.  If  the  buyer  defaults  and  the  seller 
regains  title  to  the  land  by  agreement  or  process  of  law,  retaining  payments 
previously  made,  he  may  deduct  from  his  gross  income  as  a loss  in  the  year 
of  repossession  any  excess  of  the  amount  previously  reported  as  income  over 
the  amount  actually  received,  and  must  include  such  real^  estate  in  his 
inventory  at  its  original  cost  to  himself  (less  any  depreciation  as  defined 
in  articles  161  [111330]  and  162  [P331]).  See  article  153  [for  worthless 
mortgage  debt,  1|1320].  (Art.  46,  Reg.  45,  Rev.,  April  17,  1919.) 

938  Annuities  and  Insurance  Policies. — Annuities  paid  by  religious, 
charitable  and  educational  corporations  under  an  annuity  contract 

are  subject  to  tax  to  the  extent  that  the  aggregate  amount  of  the  payments 
to  the  annuitant  exceeds  any  amounts  paid  by  him  as  consideration  for 
the  contract.  An  annuity  charged  upon  devised  land  is  income  taxable 
to  the  annuitant,  whether  paid  by  the  devisee  out  of  the  rents  of  the  land 
or  from  other  sources.  The  devisee  is  not  required  to  return  as  taxable 
income  the  amount  of  rent  paid  to  the  annuitant,  and  he  is  not  entitled  to 
deduct  from  his  taxable  income  any  sums  paid  to  the  annuitant.  Where  an 
insured  receives  under  life  insurance,  endowment  or  annuity  contracts  sums 
in  excess  of  the  premiums  paid  therefor,  such  excess  is  income  for  the 
year  of  its  receipt.  See  article  72  [for  proceeds  of  insurance,  1[1114]. 
Distributions  on  paid-up  policies  which  are  made  out  of  earnings  of  the 
insurance  company  subject  to  tax  are  in  the  nature  of  corporate  dividends 
and  are  income  of  an  individual  only  for  the  purpose  of  the  surtax.  (Art, 
47,  Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


144  TAX 


GROSS  INCOME. 


939  Rent  and  Royalties. — When  improvements  made  by  a lessee  be- 
come part  of  the  real  estate,  the  value  of  such  improvements  upon 
the  expiration  of  the  existing  term  of  the  lease  is  income  to  the  lessor. 
In  general,  sums  paid  by  a tenant  for  the  use  of  property,  although  to 
another  than  the  landlord,  are  properly  to  be  regarded  as  rent  and  con- 
stitute income  of  the  landlord.  See  further  article  109  [P231].  Royalties 
on  patents  are  income.  (Art.  48,  Reg.  45,  Rev.,  April  17,  1919.) 

9J:0  Board,  lodging  or  other  consideration  received  in  lieu  of  rental  is  con- 
sidered incomiC  equal  in  amount  to  the  indebtedness  in  payment  of 
which  it  is  received,  and  should  be  included  in  any  return  of  annual  net 
income  its  recipient  is  required  to  render  under  the  provisions  of  the 
income-tax  law.  (T.  D.  2135,  Jan.  23,  1915.) 

9-11  Compensation  for  Loss,— In  the  case  of  property  which  has  been 
lost  or  destroyed  in  whole  or  in  part  through  fire,  storm,  shipwreck 
or  other  casualty,  or  where  the  owner  of  property  has  lost  or  transferred 
title  by  reason  of  the  exercise  of  the  power  of  requisition  or  eminent 
domain,  including  cases  where  a voluntary  transfer  or  conveyance  is  in- 
duced by  reason  of  the  fact  that  a technical  requisition  or  condemnation 
proceeding  is  imminent,  the  amount  received  by  the  owner  as  compensa- 
tion for  the  property  may  show  an  excess  over  the  value  of  the  property 
on  March  1,  1913,  or  over  its  cost,  if  it  was  acquired  after  that  date  (after 
making  proper  provision  in  either  case  for  depreciation  to  the  date  of  the 
loss,  damage  or  transfer).  The  transaction  is  not  regarded  as  completed 
at  this  stage,  however,  if  the  taxpayer  proceeds  immediately  in  good  faith 
to  replace  the  property,  or  if  he  makes  application  to  establish  a replace- 
ment fund  as  provided  in  the  following  article.  In  such  a case  the  gain, 
if  any,  is  measured  by  the  excess  of  the  amount  received  over  the  amount 
actually  and  reasonably  expended  to  replace  or  restore  the  property  sub- 
stantially in  kind,  exclusive  of  any  expenditures  for  additions  or  betterments. 
The  new  or  restored  property  effects  a replacement  in  kind  only  to  the 
extent  that  it  serves  the  same  purpose  as  the  property  which  it  replaces 
without  added  capacity  or  other  element  of  additional  value.  Such  new  or 
restored  property  shall  not  be  valued  in  the  accounts  of  the  taxpayer  at 
an  amount  in  excess  of  the  cost  or  value  at  klarch  1,  1913,  if  acquired 
before  that  date  (after  making  proper  provision  in  either  case  for  depre- 
ciation to  the  date  of  the  loss,  damage  or  transfer),  of  the  original  property, 
plus  the  cost  of  any  actual  additions  and  betterments.  If  the  taxpayer  does 
not  elect  to  replace  or  restore  the  property,  the  transaction  will  then  be 
deemed  to  be  completed  and  the  income  shall  be  measured  by  the  excess  of 
the  amount  of  the  compensation  received  over  the  cost  of  the  property  or 
its  actual  value  at  March- 1,  1913,  if  acquired  before  that  date  (after  making 
proper  provision  in  either  case  for  depreciation  to  the  date  of  the  loss, 
damage  or  transfer).  See  article  141  [for  deductible  losses,  |fl305]. 
Article  49  [this  article]  and  50  [11942]  have  no  application  to  property 
which  is  voluntarily  sold  or  disposed  of,  (Art.  49,  Reg.  45,  Rev.,  April  17, 
1919.) 

942  Replacement  Fund  for  Loss. — In  any  case  in  which  the  taxpayer 
elects  to  replace  or  restore  the  lost,  damaged  or  transferred  property, 
but  where  it  is  not  practicable  to  do  so  immediately,  he  may  obtain  per- 
mission to  establish  a replacement  fund  in  his  accounts  in  which  the  entire 
amount  of  compensation  so  received  shall  be  held,  without  deduction  for 

145  TAX 


INC. 


GROSS  INCOME. 


the  payment  of  any  mortgage,  and  pending  the  disposition  thereof  the 
accounting  for  gain  or  loss  thereupon  may  be  deferred  for  a reasonable 
period  of  time,  to  be  determined  by  the  Commissioner.  In  such  a case  the 
taxpayer  should  make  application  to  the  Commissioner  on  form  1114  for 
permission  to  establish  such  a replacement  fund  and  in  his  application  should 
recite  all  the  facts  relating  to  the  transaction  and  undertake  that  he  will 
proceed  as  expeditiously  as  possible  to  replace  or  restore  such  property. 
The  taxpayer  will  be  required  to  furnish  a bond  with  such  surety  as  the 
Commissioner  may  require  for  an  amount  not  less  dian  the  estimated  addi- 
tional income  and  war  profits  and  excess  profits  taxes  assessable  by  the 
United  States  upon  the  income  so  carried  to  the  replacement  fund.  See 
section  1320  of  the  statute  [U.  S.  bonds  as  security,  pSOO].  ^ The  esti- 
mated additional  taxes,  for  the  amount  of  which  the  claimant  is  required 
to  furnish  security,  should  be  computed  at  the  rates  at  which  the  claimant 
would  have  been  obliged  to  pay,  taking  into  consideration  the  remainder 
of  his  net  income  and  resolving  against  him  all  m.atters  in  dispute  affect- 
ing the  amount  of  the  tax.  Only  surety  companies  holding  certificates  of 
authority  from  the  Secretary  of  the  1 reasury  as  acceptable  sureties  on 
federal  bonds  will  be  approved  as  sureties.  The  application  should  be 
executed  in  triplicate,  so  that  the  Commissioner,  the  applicant  and  the 
surety  or  depositary  may  each  have  a copy.  (Art.  50,  Reg.  45,  Rev.,  April 
17,  1919.) 


y Forgiveness  of  Indebtedness. — Hie  cancellation  and  forgiveness 
of  indebtedness  is  dependent  on  the  circumsiances  for  its  effect.  _ It 
may  amount  to  a payment  of  income  or  to  a gift  or  to  a capital  transaction. 
If,  for  example,  an  individual  performs  services  for  a ci editor,  who  in 
consideration  thereof  cancels  the  debt,  inconie  to  that  amount  is  realized  by 
the  debtor  as  compensation  for  his  services.  If,  however,^  a creditor 
merely  desires  to  benefit  a debtor  and  without  any  consideration  therefor 
cancels  the  debt,  the  amount  of  the  debt  is  a gift  frorn  the  creditor  to  the 
debtor  and  need  not  be  included  m the  latter’s  gross  income.  If  a stock- 
holder in  a corporation  v/hich  is  indebted  to  him  gratuitously  forgives  the 
debt,  the  transaction  amounts  to  a contribution  to  the  capital  of  the  cor- 
poration If  however,  a corporation  to  which  a stockholder  is  indebted 
forgives’ the  debt,  the  transaction  has  the  effect  of  the  payment  of  a divi- 
dend See  sections  213  (b)  (3)  and  2^0  of  the  statute  and  articles  543 
[contributions  by  stockholders,  11950]  and  631-638  [affiliated  corpora- 
tions 111826].  (Art.  51,  Reg.  45,  Rev.,  Aprd  17,  1919.) 

944  [The  Circuit  Court  of  Appeals,  Second  Circuit,  held  in  U.  S ys. 
Oregon-Washington  R.  & Nav.  Co.  April  24,  1918  (251  Fed.  211), 

that  a debt  forgiven  is  not  income  to  the  debtor.  -The  parties  in  interest  here 
were  affiliated  corporations.  (Page  665,  1918  Income  Tax  Service.)] 

945  When  Included  in  Gross  Income. — Gains,  profits  and  income  are 
to  be  included  in  the  gross  income  for  the  taxable  year  in  which  they 

are  received  by  the  taxpayer,  unless  they  are  included  when  they  accrue  to 
him  in  accordance  with  the  approved  method  of  accounting  followed  by 
him.  See  articles  21-24  [beginning  at  11780].^  Lands  which  are  received 
as  compensation  for  services  in  one  year,  the  title  to  which  is  disputed  and 
in  a later  year  adjudged  to  be  valid,  constitute  income  to  the  grantee  in 
the  former  year.  On  the  other  hand,  a person  may  sue  m one  year  on  a 

146  TAX 


INC. 


GROSS  INCOME. 


pecuniary  claim  or  for  property,  but  money  or  property  recovered  on  a 
judgment  therefor  rendered  in  a later  year  would  be  income  in  that  year, 
assuming  that  it  would  have  been  income  in  the  earlier  year  if  then  re- 
ceived. This  is  true  of  a recovery  for  patent  infringement.  Bad  debts 
or  accounts  charged  off  because  of  the  fact  that  they  were  determined  to  be 
worthless,  which  are  subsequently  recovered,  whether  or  not  by  suit,  con- 
stitute income  for  the  year  in  which  recovered,  regardless  of  the  date  when 
the  amounts  were  charged  off.  See  articles  111  [when  charges  are  de- 
ductible, ^792]  and  151  [bad  debts,  ^1318].  In  view  of  the  unusual  con- 
ditions prevailing  at  the  close  of  the  year  1918  it  is  recognized  that  many 
items  of  gross  income  such  as  claims  for  compensation  under  cancelled 
contracts,  together  with  claims  against  contracting  departments  of  the 
Government  for  amortization  and  other  matters,  while  properly  constituting 
gross  income  for  the  taxable  year  1918  were  undecided  and  not  sufficiently 
definite  in  amount  to  be  reported  in  the  original  return  for  that  year.  In 
every  such  case  the  taxpayer  should  attach  to  his  return  a full  statement  of 
such  pending  claims  and  other  matters,  and  when  the  correct  amount  of 
such  items  is  ascertained  an  amended  return  for  the  taxable  year  1918 
should  be  filed.  (Art.  52,  Reg.  45,  Rev.,  April  17,  1919.) 

946  Income  Not  Reduced  to  Possession.— Income  which  is  credited 
to  the  account  of  or  set  apart  for  a taxpayer  and  which  may  be  drawn 

upon  by  him  at  any  time  is  subject  to  tax  for  the  year  during  which  so 
credited  or  set  apart,  although  not  then  actually  reduced  to  possession. 
To  constitute  receipt  in  such  a case  the  income  must  be  credited  to  the 
taxpayer  without  any  substantial  limitation  or  restriction  as  to  the  time  or 
manner  of  payment  or  condition  upon  which  payment  is  to  be  made.  A 
book  entry,  if  made,  should  indicate  an  absolute  trz.isfer  from  one  account 
to  another.  If  the  income  is  not  credited,  but  is  set  apart,  such  income 
must  be  unqualifiedly  subject  to  the  demand  of  the  taxpayer.  Where  a 
corporation  contingently  credits  its  employees  with  bonus  stock,  but  the 
stock  is  not  available  to  such  employees  until  the  termination  of  five  years 
of  employment,  the  mere  crediting  on  the  books  of  the  corporation  does 
not  constitute  receipt.  The  distinction  between  receipt  and  accrual  must 
be  kept  in  mind.  Income  may  accrue  to  the  taxpayer  and  yet  not  be  sub- 
ject to  his  demand  or  capable  of  being  drawn  on  or  against  by  him.  (Art. 
53,  Reg.  45,  Rev.,  April  17,  1919.) 

947  Examples  of  Constructive  Receipt.— When  interest  coupons 
have  matured,  but  have  not  been  cashed,  such  interest  payment. 

though  not  collected  ’^^^hen  due  and  payable,  is  nevertheless  available  to  the 
taxpayer  and  should  therefore  be  included  in  his  gross  income  for  the  year 
during  which  the  coupons  matured.  This  is  so  if  the  coupons  are  exchanged 
for  other  property  instead  of  eventually  being  cashed.  Dividends  on  cor- 
porate stock  are  subject  to  tax  when  set  apart  for  the  stockholder,  although 
not  yet  collected  by  him.  See  section  201  of  the  statute  and  articles  1541- 
1549  [dividends,  beginning  at  |[815].  The  distributive  share  of  the 
profits  of  a partner  in  a partnership  or  of  a stockholder  in  a personal 
service  corporation  is  regarded  as  received.  See  section  218  of  the  statute 
and  articles  321-335  [partnerships,  beginning  at  pSl].  Interest  credited 
on  savings  bank  deposits,  even  though  the  bank,  nominally  have  a rule, 
seldom  or  never  enforced,  that  it  may  require  so  many  days’  notice  in 
advance  of  cashing  depositor’s  checks,  is  income  to  the  depositor  when 
credited.  An  amount  credited  to  shareholders  of  a building  and  loan  asso- 

INC.  147  TAX 


GROSS  INCOME. 


ciation,  when  such  credit  passes  without  restriction  to  the  shareholder,  has 
a taxable  status  as  income  for  the  year  of  the  credit.  Where  the  amount 
of  such  accumulations  does  not  become  available  to  the  shareholder  until 
the  maturity  of  a share,  the  amount  of  any  share  in  excess  of  the  aggregate 
amount  paid  in  by  the  shareholder  is  income  for  the  year  of  the  maturity 
of  the  share,  .(^rt.  54,  Reg.  45,  Rev.,  April  17 , 1919.) 

948  Bond  Interest  Due  Prior  to  March  1,  1913. — [For  discussion  of 
withholding  on  coupon  interest  maturing  m years  1918, 

coupons  not  being  presented  for  payment  until  1919,  read  at  ^1631.  J 


949  Sale  of  Capital  Stock. — The  proceeds  from  the  original  sale  by 
a corporation  of  its  shares  of  capital  stock,  whether  such  proceeds 
are  in  excess  of  or  less  than  the  par  value  of  the  stock  issued,  constitute 
the  capital  of  the  company.  If  the  stock  is  sold  at  a premium,  the  premium 
is  not  income.  Likewise,  if  the  stock  is  sold  at  a discount,  the  amount 
of  the  discount  is  not  a loss  deductible  from  gross  income.  If,  for  the 
purpose  of  enabling  a corporation  to  secure  working  capital  or  for  any  other 
purpose,  the  stockholders  donate  or  return  to  the  corporation  to  be  resold 
by  it  certain  shares  of  stock  of  the  company  previously  issued  to  them, 
or  if  the  corporation  purchases  any  of  its  stock  and  holds  it  as  treasury 
stock,  the  sale  of  such  stock  will  be  considered  a capital  transaction  and 
the  proceeds  of  such  sale  will  be  treated  as  capital  and  will  not  constitiRe 
income  of  the  corporation.  A corporation  realizes  no  gain  or  loss  from  the 
purchase  of  its  own  stock.  See  articles  563  [for  restatement  that  no 
loss  is  sustained  on  sale  of  capital  stock,  p244],  861  and  862  [involving 
invested  capital — War  Tax  Service].  (Art.  542,  Reg.  45,  Rev.,  April  17, 
1919.) 


950  Contributions  by  Stockholders. — Where  a corporation  requires 
additional  funds  for  conducting  its  business  and  obtains  such  needed 
money  through  voluntary  pro  rata  payments  by  its  stockholders,  the  amounts 
so  received  being  credited  to  its  surplus  account  or  to  a special  capital 
account,  such  amounts  will  not  be  considered  income,  although  there  is  no 
increase  in  the  outstanding  shares  of  stock  of  the  corporation.  The  pay- 
ments in  such  circumstances  are  in  the  nature  of  voluntary  assessments 
upon  and  represent  an  additional  price  paid  for,  the  shares  of  stock  held 
by  the  individual  stockholders,  and  will  be  treated  as  an  addition  to  and 
as  a part  of  the  operating  capital  of  the  company..  See  articles  51  [tor 
forgiveness  of  indebtedness,  lj943J,  293  [for  assessments,  as  ca^  a 
expenditures,  111190],  838  and  869  [involving  invested  capital— War  lax 
Service].  (Art.  543,  Reg.  45,  Rev.,  April  17,  1919.) 


951  Sale  and  Retirement  of  Corporate  Bonds. — (1)  (a)  If  bonds  are 
issued  by  a corporation  at  their  face  value,  the  corporation  realizes 
no  gain  or  loss,  (b)  If  thereafter  the  corporation  purchases  and  retires 
any^of  such  bonds  at  a price  in  excess  of  the  issuing  price  or  face  value, 
the  excess  of  the  purchase  price  over  the  issuing  price  or  face  value  is  a 
deductible  expense  for  the  taxable  year.  See  section  234  of  the  statute 
and  article  563  [for  similar  statement,  111244].  (c)  If,  however,  the  cor- 

poration purchases  and  retires  any  of  such  bonds  at  a price  less  than  the 
issuing  price  or  face  value,  the  excess  of  the  issuing  price  or  face  value 
over  the  purchase  price  is  gain  or  income  for  the  taxable  year. 


INC. 


148  TAX 


GROSS  INCOME. 


952  (2)  (a)  If  bonds  are  issued  by  a corporation  at  a premium,  the 

net  amount  of  such  premium  is  gain  or  income  which  should  be  pro- 
rated or  amortized  over  the  life  of  the  bonds,  (b)  If  thereafter  the  cor- 
poration purchases  and  retires  any  of  such  bonds  at  a price  in  excess  of 
the  issuing  price  minus  any  amount  of  premium  already  returned  as  income, 
the  excess  of  the  purchase  price  over  the  issuing  price  minus  any  amount 
of  premium  already  returned  as  income  (or  over  ihe  face  value  plus  any 
amount  of  premium  not  yet  returned  as  income)  is  a deductible  expense  for 
the  taxable  year,  (c)  If,  however,  the  corporation  purchases  and  retires 
any  of  such  bonds  at  a price  less  than  the  issuing  price  minus  any  amount 
of  premium  already  returned  as  income,  the  excess  of  the  issuing  price 
minus  any  amount  of  premium  already  returned  as  income  (or  of  the  face 
value  plus  any  amount  of  premium  not  yet  returned  as  income)  over  the 
purchase  price  is  gain  or  income  for  the  taxable  year. 

953  (3)  (a)  If  bonds  are  issued  by  a corporation  at  a discount,  the  net 

amount  of  such  discount  is  deductible  as  interest  and  should  be  pro- 
rated or  amortized  over  the  life  of  the  bonds,  (b)  If  thereafter  the  cor- 
poration purchases  and  retires  any  of  such  bonds  at  a price  in  excess  of 
the  issuing  price  plus  any  amount  of  discount  already  deducted,  the  excess 
of  the  purchase  price  over  the  issuing  price  plus  any  amount  of  discount 
already  deducted  (or  over  the  face  value  minus  any  amount  of  discount  not 
yet  deducted)  is  a deductible  expense  for  the  taxable  year,  (c)  If,  how- 
ever, the  corporation  purchases  and  retires  any  of  such  bonds  at  a price 
less  than  the  issuing  price  plus  any  amount  of  discount  already  deducted, 
the  excess  of  the  issuing  price  plus  any  amount  of  discount  already  de- 
ducted (or  of  the  face  value  minus  any  amount  of  discount  not  yet  de- 
ducted) over  the  purchase  price  is  gain  or  income  for  the  taxable  year. 
(Art.  544,  Reg.  45,  Rev.,  April  17,  1919.) 

954  Discount  on  Bonds  Issued  Prior  to  1909. — Discount  on  bonds  is- 
sued and  sold  prior  to  the  year  1909,  if  such  discount  was  then 

charged  against  surplus  or  against  the  income  of  the  year  in  which  the 
bonds  were  sold,  is  held  not  to  be  deductible  from  the  income  of  subse- 
quent years,  for  the  reason  that  the  charging  off  prior  to  January  1,  1909, 
of  the  entire  amount  of  the  discount  constitutes  a closed  transaction,  and 
such  transaction  can  not  be  reopened  for  the  purpose  of  reducing  the  tax- 
able income  of  a corporation  for  subsequent  years  by  deducting  therefrom 
an  aliquot  part  of  the  discount.  (Art.  149,  11461,  Reg.  33,  Rev.,  Jan.  2, 
1918.)  (C.  & A.  R.  R.  V.  U.  S.,  Court  of  Claims  rjf955]). 

955  Xhe  appended  opinion  [caption  only,  ^956]  of  the  Court  of  Claims 
of  the  United  States  in  the  case  of  Chicago  & Alton  Railroad  Co.  v. 

United  States  [decided  Dec.  3,  1917]  is  published  for  the  information  of 
internal-revenue  officers  and  others  concerned. 

956  Caption  referred  to  in  1[955. — Where  a railroad  company  sold  bonds 
and  equipment  notes  at  a discount  in  1906  and  the  books  show  that 

the  loss  was  entirely  charged  off  under  the  profit  and  loss  account  for 
1906,  and  the  company  in  making  returns  under  the  act  of  August  5,  1909, 
for  purpose  of  assessment  of  excise  tax  for  years  1911  and  1912,  failed 
to  deduct  the  proportionate  amount  of  discount  sustained,  it  has  no  right 
to  claim  refund  of  such  amount.  The  petition  of  claimant  foi'  refund  of 
tax  dismissed.  (T.  D.  2631,  Jan.  19,  1918.)  (249  Fed.  280.) 


INC. 


149  TAX 


GROSS  INCOME. 


957  Discount  on  Bonds  Issued  Subsequent  to  January  1,  1909. — If, 

however,  the  bonds  were  sold  subsequent  to  January  1,  1909,  at  a 
discount,  and  the  amount  of  the  discount  was  then  charged  off  on  the 
books,  either  against  earnings  or  surplus,  but  not  deducted  in  the  cor- 
poration’s return  of  net  income,  such  discount  as  was  not  then  deducted, 
may  be  spread  over  the  life  of  the  bonds,  and  an  aliquot  part  of  the  dis- 
count may  be  deducted  from  the  gross  income  of  each  year  until  the  bonds 
mature  or  are  redeemed. 

958  In  cases  wherein  a corporation  sells  its  bonds  at  a discount  plus  a 
commission  for  selling,  the  amount  of  such  discount  and  commission, 

together  with  other  expenses  incidental  to  issuing  the  bonds,  constitutes  a 
loss,  the  aggregate  amount  of  which  loss  will  for  the  purpose  of  an  income 
tax  return,  be  prorated  over  the  life  of  the  bonds  sold,  and  the  amount 
thus  apportioned  to  each  year  will  be  deductible  from  the  gross  income 
of  each  such  year  until  the  bonds  shall  have  been  redeemed. 

959  If  a corporation  having  sold  its  bonds  at  a discount,  the  discount 
having  been  deducted  from  gross  income  later  repurchases  or  redeems 

the  bonds  at  a price  less  than  par,  the  difference  between  the  price  at 
which  they  are  redeemed  and  their  par  value  will  be  returned  as  income. 
If  bonds  are  sold  at  a premium  the  premium  must  be  returned  as  income. 
(Art.  150,  m2-464,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

960  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals 
for  the  Third  Circuit,  in  the  case  of  the  Baldwin  Rocomotive  Works 

V.  McCoach,  collector,  [221  Fed.  59,  holding  that  if  the  loss  sustained  by 
selling  its  own  bonds  at  a discount  is  an  expense  of  the  business  of  a cor- 
poration the  expense  will  not  be  paid  until  the  maturity  of  the  bonds]  is 
published  for  the  information  of  internal  revenue  officers  and  others  con- 
cerned. (T.  D.  2185,  April  1,  1915.)  [Decision  reported  at  221  Fed.  59.] 

961  Loss  Due  to  Retirement  of  Bonds. — In  a case  wherein  a corpora- 
tion, under  the  terms  of  its  indenture,  securing  an  issue  of  bonds, 

is  required  annually  or  at  certain  specified  periods  to  purchase  and  retire  a 
certain  number  of  its  bonds  and  in  doing  so  pays  more  than  par  for  the 
bonds,  the  loss  sustained  is  an  allowable  deduction  from  gross  income  for 
the  year  in  which  such  purchase  is  made,  under  the  following  conditions : 

962  First.  If  the  bonds  were  sold  at  par,  then  the  loss  is  the  difference 
between  par  and  the  price  at  which  they  were  repurchased  for 

retirement. 

963  Second.  If  the  bonds  were  sold  at  a premium  and  such  premium  was 
accounted  for  as  income  for  the  year  in  which  issued,  then  the  differ- 
ence between  par  and  the  repurchase  price  may  be  deducted  as  loss,  but 
if  the  premiums  at  which  the  bonds  were  issued  had  not  been  carried  into 
the  income  account  then  the  loss  to  be  claimed  should  be  the  difference 
between  the  price  at  which  the  bonds  were  sold  and  the  price  at  which  they 
were  repurchased. 

964  Third.  If  the  bonds  were  sold  at  a discount  and  the  discount  was 
charged  against  the  earnings  of  the  year  in  which  issued,  the  differ- 
ence between  par  and  the  repurchase  price  may  be  deducted  as  a loss,  but  if 
the  discount  on  the  bonds  was  prorated  over  the  life  of  the  bonds  and  the 
annual  proportion  charged  against  the  yearly  income,  the  amount  to  be 
charged  off  as  a loss  for  the  year  in  which  the  bonds  are  repurchased  for 
retirement  should  be  the  difference  between  the  price  at  which  the  bonds 
were  sold  and  the  repurchase  price  minus  an  allowance  for  the  sum  that 

1 50  TAX 


INC. 


GROSS  INCOME. 


had  been  charged  off  annually  on  account  of  the  prorated  discount  on  such 
bonds.  (Art.  152,  1467-470,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


Redemption  of  Stock  on  a Stipulated  Premium  Basis  Considered 
a Capital  Transaction. — The  office  is  in  receipt  of  your  letter  of 
the  6th  instant,  in  which  you  ask  for  information  on  the  following  question: 

A corporation  in  1912  issued  preferred  stock  for  par.  It  was  provided  on 
the  certificates  that  said  stock  was  redeemable  at  110.  The  company  exer- 
cised its  option  and  redeemed  the  stock  at  110  by  calling  it  in.  The  differ- 
ence appeared  on  the  books  as  a reduction  of  undivided  profits.  Is  this 
difference  a lawful  deduction?’'  lln  reply  you  are  informed  that  this 
office  will  hold  that  the  redeeming  of  the  stock  at  a price  in  excess  of 
par  represents  a capital  transaction  in  which  there  can  be  no  gain  or  loss 
to  the  corporation,  and  therefore  the  difference  between  the  selling  price 
of  the  stock  and  the  price  at  which  it  was  redeemed  will  not  be  deductible 
in  a return  of  annual  net  income.  (Letter  to  a subscriber,  signed  by  Deputy 
Commissioner  G.  E.  Fletcher  and  dated  April  11,  1917.) 

Sale  of  Capital  Assets.— Where  property  is  acquired  and  later 
sold  for  a higher  price,  the  gain  on  the  sale  is  income.  If,  however, 
the  property  was  acquired  before  March  1,  1913,  only  such  portion  of  the 
gain  as  accrued  subsequently  to  February  28,  1913,  is  taxable.  Where,  then, 
a corporation  sells  its  capital  assets  in  whole  or  in  part,  it  shall  include  in 
its  gross  income  for  the  year  in  which  the  sale  was  made!  the  amount  of 
the  excess  of  the  sales  price  over  the  fair  market  value  of  such  assets  as 

of  March  1,  1913,  if  acquired  prior  to  that  date,  or  over  their  cost  if 

acquired  subsequently  to  that  date.  In  every  case,  however,  in  ascertaining 
the  gain,  the  cost  of  the  assets,  or  the  fair  market  value  as  of  March  1, 
1913,  of  the  assets  acquired  prior  thereto  should  first  be  reduced  by  the 
amount  of  any  charges  for  depreciation,  depletion  and  other  losses  which 
have  been  or  should  have  been  made.  If  the  purchaser  takes  over  all  the 

assets  and  assumes  the  liabilities,  the  amount  so  assumed  is  part  of  the 

purchase  price.  See  also  article  563  [p244].  If  the  sale  is  made  for 
stock  of  another  corporation,  the  rules  contained  in  section  202  of  the 
statute  and  in  articles  1561-1570  [beginning  at  ^1058]  are  particularly 
applicable.  (Art.  545,  Reg.  45,  Rev.,  April  17,  1919.) 

967  Income  from  Leased  Property. — Where  a corporation  has  leased 
its  property  in  consideration  that  the  lessee  shall  pay  in  lieu  of  other 
rentah  an  amount  equivalent  to  a certain  rate  of  dividend  on  the  lessor’s 
capital  stock  or  the  interest  on  the  lessor’s  outstanding  indebtedness,  to- 
gether with  taxes,  insurance  or  other  fixed  charges,  such  payments  shall 
be  considered  rental  payments  and  shall  be  returned  by  the  lessor  cor- 
poration as  income,  notwithstanding  the  fact  that  the  dividends  and  interest 
are  paid  by  the  lessee  directly  to  the  stockholders  and  bondholders  of  the 
lessor.  The  fact  that  a corporation  has  conveyed  or  let  its  property  and 
has  parted  with  its  management  and  control,  or  has  ceased  to  engage  in  the 
business  for  which  it  was  originally  organized,  will  not  relieve  it  from 
liability  to  the  tax.  While  the  payments  made  by  the  lessee  directly  to  the 
bondholders  or  stockholders  of  the  lessor  are  rentals  as  to  both  the  lessee 
and  lessor  (rentals  paid  in  one  case  and  rentals  received  in  the  other),  to 
the  bondholders  and  the  stockholders  such  amounts  are  interest  and  divi- 
dend payments  received  as  from  the  lessor  and  as  such  shall  be  accounted 
for  in  their  returns.  (Art.  546,  Reg.  45,  Rev.,  April  7,  1919.) 

151  TAX 


INC. 


GROSS  INCOME. 


968  Gross  Income  of  Corporation  in  Liquidation. — When  a corpora- 
tion is  dissolved  its  affairs  are  usually  wound  up  by  a receiver  or 
trustees  in  dissolution.  The  corporate  existence  is  continued  for  the  pur- 
pose of  liquidating  the  assets  and  paying  the  debts,  and  such  receiver  or 
trustees  stand  in  the  stead  of  the  corporation  for  such  purposes.  Any 
sales  of  property  by  them  are  to  be  treated  as  if  made  by  the  corporation 
for  the  purpose  of  ascertaining  the  gain  or  loss.  No  gain  or  loss  is  realized 
by  a corporation  from  the  mere  distribution  of  its  assets  qn  kind  upon 
dissolution,  however  they  may  have  appreciated  or  depreciated  in  value 
since  their  acquisition.  See  further  articles  622  [for  returns  by  recei'^rs, 
111786]  and  1548  [for  distributions  in  liquidation,  1[867].  (Art.  54/,  Keg. 
45,  Rev.,  April  17,  1919.) 


969  Return  by  Corporation  for  Taxable  Year  During  Which  Its  Affairs 

Are  Placed  in  Hands  of  Receiver,  etc.,  for  Purposes  of  Dissolution. 

Receipt  is  acknowledged  of  your  letter  dated  October  16,  1919, 

relative  to  the  meaning  of  Article  547  of  Regulations  45  ^ply  you 

are  advised  that  your  question  as  to  whether,  under  Aiticle  ^47  of  the 
Regulations,  any  profit  or  loss  resulting  from  the  sale  of  capital  assets  by 
the  trustees  or  receivers  during  the  process  of  liquidation  is  to  be  merged 
wfth  the  p ofit  or  loss  resulting  from  the  regular  business  of  he  yrpora- 
don  during  the  same  taxable  year  prior  to  the  taking  over  of  the  affairs 
of  the  corporation  by  the  trustees  or  by  the  receiver  is  answered  in  the 
affirmative^  tFor  information  as  to  the  meaning  of  the  term 
vear”  aTused  in  the  Revenue  Act  of  1918  and  for  further  information  as 
to  the  reouirements  of  the  Statute  with  respect  to  the  filing  of  returns  by 

Daniel  C.  Roper,  and  dated  October  24,  1919.) 


(Decision.) 

(Revenue  Act  of  1916.) 

Income  Tax  Liability  of  a Trustee  in  Bankruptcy. 

In  re.  Heller,  Hirsh  & Co.  . 

(U.  S.  Circuit  Court  of  Appeals,  Second  Circuit.) 

970  Appeal  from  the  District  Court  of  the  United  Sta  es  oi 
District  of  New  York.  In  the  matter  of  Hellei,  Hush  IL  ^ 

poMioS  b-rup,.  A p,.i,ion  bp  the  y„i,.b  S™ 

directingfthe^mistee^oj  o™Neiv  York  $2,400  as  taxes  on  income 

undeTAct  Sept.  8,  1916,  as  a preferred  claim,  was  denied,  and  the  govern- 

"^^"Be^or^Ward  Rogers  and  Manton,  Circuit  Judges. 

971  Per  Sm  tS  United  States  attorney  filed  a petition  for  an 
Se/directing  the  t-tee  of  the  baidt^^^^ 

collector  of  internal  revenu 

$2,400  under  Act  ^’preferred  claim.  The  trustee  was  not 

rs  sd-  Tr,Se::?r  rTrw...bd'  e,,.. 

152  TAX 


INC. 


GROSS  INCOME. 


mended  that  the  prayer  of  the  petition  be  denied,  and  his  report,  which 
is  set  but  below  [in  part],  was  confirmed  without  opinion  by  Judge  Hough. 
We  are  quite  clear  that  under  section  13  (c)  of  the  act  of  1916  (Comp.  St 
Sec.  6336m)  [1918  Act,  p785  herein.]  only  net  income  earned  by  a trustee 
while  operating  th.e  business  of  a bankrupt  corporation  is  taxable. 

972  • The  order  is  affirmed. 

973  Note. — Referee  Townsend’s  opinion,  referred  to  in  the  opinion?- 
here  follows  [in  part]  : 

974  “Carefully  prepared  briefs  have  been  filed  with  the  Referee  by  the 
parties.  I find  in  the  briefs  no  decisions  which  I deem  decisive  of 

the  present  motion,  viz.,  no  decisions  where  the  government  asserts  a 
claim  for  an  income  tax  against  a trustee  in  bankruptcy  of  a corporation 
or  individual  adjudicated  a bankrupt  and  therefore  presumably  insolvent. 
I refer  below  to  certain  decisions  which  in  my  opinion  aid  in  deciding  the 
present  motion. 

975  “In  my  opinion  the  present  motion  depends  for  its  determination 
upon  a judicial  interpretation  of  the  act  of  September  8,  1916,  a 

copy  of  which  act  accompanies  this  report.  Such  interpretation  should  be 
a fair  one.  It  is  not  the  duty  of  this  court  or  of  the  government  authori- 
ties to  resort  to  Procrustean  methods  of  interpretation  against  the  taxpayer. 

976  “I  find  nothing  in  the  act  of  September  8,  1910,  to  indicate  that 
Congress  intended  to  impose  an  income  tax  upon  a trustee  in  bank- 
ruptcy in  respect  to  the  assets  of  a bankrupt  corporation  which  he  has 
taken  over  to  be  marshaled  and  distributed  among,  the  creditors  of  the 
corporation.  To  my  mind  the  text  of  the  act  of  September  8,  1916,  does 
not  indicate  any  such  purpose.  This  view  of  the  act  does  not  deprive  the 
government  of  its  just  due.  The  dividends  declared  and  distributed  to 
the  creditors  are  presumptively  income  in  the  hands  of  the  latter  subject 
to  an  income  tax  to  be  assessed  against  the  latter. 

977  “Great  stress  is  laid  by  the  government  on  the  provisions  of  section 
13  (c)  of  the  act  of  September  8,  1916.  The  presence  of  subdivision 

(c)  in  the  act  of  September  8,  1916,  and  its  absence  from  the  prior  act 
of  October  3,  1913,  has  to  my  mind  no  significance  in  the  present  case  in 
view  of  the  peculiar  language  of  subdivision  (c). 

978  “The  language  used  in  subdivision  (c)  shows  that  the  subdivision 
was  not  intended  by  Congress  to  apply  in  the  case  of  receivers  or 

trustees  in  bankruptcy  or  assignees  who  merely  marshaled  and  distributed 
the  assets  of  an  insolvent  corporation  among  its  creditors.  In  terms 
subdivision  (c)  applies  only  in  cases  where  receivers  or  trustees  in  bank- 
ruptcy or  assignees  ‘are  operating  the  property  or  business  of  corporations’ 
and  thus  may  be  in  the  receipt  of  a ‘net  income’  as  defined  in  the  prior 
sections  of  the  act.  I regard  the  quoted  words  as  of  marked  significance. 

979  “To  my  mind  the  subdivision  was  inserted  in  the  act  to  meet  the 
specified  case  of  the  profitable  operation  of  the  business  of  a corpora- 
tion by  the  officers  mentioned;  for  instance  the  operation  of  the  business 
of  a railroad  corporation  by  receivers  or  the  operation  of  the  business 
of  a manufacturing  corporation  by  a trustee  in  bankruptcy,  etc. 

980  “The  decisions  cited  in  the  brief  filed  by  the  government,  such 
as  Edwards  v.  Keith,  Collector,  231  Fed.  Ill,  145  C.  C.  A.  298, 

L.  R.  A.  1918A,  498  (C.  C.  A.,  2d  Circuit),  and  Towne  v.  Eisner,  Col- 

153  TAX 


INC. 


TAX  ON  INSURANCE  COMPANIES. 


lector,  245  U.  S.  418,  38  Sup.  Ct.  158,  62  L.  Ed.  372,  L.  R.  A.  1918D,  254 
(January  1918)  turning  as  they  do  on  what  is  and  what  is  not  taxable 
income,  no  question  arising  in  those  cases  as  to  the  status  of  the  taxes, 
are  not  pertinent  in  my  view  of  the  case  before  me. 

981  “For  like  reason  I have  not  discussed  the  correctness  of  the  amount 
of  net  income  upon  which  the  government  claims  a tax.  This 
amount,  as  well  as  his  liability  for  any  tax,  is  challenged  by  the  trustee  in 
bankruptcy. 

^^2  ‘U  am  of  the  opinion  that  the  trustee  in  bankruptcy  is  entitled  to, 
an  order  denying  the  prayer  of  the  petition  filed  by  the  United 
States  attorney  for  the  Southern  district  of  New  York,  on  behalf  of  the 
collector  of  internal  revenue  for  the  Second  district  of  New  York.”  (258 
Fed.  208.) 


Insurance  Companies. — Insurance  companies  include  both  stock 
and  mutual  companies,  as  well  as  mutual  benefit  insurance  com- 
panies. A voluntary  unincorporated  association  of  employees  formed  for 
the  purpose  of  relieving  sick  and  aged  members  and  the  dependents  of  de- 
ceased members  is  an  insurance  company,  whether  the  fund  for  such  purpose 
is  created  wholly  by  membership  dues  or  partly  by  contributions  from  the 
employer.  But  a corporation  which  merely  sets  aside  a fund  for  the  insur- 
ance of  its  employees  is  not  required  to  file  a separate  return  for  such  fund 
if  the  income  and  disbursements  therefrom  are  included  in  the  corporation’s 
own  return.  (Art.  1508,  Reg.  45,  Rev.,  April  17,  1919.) 

984  Exempt  Insurance  Companies. — [Read  at  1f767.] 

985  Gross  Income  of  Insurance  Companies. — The  gross  income  of 
insurance  companies  consists  of  their  total  revenue  from  the  opera- 
tion of  the  business  and  of  their  income  from  all  other  sources  within  the 
taxable  year,  except  as  otherwise  provided  by  the  statute.  Gross  income 
includes  net  premiums  (that  is,  gross  premiums  less  returned  premiums  on 
policies  cancelled  and  premiums  on  policies  not  taken),  investment  in- 
comxe,  profits  from  the  sale  of  assets,  and  all  gains,  profits  and  income  re- 
ported to  the  State  insurance  departments,  except  income  specifically  exempt 
from  tax.  Premiums  received  by  mutual  marine  insurance  companies  which 
are  paid  out  for  reinsurance  should  be  eliminated  from  gross  income  and 
the  payments  for  reinsurance  from  disbursements.  Deposit  premiums  on 
perpetual  risks  received  and  returned  by  fire  insurance  companies  should 
be  treated  in  the  same  manner,  as  no  reserve  will  be  recognized  covering 
liability  for  such  deposits.  The  earnings  on  such  deposits  must  be  included 
in  the  investment  income.  A net  decrease  in  reserve  funds  required  by 
law  within  the  taxable  year  must  be  included  in  the  gross  income.  See 
articles  568-572  [for  deductions  allowed  insurance  companies,  11992].  (Art. 
548,  Reg.  45,  Rev.,  April  17,  1919.) 

980  Law1f282.  Gross  Income  of  Life  Insurance  Companies. — “(1)  In 

the  case  of  life  insurance  companies  there  shall  not  be  in- 
cluded in  gross  income  such  portion  of  any  actual  premium  received  from 
any  individual  policyholders  as  is  paid  back  or  credited  to  or  treated  as  an 
abatement  of  premium  of  such  policyholder  within  the  taxable  year.” 

INC.  ISA  TAX 


TAX  ON  INSURANCE  COMPANIES. 

A life  insurance  company  shall  not  include  in  gross  income  such  por- 
tion of  any  actual  premium  received  from  any  individual  policy- 
holder as  is  paid  back  or  credited  to  or  treated  as  an  abatement  of  premium 
of  such  policyholder  within  the  taxable  year,  (a)  “Paid  back”  means 
paid  in  cash,  (b)  “Credited  to”  means  held  to  the  credit  of,  including 
dividends  applied  to  pay  renewal  premiums  to  purchase  additional  paid- 
up  insurance  or  annuities,  or  to  shorten  the  endowment  or  premium- 
paying period.  It  does  not  include  dividends  provisionally  ascertained  and 
apportioned  upon  deferred  dividend  policies,  (c)  “Treated  as  an  abatement 
of  premium”  means  of  the  premium  for  the  taxable  year.  Where  the  divi- 
dend paid  back  is  in  excess  of  the  premium  received  from  the  policyholder 
within  the  taxable  year  there  may  be  excluded  from  gross  income  only  the 
amount  of  such  premium  received,  and  where  no  premium  is  received  from 
the  policyholder  within  the  taxable  year  the  company  is  not  entitled  to  ex- 
clude from  its  premiums  received  from  other  policyholders  any  amount  in 
respect  of  such  dividend  payment.  (Art.  549,  Reg.  45,  Rev.,  April  17, 
1919.) 

988  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals 
for  the  Third  Circuit  in  the  case  of  Uederer,  collector  v.  Penn  Mutual 

Life  Insurance  Co.,  is  published  for  the  information  of  internal-revenue 
officers  and  others  concerned.  [Captions  only.] 

989  1,  Dividends  Excluded  from  Gross  Income. — Under  the  provisions 
of  paragraph  G,  subdivision  (b)  of  section  2 of  the  act  of  October  3, 

1913,  that  “life  insurance  companies  shall  not  include  as  income  in  any  year 
such  portion  of  any  actual  premium  received  from  any  individual  policy- 
holder as  shall  have  been  paid  back  or  credited  to  such  individual  policy- 
holder within  such  year,”  a life  insurance  company  is  not  entitled  to  exclude 
from  its  total  income  during  the  taxable  year,  for  the  purpose  of  ascertain- 
ing its  gross  income,  any  dividends  paid  or  credited  to  policyholders  from 
whom  it  did  not  receive  any  premium  during  that  year;  and  as  to  such 
policyholders  as  it  did  receive  premiums  from  that  year  it  is  entitled  to 
exclude  only  such  part  of  the  dividends  paid  to  those  policyholders  as  did 
not  exceed  the  amount  received  from  them,  respectively,  by  way  of  pre- 
miums during  that  year. 

990  2.  Dividends  Consisting  of  Redundancies  in  Previous  Premium 

Payments. — None  of  the  cash  dividends  paid  by  a life  insurance  com- 
pany to  its  policyholders  which  represent  redundancies  in  previous  premium 
payments  are  deductible^  from  gross  income  in  annual  tax  returns  as  “sums 
other  than  dividends  paid  within  the  year  on  policv  * * * contracts  ” 

(T.  D.  2899,  July  24,  1919.) 

991  Law|[315.  Special  Deductions  Allowed  to  Insurance  Companies 

in  General. — “(^0)  In  the  case  of  insurance  companies, 
in  addition  to  the  above  [i.  e.,  the  general  deductions  allowed  to  all  cor- 
porations] : (a)  The  net  addition  required  by  law  to  be  made  within  the 

taxable  year  to  reserve  funds  (including  in  the  case  of  assessment  insurance 
companies  the  actual  deposit  of  sums  with  State  or  Territorial  officers  pur- 
suant to  law  as  additions  to  guarantee  or  reserve  funds)  ; and  (b)  the  sums 
other  than  dividends  paid  within  the  taxable  year  on  policy  and  annuity 
contracts ;” 


INC.  155 


TAX 


TAX  ON  INSURANCE  COMPANIES. 


993  Insurance  companies  are  entitled  to  the  same  deductions  from  gross 
income  as  other  corporations,  and  also  to  the  deduction  of  the  net 
addition  required  by  law  to  be  made  within  the  taxable  year  to  reserve 
funds  and  of  the  sums  other  than  dividends  paid  within  the  taxable  year  on 
policy  and  annuity  contracts.  “Paid’'  includes  “accrued”  or  “incurred” 
(construed  according  to  the  method  of  accounting  upon  the  basis  of  which 
the  net  income  is  computed)  during  the  taxable  year,  hnt  does  not  include 
any  estimate  for  losses  incurred  but  not  reported  during  the  taxable  year. 
As  payments  on  policies  there  should  be  reported  all  death,  disability  and 
other  policy  claims  (other  than  dividends  as  above  specified)  paid  within 
the  year,  including  fire,  accident  and  liability  losses,  matured  endowments, 
annuities,  payments  on  installment  policies  and  surrender  values  actually 
paid.  See  also  article  566  [for  taxes  on  stock  assessed  to  stockholders, 
^1256].  (Art.  568,  Reg.  45,  Rev.,  April  17,  1919.) 


993  Required  Addition  to  Reserve  Funds  of  Insurance  Companies. — 

Insurance  companies  may  deduct  from  gross  income  the  net  addition 
required  by  law  to  be  made  within  the  taxable  year  to  leserve  funds, 
including  in  the  case  of  assessment  insurance  companies  the  actual  deposit 
of  sums  with  State  or  Territorial  officers  pursuant  to  law  as  additions  to 
guarantee  or  reserve  funds.  This  is  considered  to  mean  the  net  addition 
required  by  the  specific  statutes  of  the  States  within  which  the^  taxpayer 
transacts  business.  A requirement  by  a State  insurance  commissioner  that 
a net  addition  shall  be  made  to  certain  amounts  retained  to  meet  specified 
liabilities  is  not  a net  addition  required  by  law  to  be  made  to  reserve  funds 
within  the  meaning  of  the  statute.  Only  reserves  commonly  recognized  as 
reserve  funds  in  insurance  accounting  are  to  be  taken  into  consideration  in 
computing  the  net  addition  to  reserve  funds  required  by  law.  In  the  case  of 
a fire  insurance  company  the  only  reserve  fund  commonly  recognized  is  the 
“unearned-premium”  fund.  Casualty  companies  may  deduct  losses  incurred 
within  the  taxable  year;  but  unless  the  net  addition  to  the  unpaid  loss 
reserve  required  by  law  exceeds  such  losses  incurred,  no  deduction  for  the 
net  addition  to  the  unpaid  loss  reserve  may  be  taken.  In  any  event  only  the 
excess  of  such  net  addition  over  such  losses  may  be  deducted.  In  the ^ case 
of  life  insurance  companies  the  net  addition  to  the  “reinsurance  reseive  and 
the  “reserve  for  supplementary  contracts  not  involving  life  contingencies 
and  the  net  addition  to  any  other  reserve  funds  necessarily  niaintained  for  the 
purpose  of  liquidating  policies  at  maturity,  are  legally  deductible.  An  in- 
crease in  the  reserve  maintained  by  a life  insurance  company  to  pay  divi- 
dends on  deferred  dividend  policies  may  not  be  deducted  from  gross  in- 
come. Mutual  hail  and  mutual  cyclone  insurance  companies  are  entitled 
to  deduct  from  gross  income  the  net  addition  which  they  required  to 
make  to  the  “guaranty  surplus”  fund  or  similar  fund.  (Art.  569,  Re^. 
Rev.,  April  17,  1919.) 


994  Law  pie.  Life,  Health  and  Accident  Insurance  Combined  in  One 
Policy. — “(11)  In  the  case  of  corporations  issuing  pol- 
icies covering  life,  health,  and  accident  insurance  combined  in  one  policy 
issued  on  the  weekly  premium  payment  plan  continuing  for  life  and  not 
subject  to  cancellation,  in  addition  to  the  above  fj.  e.,  the  general  deductions 
allowed  to  all  corporations  and  the  special  deduction  allowed  to  all  insurance 
companies,  P9l],  such  portion  of  the  net  addition  (not  required  by  law) 
made  within  the  taxable  year  to  reserve  funds  as  the  Commissioner  finds  to 
be  required  for  the  protection  of  the  holders  of  such  policies  only ; 


INC.  156  TAX 


TAX  ON  INSURANCE  COMPANIES. 

995  Corporations  which  issue  combination  policies  of  life,  health  and 
accident  insurance  on  the  Vs^eekly  premium  payment  plan,  continuing 
for  life  and  not  subject  to  cancellation,  may  deduct  from  gross  income  only 
such  portion  of  the  net  addition  not  required  by  law  made  within  the  taxable 
year  to  reserve  funds  as  is  needed  for  the  protection  of  the  holders  of  such 
combination  policies.  In  general  the  net  addition  to  any  fund  especially 
maintained  for  the  protection  of  such  policyholders  may  be  deducted  The 
determination  by  the  company  of  the  need  for  such  addition  is  subject  to 
review  by  the  Commissioner,  and  the  return  of  income  should  be  accom- 
panied by  a full  explanation  of  the  basis  upon  which  such  fund  and  the 
additions  to  it  are  determined.  (Art.  570,  Reg.  45,  Rev.,  April  17,  1919.) 

j[283.  Mutual  Marine  Insurance  Companies — Gross  Income. 
— “(2)  Mutual  marine  insurance  companies  shall  include 
in  gross  income  the  gross  premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance.” 

997  Law|[317.  Mutual  Marine  Insurance  Companies— Special  Deduc- 

tion Authorized.— “(12)  In  the  case  of  mutual  marine 
insurance  companies,  there  shall  be  allowed,  in  addition  to  the  deductions 
allowed  in  paragraphs  (1)*  to  (10)*^,  inclusive,  amounts  repaid  to  policy- 
holders on  account  of  premiums  previously  paid  by  them,  and  interest  paid 
upon  such  amounts  between  the  ascertainment  and  the  payment  thereof;” 

998  Mutual  marine  insurance  companies  should  include  in  gross  income 

the  gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance.  See  section  233  of  the  statute  and  article  548  [11985]. 
They  may  deduct  from  gross  income  amounts  repaid  to  policyholders  on 
account  of  premiums  previously  paid  by  them,  together  with  the  interest 
actually  paid  upon  such  amounts  between  the  date  of  ascertainment  and  the 
date  of  payment  thereof.  The  remainder  of  the  premiums  accordingly  form 
part  of  the  net  income  of  the  company,  except  to  the  extent  that  they  are 
subject  to  the  deductions  allowed  insurance  companies  in  general  and 
other  corporations.  (Art.  571,  Reg.  45,  Rev.,  April  17,  1919.) 

999  LawplS.  Mutual  Insurance  Companies  Other  Than  Mutual  Life 

and  Mutual  Marine. — “(1^)  the  case  of  mutual 

insurance  companies  (other  than  mutual  life  or  mutual  marine  insurance 
companies)  requiring  their  members  to  make  premium  deposits  to  provide 
for  losses  and  expenses,  there  shall  be  allowed,  in  addition  to  the  deductions 
allowed  in  paragraphs  (1)*  to  (10)*,  inclusive,  (unless  otherwise  allowed 
under  such  paragraphs)  the  amount  of  premium  deposits  returned  to  their 
policyholders  and  the  amount  of  premium  deposits  retained  for  the  pay- 
ment of  losses,  expenses,  and  reinsurance  reserves ;” 

1000  Special  Deductions  Allowed  Mutual  Insurance  Companies. — 
Mutual  insurance  companies  (other  than  mutual  life  and  mutual 

marine  insurance  companies),  which  require  their  members  to  make  pre- 


*(1)  to  (9) — General  deductions  allowed  to  all  corporations,  begin- 
ning at  j[1180.  (10) — Special  deductions  allowed  to  all  insurance  com- 

panies, ^991. 


INC. 


157  TAX 


TAX  ON  FOREIGN  CORPORATIONS. 

mium  deposits  to  provide  for  losses  and  expenses,  are  allowed  to  deduct 
from  gross  income  the  aggregate  amount  of  premium  deposits  returned  to 
their  policyholders  or  retained  for  the  payment  of  losses,  expenses  and 
reinsurance  reserves.  If,  however,  any  portion  of  such  amount  is  applied 
during  the  taxable  year  to  the  payment  of  losses,  expenses  or  reinsurance 
reserves,  for  which  a separate  allowance  is  taken,  then  such  portion  is  not 
deductible ; and  if  any  portion  of  such  amount  for  which  an  allowance  is 
taken  is  subsequently  applied  to  the  payment  of  expenses,  losses  or  reinsur- 
ance reserves,  then  such  payment  cannot  be  separately  deducted.  An  amount 
of  premium  deposits  retained  for  the  payment  of  expenses,  and  losses,  and 
the  amount  of  such  expenses  and  losses,  may  not  both  be  deducted.  A com- 
pany which  invests  part  of  the  premium  deposits  so  retained  by  it  in  interest- 
bearing  securities  may  nevertheless  deduct  such  part,  but  not  the  interest 
received  on  such  securities.  A mutual  fire  insurance  company  which  has  a 
guaranty  capital  is  taxed  like  other  mutual  fire  insurance  companies.  A 
stock  fire  insurance  company,  operated  on  the  mutual  plan  to  the  extent  of 
paying  dividends  to  certain  classes  of  policyholders,  may  make  a return  on 
the  same  basis  as  a mutual  fire  insurance  company  with  I'espect  to  its  busi- 
ness conducted  on  the  mutual  plan.  (Art.  5/2,  Reg.  45,  Rev.,  April  17,  9 .) 

1001  Gross  Income  of  Foreign  Insurance  Companies. — [Read  at  ^[1018.] 

1002  Returns  of  Insurance  Companies.— Insurance  companies  trans- 
acting business  in  the  United  States  or  deriving  an  income  i^^m 

sources  therein  are  required  to  file  returns  of  income.  The  return  shall  be 
on  form  1120.  As  an  aid  in  auditing  the  returns,  wherever  possible  a copy 
of  the  report  to  the  State  insurance  department  should  be  submitted  with 
the  return.  Otherwise  a copy  of  schedule  D,  parts  1,  3 and  4,  of  the  report 
should  be  attached  to  the  return,  showing  the  federal.  State  and  municipal 
obligations- from  which  the  interest  omitted  from  gross  income  was  derived, 
and  a copy  of  the  complete  report  should  be  furnished  as  soon  as  ready 
for  filing.  (Art.  623,  Reg.  45,  Rev.,  April  17,  1919.) 

1003  Assessment  Life  and  Accident  Insurance  Companies;  Stock  Fire 
Insurance  Companies ; Stock  Casualty,  Fidelity  and  Surety  Insur- 
ance Companies;  Miscellaneous  Stock  Companies.— Companies  of  the 
foregoing  classes  will  make  their  returns  f 

cable  to  insurance  companies  in  general.  (Art.  245,  11713,  Reg.  , 

Jan.  2,  1918.) 

1004  Returns  by  Foreign  Insurance  Companies. — [Read  at  1044.] 

100.5  General  Law  Provisions  and  Applicable  Regulations  Relating  to 
Returns. — [Read  at  1|1808.] 

1006  General  Law  Provisions  and  Applicable  Regulations  Relating  to 
the  Payment  of  the  tax. — [Read  at  1(2,000.] 

1007  Tax  on  Foreign  Corporations.— [The  rate  is  the  same  as  for 
domestic  corporations,  for  which  see  lf713.] 

1008  Law  US.  What  Constitutes  a Foreign  Corporation.  The  teim 

‘foreign’  when  applied  to  a corporation  or  partnership 
means  created  or  organized  outside  the  United  States  ; 

158  TAX 


INC. 


TAX  ON  FOREIGN  CORPORATIONS. 


1009  Law  1[6.  ‘‘The  term  ‘United  States’  when  used  in  a geographical 

^ ..  , sense  includes  only  the  States,  the  Territories  of  Alaska 

and  Hawaii,  and  the  District  of  Columbia;” 

1010  Doniestic  and  Foreign  Persons. — A domestic  corporation  or  part- 
nership is  one  organized  or  created  in  the  United  States,  including 

^ 1 ^ States,  the  territories  of  Alaska  and  Hawaii,  and  the  District 
of  Columbia,  and  a foreign  corporation  or  partnership  is  one  organized 
or  created  outside  the  United  States  as  so  defined.  * ^ ^ foreign 

corporation  engaged  in  trade  or  business  within  the  United  States  or 
having  an  office  or  place  of  business  therein  is  sometimes  referred  to  in 
the  regulations  as  a resident  foreign  corporation  and  a foreign  corporation 
not  e^aged  in  trade  or  business  within  the  United  States  and  not  having 
any  office  or  place  of  business  therein  as  a nonresident  foreign  corporation 
(Art.  1509,  Reg.  45,  Rev.,  April  17,  1919.) 


Foreign  Corporations  Not  Engaged  in  Trade  or  Business  Within 
.u  • United  States  and  Not  Having  Any  Office  or  Place  of  Business 
source"' measure,  withheld  at  the 


as  Well  as  Domestic 
Corporations.— This  office  is  in  receipt  of  your  letter  of  the  30th 
'".wh'ch  you  ask  whether  or  not  foreign  corporations  of  the  nature 
specified  m Section  11,  under  the  heading  "Conditional  and  Other  Exemp- 
tions [1[739]  will  also  come  within  that  heading,  you  are  informed  that  the 
section  referred  to  provides  that  the  income  of  the  corporations  enumerated 
therein  shall  not  be  taxed,  and  therefore  it  follows  that  if  the  corporations 

U ‘S'  *7  '■equiied  to  file  corporate  returns,  and 

It  IS  held  by  this  office  that  the  exemption  applies  to  foreign  as  well  as  to 
domestic  corporations. 

Corporations  similar  to  those  enumerated  in  the  several  subsections 
of  Section  11  are  not  necessarily  exempt  from  making  returns  of 
annual  net  income  and  can  not  be  classed  as  exempt  corporations  until 
they  have  set  out,  in  the  form  of  an  affidavit,  either  to  the  Collector  of 
Internal  Revenue  for  their  districts  or  to  this  office  the  purpose  and  nature 
of  the  organization,  the  source  of  its  income,  the  disposition  of  the  same 
and  whether  or  not  any  of  its  net  income  will  ever  inure  to  the  benefit  of  any 
private  stockholder  or  individual.  Upon  receipt  of  such  affidavit  the  cor- 
poration, either  domestic  or  foreign,  will  be  definitely  advised  as  to  its 
status,  under  the  requirements  of  the  law.  (Letter  to  The  Central  Trust 
Company  of  New  York,  New  York,  signed  by  Commissioner  W.  H.  Osborn 
and  dated  November  1,  1916.) 

Receipt  IS  acknowledged  of  your  letter  of  November  17  1916  and 

. K 'S  Federal  Income  Tax  Law  of  Sep- 

tember 8,  1916,  provides  that  every  organization  enumerated  in  Section  II 
of  that  statute  is  exempt  from  Federal  Income  Tax  on  its  net  earnines 
profits  or  income,  and  the  office  holds  that  the  provisions  applv  whether  the 
organization  be  domestic  or  foreign.  In  a case  where  a foreign  organization 
desires  to  be  held  exempt  from  Federal  income  tax,  and  a doubt  exists  as  to 
whether  or  not  It  comes  within  the  class  of  organizations  enumerated  in 
Section  II,  It  will  be  required  to  file  a copy  of  its  charter  and  by-laws,  and 
an  affidavit  executed  by  its  principal  officer  showing  the  disposition  made 

INC.  159 


TAX 


TAX  ON  FOREIGN  CORPORATIONS. 


of  such  income  as  it  receives,  and  stating  specifically,  whether  or  not  any  of 
the  income  so  received  inures  to  the  benefit  of  any  individual  stockholder. 
The  question  of  whether  or  not  the  office  will  hold  the  organization  to  be 
“exempt”  will  be  determined  by  the  facts  shown  in  its  charter,  by-laws  and 
affidavit.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner W.  H.  Osborn,  and  dated  December  6,  1916.) 


1015  Law  |[280.  Net  Income  of  a Foreign  Corporation  Defined.--“Sec. 

232.  That  in  the  case  of  a corporation  subject  to  the  tax 
imposed  by  section  230*  [lf713]  the  term  ‘net  income’  means  the  gross  in- 
come as  defined  in  section  233  [pOlb]  less  the  deductions  allowed  by  section 
234  [^11801,  and  the  net  income  shall  be  computed  on  the  same  ba^s  as  is 
provided  in  subdivision  (b)  of  section  212_^  {V69]  or  in  section  226  [ Returns 
when  accounting  period  is  changed,’  1fl855].”  ^ 

* [The  tax  imposed  by  section  230  is  “upon  the  net  income  of  every 

corporation”  simply.] 


1016  LawT[281.  Gross  Income  of  a Foreign  Corporation  Defined. 

“Sec.  233.  (a)  That  in  the  case  of  a corporation  subject 
to  the  tax  imposed  by  section  230^  [1[713]  the  term  ‘gross  income’  means 
the  gross  income  as  defined  in  section  213  [^802], 


1017  Law  U284.  Gross  Incom.e  of  a Foreign  Corporation  Is  That  from 
Sources  Within  the  United  States  Only.— “(b)  In  the 

case  of  a foreign  corporation  gross  income  includes  only  the  gross  income 
from  sources  within  the  United  States,” 


1018  Gross  Income  of  Foreign  Corporations. — The  gross  income  of  a 
foreign  corporation  or  insurance  company  means  its  gross  ^ incorne 
from  sources  within  the  United  States,  as  defined  and  described  in 
articles  91-93  [beginning  at  1[1545]  relating  to  nonresident  alien  indi- 
viduals. The  income  from  business  relating  to  a foreign  country  which  is 
transacted  by  a United  States  branch  or  agency  of  a foreign  insurance  com- 
pany must  be  returned  as  gross  income.  (Art.  550,  Reg.  45,  Rev.,  April 
17,  1919.) 


1019  Foreign  Corporations  Doing  Business  by  Agents. — [Note  that 
the  wording  of  the  present  Act  is  “income  from  sources  within  the 

United  States.”]  The  Federal  income  tax  law  provides  that  the  normal  tax 
imposed  by  it  shall  be  levied,  assessed,  and  collected  upon  the  entire  net 
income  arising  and  accruing  to  foreign  corporations  from  business  trans- 
acted or  capital  invested  in  this  country.  Such  a corporation  may  transact 
business  or  have  capital  invested  in  this  country  through  and  by  an  agent 
as  completely  as  if  it  were  transacting  the  business  or  investing  the  capital 
direct  from  its  home  office  or  through  a duly  established  branch  office^  m 
the  United  States.  An  agent  who  is  doing  business  in  this  country,  buying 
and  selling  certain  products  of  the  foreign  corporation,  is  to  all  intents 
and  purposes  a branch  of  the  foreign  corporation,  as  through  and  by 
him  the  foreign  corporation  is  transacting  business  m this  country. 

1020  The  buying  and  selling  of  a product  in  this  country  through  a local 
agency  or  branch  for  and  on  behalf  of  a foreign  corporation  is  d^i'^Y 

transacting  business  in  this  country  within  the  meaning  of  the  Fed- 
eral income  tax  law,  and  any  net  income  arising  and  accruing  because  of 
the  business  to  be  transacted  will  be  held  to  be  subject  to  the  tax  irnposed 
by  the  Federal  income  tax  law,  and  every  foreign  corporation  carrying  on 


160  TAX 


INC. 


TAX  ON  FOREIGN  CORPORATIONS. 

business  in  the  manner  indicated  will  be  required  to  make  a return  of 
annual  net  income  covering  the  business  so  transacted.  (T.  D.  2137,  Tan. 
30,  1915.) 

1021  When  a foreign  corporation  sends  a representative  to  this  country 
to  solicit  business,  the  merchandise  thus  sold  to  be  shipped  direct  to 

the  consignee,  it  will  be  held  that  such  corporation  is  transacting  business 
in  this  country.  The  fact  that  the  solicitor  or  representative  has  only  a 
mailing  address  in  this  country  is  immaterial ; he  is  none  the  less  an  agent  of 
the  foreign  corporation.  To  the  extent  that  he  sells  in  this  country  goods  or 
merchandise  for  the  foreign  corporation,  to  that  extent  the  foreign  corpora- 
tion is  transacting  business  in  the  United  States,  and  the  net  income  arising 
and  accruing  to  the  corporation  by  reason  of  the  business  so  transacted  will 
be  subject  to  the  income  tax  imposed  by  section  2,  act  of  October  3,  1913. 

1022  Any  foreign  corporation  transacting  business  in  this  country  in  the 
manner  hereinbefore  indicated  will  make  a return  of  annual  net 

income  to  the  collector  of  the  district  in  which  its  representative  has 
his  mailing  address,  showing  in  such  return  the  net  income  accruing  to  it 
from  the  business  so  transacted.  (T.  D.  2161,  Feb.  19,  1915.) 

1023  Taxable  Income  of  Foreign  Steamship  Companies. — This  office  is 
in  receipt  of  your  letter  of  the  17th  instant,  in  which  you  quote  what 

purports  to  be  a ruling  of  this  office  with  respect  to  the  manner  of  computing 
the  income,  taxable  under  the  federal  income  tax  law  (Section  2,  Act  of 
October  3,  913),  against  foreign  steamship  companies  doing  business  in  and 
from  this  country,  and  you  ask  if  the  ruling  quoted  “represents  the  stand  of 
the  Bureau  of  Internal  Revenue  on  the  subject  in  question.”  In  reply  you 
are  informed  that  the  ruling  referred  to  is  quoted  from  a letter  written  by 
this  office  and,  in  the  main,  represents  the  position  of  this  Bureau  in  regard 
to  the  question  raised.  * ❖ * qj.  position  of  this  office  with 

respect  to  the  method  of  ascertaining  the  taxable  income  of  foreign  steam- 
ship companies,  whose  steamships  touch  at  American  ports  and  which 
carry  therefrom  freight  and  passengers  for  hire,  could  perhaps  be  better 
stated  as  follows : The  returns  made  by  such  corporations,  for  the  purpose 
of  the  income  tax  imposed  by  the  act  cited,  should  include  as  gross  income 
the  total  receipts  of  all  outgoing  business,  whether  freight  or  passengers. 
With  the  gross  income  thus  ascertained,  the  ratio  existing  between  it  and 
the  gross  income  from  all  ports,  both  within  and  without  the  United  States,  . 
should  be  determined  as  the  basis  upon  which  allowable  deductions  may  be 
computed,  the  principle  being  that  allowable  deductions  shall  be  computed 
upon  a basis  which  recognizes  that  the  income  arising  and  accruing  from 
business  done  in  and  from  this  country  shall  bear  its  share,  and  no  more, 
of  expense,  incident  to  the  earning  or  creation  of  such  income,  in  the  ratio 
that  the  gross  income  arising  in  and  from  this  country  bears  to  the  entire 
gross  income  arising  from  business  done  both  within  and  without  this  coun- 
try. In  other  words,  the  net  income  of  a foreign  steamship  company  doing 
business  in  or  from  this  country,  for  the  purpose  of  the  income  tax  assessable 
and  payable  to  the  United  ^States,  will  be  ascertained  by  deducting  from  the 
gross  receipts  from  outgoing  business  such  a portion  of  the  aggregate  ex- 
penses, losses,  etc.,  as  such  receipts  bear  to  the  aggregate  receipts  from  all 
ports.  * * [See  T|1034.j  (I.etter  to  The  Cor])oration  Trust  Company, 
signed  by  Acting  Commissioner  David  A.  Gates,  'ind  dated  July  18,  1916.) 

1024  General  expenses,  such  as  coal,  ship  stores,  etc.,  of  foreign  steamship 
companies  shall  1)e  prorated  as  ])rovided  in  ['111034  * * * i ^Art 

116,  Reg.  33,  Jan.  5,  1914.) 


INC. 


161 


TAX 


TAX  ON  FOREIGN  CORPORATIONS. 

1025  Lawt[285.  “Gross  Income”  of  a Foreign  Corporation  Includes 

Interest  on  the  Obligations  of  All  Residents  and  Divi- 
dends on  Stock  of  Resident  Corporations. — “including  the  interest  on 
bonds,  notes,  or  other  interest-bearing  obligations  of  residents,  corporate  or 
otherwise,  dividends  from  resident  corporations,  and” 

1026  Gross  income  from  sources  within  the  United.  States  as  applied  to 
foreign  corporations  shall  include  interest  received  on  bonds,  notes, 

or  other  interest-bearing  obligations  of  residents,  corporate  or  otherwise, 
as  well  as  income  derived  from  dividends  on  capital  stock  or  from  the  net 
earnings  of  resident  corporations,  joint-stock  companies,  or  associations,  or 
insurance  companies,  subject  to  tax  under  this  title,  and  likewise  income 
from  rentals  and  royalties,  from  business  transacted  or  capital  invested  in 
the  United  States.  (Art.  89,  p50,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1027  Lawj[286.  “Gross  Income”  of  a Foreign  Corporation  Includes 

Amounts  Received  as  Profits  on  the  Manufacture  and 
Disposition  of  Goods  Within  the  United  States. — “including  all  amounts 
received  (although  paid  under  a contract  for  the  sale  of  goods  or  other- 
wise) representing  profits  on  the  manufacture  and  disposition  of  goods 
within  the  United  States.”  [Reg.  45  reads  “manufacture  or  disposition,” 
111545.] 

Comment. — [The  following  ruling  is  based  on  the  old  law  which 
did  not  carry  the  specific  provision  found  at  |fl027,  above.] 

1028  A Foreign  Corporation  Having  no  Office  or  Agent  in  the  U.  S., 
Collecting  Commissions  Only  on  Account  of  Sales  of  American 

Goods  Abroad,  Is  Not  Liable  to  Tax  on  Amounts  so  Earned.— Reference 
is  made  to  your  letter  of  the  12th  instant,  in  v/hich  you  state  that  a corpora- 
tion located  at  Singapore,  incorporated  under  the  laws  of  that  country,  which 
has  no  office  or  agent  in  the  United  States,  and  is  engaged  in  the  commission 
business  has,  during  the  year  1917,  sold  in  Singapore  and  nearby  countries 
certain  products  of  manufacturing  establishments  in  the  United  States. 
The  purchase  price  of  these  goods  is  transmitted  by  the  purchasers  to  the 
manufacturers  and  American  houses  direct.  When  the  money  is  received 
in  the  United  States  a commission  is  paid  out  of  the  proceeds  of  sale  to  this 
♦ foreign  corporation.  jjRelative  to  your  inquiries,  you  are  advised  that 
under  the  above  statement  of  facts  the  commission  earned  by  the  Singapore 
corporation  is  not  considered  to  be  income  derived  from  sources  within  the 
United  States,  and  the  Singapore  corporation  is  not  required  to  report  such 
commissions  as  income  under  the  provisions  of  the  Act  of  September  8, 
1916,  and  Titles  I and  II  of  the  Act  of  October  3,  1917.  Ifin  regard  to  your 
second  inquiry,  you  state  that  a corporation  in  this  country  receives  from 
the  manufacturer  these  commissions  and  transmits  the  same  to  the  Singa- 
pore corporation,  and  ask  to  be  advised  whether  this  corporation  which  so 
receives  and  transmits  these  commissions  is  under  obligations  to  report 
such  commissions  in  its  return  of  annual  net  income.  Tfin  reply,  you  are 
informed  that  if  the  American  corporation  in  question  simply  acts  as  the 
agent  for  the  Singapore  corporation  in  receiving  and  transmitting  such 
commissions,  and  does  not  retain  for  its  own  use  any  part  thereof,  it  is 
held  that  such  commissions  need  not  be  reported  as  income  by  the  domestic 
corporation  referred  to.  (Letter  to  Brower,  Brower  and  Brower,  Brook- 
lyn, New  York,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated 
April  20,  1918.) 


TAX  ON  FOREIGN  CORPORATIONS. 


1029  Law  |f287.  Deductions  Allowed  Foreign  Corporations. — “Sec.  234. 

(a)  That  in  computing  the  net  income  of  a corporation 
subject  to  the  tax  imposed  by  section  230  there  shall  be  allowed  as  de- 
ductions .’I* 

1030  Comment. — [The  deductions  which  may  be  allowed  to  foreign 
corporations  are  in  character  the  same  as  those  allowed  to  domestic 

corporations.  These  shall  be  allowed  only  to  the  extent  indicated  below  in 
paragraphs  1031,  1032,  and  1033.] 

1031  Law  ][293.  Interest  Allowed  as  a Deduction  to  Foreign  Corpo- 

rations.— [Same  as  for  domestic  corporations,  P234, 
qualified  as  follow’S — ] “or,  in  the  case  of  a foreign  corporation,  the  propor- 
tion of  such  interest  which  the  amount  of  its  gross  income  from  sources 
within  the  United  States  bears  to  the  amount  of  its  gross  income  from  all 
sources  within  and  without  the  United  States;’' 

1032  Law]j300.  Taxes  Allowed  as  a Deduction  to  Foreign  Corpora- 

tions.— [Same  as  for  domestic  corporations,  P249, 
qualified  as  follows — ] “(e)  in  the  case  of  a foreign  corporation,  by  the 
authority  of  any  foreign  country  (except  income,  war-profits  and  excess- 
profits  taxes,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to 
increase  the  value  of  the  property  assessed),  upon  the  property  or  business:” 

1033  Law|[324.  The  Apportionment  and  Allocation  of  Deductions 

Allowed  Foreign  Corporations  Other  Than  Interest 
and  Taxes. — “(b)  In  the  case  of  a foreign  corporation  the  deductions 
allowed  in  subdivision  (a)  [P180],  except  those  allowed  in  paragraph  (2) 
[P234]  and  in  clauses  (a)  [P250],  (b)  [111251],  and  (c)  [p252]  of 
paragraph  (3),  shall  be  allov/ed  only  if  and  to  the  extent  that  they  are  con- 
nected with  income  arising  from  a source  within  the  United  States;” 

1034  Law1f325.  “and  the  proper  apportionment  and  allocation  of  the 

deductions  with  respect  to  sources  of  income  within  and 
without  the  United  States  shall  be  determined  under  rules  and  regulations 
prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary.” 

1035  Deductions  Allowed  Foreign  Corporations. — Foreign  corporations 
are  allowed  the  same  deductions  from  their  gross  income  arising 

from  sources  within  the  United  States  as  are  allowed  to  domestic 
corporations,  to  the  extent  that  such  deductions  are  connected  with 
such  gross  income,  with  the  exception  that  the  interest  deductible  is  that 
proportion  of  so  much  of  the  entire  interest  paid  on  the  corporate  indebted- 
ness as  would  be  deductible  if  paid  by  a domestic  corporation  which  the 
gross  income  from  sources  within  the  United  States  bears  to  the  total  gross 
income,  and  that  full  deduction  may  be  made  for  taxes  imposed  by  the 
United  States  or  any  of  its  possessions,  or  by  any  State,  Territory  or  po- 
litical subdivision  thereof,  except  taxes  for  local  benefits  and  income,  war 
profits  and  excess  profits  taxes.  A Canadian  manufacturing  corporation 
which  sells  part  of  its  product  in  the  United  States  and  part  in  Canada 
should  report  its  deductions  for  cost  of  manufacture,  exclusive  of  interest 
paid  on  its  indebtedness,  in  the  same  proportion  as  the  quantity  of  its 
product  sold  in  the  United  States  bears  to  the  total  quantity  sold.  (Art.  573, 
Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


163  TAX 


TAX  ON  FOREIGN  CORPORATIONS. 


1036  Deductions  Permitted  to  Foreign  Corporations  Deriving  Their 

Taxable  Income  Solely  from  Stock  or  Bonds  of  Domestic  Corpo- 
rations.— [Under  the  present  law  the  dividends  themselves  would  con- 
stitute an  allowable  deduction.  The  tax  on  the  bond  interest  should  be 
withheld  at  the  source  [111614]  unless  the  corporation  had  an  “office’’  within 
the  United  States.  Under  the  present  law  gross  income  of  a foreign  cor- 
poration includes  “only  the  gross  income  from  sources  within  the  United 
States.”]  This  office  is  in  receipt  of  your  letter  of  the  20th  ultimo,  in 
which  you  refer  to  office  letter  of  April  8 [10],  1916,  in  which  it  was  held 
that  a non-resident  corporation,  holding  stock  of  a domestic  corporation, 
will  be  chargeable  with  such  income  tax  as  may  be  assessable  upon  the 
dividends  on  said  stock  and  will  be  Subject  to  all  provisions  of  the  law  and 
the  regulations  for  making  return  and  paying  tax.  You  also  point  out  the 
fact  that  the  income  tax  law  provides,  in  paragraph  2 [G],  that  the  normal 
tax  shall  be  imposed  upon  the  net  income  accruing  to  a foreign  corporation 
from  business  transacted  and  capital  invested  v/ithin  the  United  States 
during  the  year  and  prescribes  the  deductions  to  which  such  foreign  cor- 
porations are  entitled. 

1037  You  therefore  ask: 

“if  the  foreign  corporation  is  not  engaged  in  business,  but  derives  its 
income  from  the  United  States  solely  in  the  form  of  dividends  or 
interest,  to  v/hat  extent  is  it  entitled  to  take  advantage  of  the  deductions 


prescribed  by  lav/.” 

1038  In  reply  you  are  informed  that,  if  a foreign  corporation  is  liable 
under  the  present  income  tax  law  to  the  tax  imposed  by  it,  it  is 

liable  for  the  reason  that  such  corporation  is  either  transacting  busi- 
ness or  has  capital  invested  in  the  United  States.  The  liability  of  a foreign 
corporation  to  income  tax  on  the  income  received  by  it  from  ^ocks  and 
bonds  of  domestic  corporations  exists  because  of  the  fact  that  such  corpora- 
tion has  capital  invested  in  the  securities  the  income  from  which  its 
source  in  the  United  States.  In  other  words,  a foreign  corporation  which 
derives  its  income  from  the  United  States  solely  in  the  form  of  dividends 
or  interest  has  capital  invested  in  the  United  States,  and,  under  the  ruing 
hereinbefore  referred  to,  the  liability  of  the  corporation  to  tax  attaches  by 
reason  of  the  source  of  the  income  bein^  in  the  United  States,  the  domici  e 
of  the  securities  as  well  as  of  the  corporation  owning  them  being  immatena  . 

1039  It  therefore  follows  that,  as  the  income  arising  and  accruing  to  a 
foreign  corporation  from  capital  invested  in  stoAs  and  bonds  o 

domestic  corporations  is  subject  to  the  tax  imposed  by  Section  2,  Act  o 
October  3,  1913,  it  will  be  permissible  for  such  a foreign  corporation 
although  its  income  from  the  United  States  is  derived  “solely  in  the  form  of 
dividends  and  interest”  on  domestic  stocks  and  bonds,  to  deduct  from  the 
gross  income  so  received  any  or  all  of  the  items  scheduled  in  the  law  as 
proper  deductions  in  the  case  of  a foreign  corporation,  regardless  of  the 
source  of  the  income,  provided  the  amounts  so  deducted  will  not  exceed  the 
limit  defined  in  the  schedule  of  allowable  deyictions  In  other  words 
fact  that  the  income  arising  or  accruing  m the  United  States  to  a 
corporation  is  “derived  solely  from  dividends  or  interest  on  domestic 
stocks  and  bonds  will  not  operate  to  deprive  such  'TU™” 

deducting  from  the  gross  income  from  th's  source  such  items  of  disburse 
menb  lofs,  etc.,  as  would  be  properly  deductible  were  the  income  derived 
from  any  other  source. 


t 


f 


f 

f 

f 


INC. 


164  TAX 


TAX  ON  FOREIGN  CORPORATIONS. 

1040  It  is  contemplated  by  this  ruling,  however,  that,  in  as  far  as  prac- 
ticable, the  deductions  shall  comprehend  only  such  expenditures, 

losses,  etc.,  as  are  incurred  in,  or  are  incidental  to,  the  creation  of 
the  income  against  which  they  are  charged  and  in  all  cases  the  deductible 
amounts  must  be  within  the  limit  fixed  by  the  law.  (Letter  to  The,.  Cor- 
poration Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
June  6,  1916.) 

1041  Credits  Against  Income  Allowed  Foreign  Corporations. — A for- 
eign corporation  is  allowed  the  same  credits  [as  a domestic  corpora- 
tion, see  [^1533]  other  than  the  sum  of  $2,000.  (Art.  591,  Reg.  45,  Rev., 
April  17,  1919.) 

1042  Credit  to  Foreign  Corporation  for  Foreign  Taxes  Paid. — [This 
credit  is  not  allowed  to  foreign  corporations  except  in  cases  where 

the  foreign  corporation  is  affiliated  with  a domestic  corporation.]  For 
credit  where  taxes  are  paid  by  a foreign  corporation  controlled  by  a domestic 
corporation  see  article  636  [[[1845].  A claim  for  credit  in  such  a case  is 
also  be  made  on  form  1118.  (Art.  611,  Reg.  45,  Rev.,  April  7,  1919.) 

104^^  Domestic  Corporation  Affiliated  With  Foreign  Corporation. — [See 
Art.  636,  [[1845.] 

1044  Returns  of  Foreign  Corporations. — Every  foreign  corporation  hav- 
ing income  from  sources  within  the  United  States  must  make  a return 

of  income  on  Form  1120.  If  such  a corporation  has  no  office  or  place 
of  business  here,  but  has  a resident  agent,  he  shall  make  the  return. 
It  is  not  necessary,  however,  for  it  to  be  required  to  make  a return  that  the 
foreign  corporation  shall  be  engaged  in  business  in  this  country  or  that  it 
have  any  office,  branch  or  agency  in  the  United  States.  See  articles  404 
[for  return  of  income  by  nonresident  alien,  [[1579],  550  [for  gross  income 
of  foreign  corporationns,  [[1018]  and  573  [for  deductions  allowed  foreign 
corporations,  ["1035].  (Art.  625,  Reg.  45,  Rev.,  April  17,  1919.) 

1045  Law  [[359.  ‘'(b)  Returns  shall  be  made  to  the  collector  of  the 

district  in  which  is  located  the  principal  place  of  busi- 
ness or  principal  office  or  agency  of  the  corporation,” 

1040  Law  [[345.  “If  any  foreign  corporation  has  no  office  or  place  of 
business  in  the  United  States  but  has  an  agent  in  the 
United  States,  the  return  shall  be  made  by  the  agent.” 

1047  Law  [[360.  ‘ffir,  if  it  has  no  principal  place  of  business  or  principal 

office  or  agency  in  the  United  States,  then  to  the  collector 
at  Baltimore,  Maryland. 

[In  connection  with  the  above  read  at  [[1816.] 

1048  Foreign  Corporation  Having  Several  Branch  Offices  in  the  United 
States. — A foreign  corporation  having  several  branch  offices  in 

the  United  States  should  designate  one  of  such  branches  as  its  principal 
office,  and  should  also  designate  the  proper  officers  to  make  the  required 
return.  (Art.  83,  Reg.  33,  Jan.  5,  1914.) 

• 

1049  Consolidated  Returns. — [Read  at  [[1845.] 

165  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 


1050  General  Law  Provisions  and  Applicable  Regulations  Relative  to 
Returns  by  Corporations. — [Read  at  If 1808.] 

1051  Credit  for  Amount  of  Tax  Withheld  at  the  Source. — [Sec.  237, 
]fl614,  provides  that  a 10  per  cent  or  a 2 per  cent  tax  is  to  be  withheld 

at  the  source  in  the  case  of  foreign  corporations  not  engaged  in  trade  or 
business  within  the  United  States  and  not  having  any  office  or  place  of 
business  therein,  in  the  same  manner  as  is  provided  in  Sec.  221,  ]fl585,  and 
“subject  to  the  same  conditions  as  provided  in  that  section.”  One  condi- 
tion provided  for  in  Sec.  221  at  1fl719,  is  that  any  amount  of  tax  withheld  is 
to  be  credited  against  the  income  tax  shown  in  the  taxpayer’s  return,  the 
income  on  which  the  tax  has  been  withheld  being  included  in  such  return. 
Read  1fl722.] 

1052  Replying  to  3^our  further  inquiries  you  are  informed  : jfThat  it  will 
be  sufficient  for  foreign  corporations  against  whom  income  tax  is 

withheld  at  the  source  to  give  the  name  of  the  withholding  agent  and  the 
amount  so  withheld.  Ifin  the  case  of  bonds  which  contain  the  so-called 
^'tax-free”  covenant,  the  bondholders  have  the  right  to  assume  that  the 
fiscal  agent  of  the  corporation  has  withheld  and  paid  over  to  the  proper 
officers  of  the  United  States  Government  the  tax  due  on  the  bond  interest 
due  the  bondholders,  though  this  assumption  will  not  relieve  the  bondholder 
from  tax  should  it  develop  that  the  debtor  corporation  did  not  so  withhold 
it  or  pay  it  overUo  the  proper  United  States  officer.  IfClearly,  when  the 
tax  has  been  withheld  and  remitted  to  the  Government  and  the  bondholder 
is  advised  of  that  fact,  such  bondholder  may  take  credit  in  his  or  its  return 
against  the  full  amount  of  tax  due  as  shown  by  the  return,  for  the  amount 
so  withheld  and  paid  over  to  the  United  States  officer.  In  other  words, 
when  withholding  agents  have  paid  the  tax  on  account  of  nonresident  alien 
corporations  having  income  from  interest  and  * ♦ ♦ from  sources 

within  the  United  States,  they,  are  entitled  to  the  benefit  of  a credit  for  such 
payments  as  against  the  tax  due  and  assessable  on  the  basis  of  the  income 
which  they  received  from  all  sources  within  the  United  States. 

1053  As  to  the  case  you  cite  in  which  a nonresident  ajien  corporation, 
through  you  as  its  American  agent,  had  over-paid  its  tax  by  reason 

of  its  not  having  been  able  to  take  credit  for  the  amount  of  tax  withheld 
at  the  source,  you  are  informed  that  a claim  for  refund  [112133]  of  the 
'amount  overpaid  may  be  filed  with  the  Collector  to  whom  such  arnount 
was  paid.  With  the  claim  a statement  setting  out  all  the  facts  should  be 
filed  and  the  matter  will  have  proper  consideration  and  as  prompt  attenLon 
as  possible.  [Read  also  at  [[1579.]  (Letter  to  Lee,  Higgmson  & Co., 
Boston  Mass.,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  Novem- 
ber 10,  1917.) 


1054  Payment  of  Tax,  if  Any,  Not  Withheld  at  the  Source. — [Read  at 

pooo.] 

1055  Law  [[43.  Basis  for  Determining  Gain  or  Loss. — “Sec.  202.  (a) 

That  for  the  purpose  of  ascertaining  the  gam  derived  or 
loss  sustained  from  the  sale  or  other  disposition  of  property,  real,  personal, 
or  mixed,  the  basis  shall  be — ” 

1056  Law  [[44.  Basis  for  Determining  Gain  or  Loss  in  the  Case  of 

Property  Acquired  Prior  to  March  1,  1913. — (1)  In 

the  case  of  property  acquired.before  March^l,  1913,  the  fair  market  price  or 
value  of  such  property  as  of  that  date ; and” 

166  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 

1057  Law  45.  Basis  for  Determining  Gain  or  Loss  in  the  Case  of 

Property  Acquired  Subsequent  to  March  1,  1913. — 

“(2)  In  the  case  of  property  acquired  on  or  after  that  date  [March  1,  1913], 
the  cost  thereof;  or  the  inventory  value,  if  the  inventory  is  made  in  ac- 
cordance with  section  203  [P090].’' 

1058  Basis  for  Determining  Gain  or  Loss  from  Sale.— For  the  purpose 

of  ascertaining  the  gain  or  loss  from  the  sale  or  exchange  of  prop- 
erty the  basis  is  (a)  its  fair  market  price  or  value  as  of  March  1, 
1913,  if  acquired  prior  thereto,  or  (b),  if  acquired  on  or  after  that 
date,  its  cost  or  its  approved  inventory  value.  In  both  cases  proper  adjust- 
ment must  be  made  for  any  depreciation  or  depletion  sustained.  What  the 
fair-market  price  or  value  of  property  was  on  March  1,  1913,  is  a question 
of  fact  to  be  established  by  any  evidence  which  will  reasonably  and  ade- 
quately make  it  appear.  As  to  inventories  see  section  203  of  the  statute 
and  articles  1581-1585  [beginning  at  P091].  The  fair  market  value  as  of 
March  1,  1913,  has  no  bearing  on  the  determination  of  the  invested  capital 
of  a corporation  for  the  purpose  of  the  war  profits  and  excess  profits  tax. 
See  section  326  and  article  831  [for  invested  capital — War  Tax  Service]. 
(Art.  1561,  Reg.  45,  Rev.,  April  17,  1919.) 

1059  Method  of  Determining  Value  as  of  March  1,  1913. — No  method 
of  determining  this  value  can  be  stated  by  the  department  which  will 

adequately  meet  all  circumstances.  What  that  value  was  is  a question  of 
fact  to  be  established  by  any  evidence  which  will  reasonably  and  ade- 
quately make  it  appear.  (Art.  4,  %3,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1060  Determination,  in  the  Case  of  Stock,  of  “Fair  Market  Price  or 
Value”  as  of  March  1,  1913.— This  office  is  in  receipt  of  your 

letter  of  November  20,  1916,  in  matter  of  computing  gain  or  loss  on  sale 
of  property  acquired  prior  to  March  1,  1913,  and  asking  whether 

“In  case  of  the  sale  of  stock  traded  in  on  the  exchange,  shall  the 
opening  price  on  March  1st,  or  the  closing  price,  or  the  average 
price  for  the  day,  be  taken  as  the  basis  ?” 

1061  Under  paragraph  (c)  of  Section  2 and  paragraph  (4)  of  Section  5, 
Act  of  September  8,  1916,  in  case  of  property  acquired  prior  to 

March  1,  1913,  “the  fair  market  price  or  value  of  such  property  as  of 
March  1,  1913,  shall  be  the  basis  for  determining  the  amount  of  gain  or 
loss”  upon  sale  or  other  disposition  of  the  property. 

1062  “The  fair  market  price  or  value  as  of  March  1”  is  held  to  be  the  fair 
market  price  or  value  as  of  the  entire  day  of  March  1,  which  in  the 

case  of  variation  between  “opening  and  closing  price”  for  the  day,  would 
mean  the  average  price  for  the  day.  This,  however,  would  be  conffitioned 
upon  showing  that  the  exchange  quotation  represented  the  fair  market  price 
or  value  of  the  stock,  as  it  is  this  “fair  market  price  or  value”  which  is 
to  control,  however  that  fact  may  be  ascertained.  (Letter  to  The  Corpo- 
ration Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
November  21,  1916.) 

106.3  In  Determining  Value  of  Stock  as  of  March  1,  1913,  the  Good- 
will of  the  Corporation  is  to  be  Taken  Into  Consideration. — 

Receipt  is  acknowledged  of  your  letter  of  July  2,  1919,  in  which  you 
refer  to  the  consideration  to  be  given  to  the  value  of  goodwill  of  a cor- 
poration where  it  is  desired  to  establish  the  fair  market  value  of  its  out- 

167  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 


standing  capital  stock  on  March  1,  1913,  ^n  reply,  you  are  advised  that 
the  value  of  the  tangible  and  intangible  assets  of  a corporation,  inclusive 
of  the  value  of  goodwill,  as  of  March  1,  1913,  is  to  be  taken  into  consid- 
eration, together  with  such  other  facts  as  may  be  necessary,  where  it  is 
desired  to  establish  the  market  value  of  its  outstanding  capital  stock  on 
March  1,  1913,  for  income  tax  purposes.  (Letter  to  The  Corporation  Trust 
Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  July  22, 
1919.) 

1064  Determination  of  Cost:  Real  Estate.— The  cost  of  property 
acquired  subsequent  to  tlie  incidence  of  the  tax  will  be  the  actual 

price  paid  for  it,  together  with  the  expense  incident  to  the  procurement  of 
the  property  in  the  first  instance,  and  its  sale  thereafter,  and  the  cost 
of  improvement  or  betterment,  if  any.  (T.  D.  2005,  July  8,  1914.) 

1065  In  determining  the  cost  of  the  property  for  the  purpose  of  arriving 
at  the  profit  realized  upon  the  sale  it  will  be  permissible  for  the 

corporation  to  add  to  the  initial  cost  such  carrying  charges  as  interest, 
taxes,  insurance,  etc.,  provided  such  carrying  charges  have  not  been  de- 
ducted from  net  income  which  the  corporation  may  have  had  and  returned 
for  years  subsequent  to  January  1,  1909,  and  prior  to  the  date  of  sale  of  the 


property.  ^ ^ . . 

1066  T.  D.  2005  is  not  intended  to  be  so  construed  that  carrying  charges, 
if  they  consist  of  such  expenditures  as  constitute  allowable  deduc- 
tions from  gross  incomes,  are  to  be  added  to  the  cost  of  the  property  if  there 
is  a gross  income  from  which  such  charges  as  constitute  allowable  deduc- 
tions may  be  deducted.  It  is  intended,  however,  that  in  the  case  of  a holding 
or  developing  company  which  has  not  yet  reached  the  stage  of  having  any 
income  of  consequence  resulting  from  its  corporate  operations,  the  carry- 
ing charges  or  other  excess  over  the  incidental  income  received  may  be 
added  to  and  made  a part  of  the  cost  of  the  property.  (i.D.  2137,  Jan. 
30,  1915.) 


1067  In  reply,  you  are  informed  that  special  assessments,  if  any,  actually 
paid  as  ’local  benefits  in  connection  with  real  estate  are  held  to  be 

expenditures  which  add  to  the  value  of  the  property  and  should  be  capi- 
talized whether  such  expenditures  were  made  prior  to,  or  subsequent  to,  the 
incidence  of  the  tax;  that  is  to  say,  such  expenditures,  no  matter  when 
paid,  became,  in  effect,  a part  of  the  cost  of  the  property. 

1068  All  carrying  charges  in  excess  of  the  income  whicn  may  have  been 
received  prior  to  the  sale  of  the  property  may  be  included  from  the 

gross  proceeds  of  the  sale  when  the  property  is  sold  and  the  excess  of 

such  cost  will  be  returned  as  income.  . , , • 

1069  This  ruling  is  based  upon  the  presumption  that  the  corporation  is 
doing  business,  and,  having  income  as  a result  of  the  business  done, 

must  use  such  income  to  offset  in  as  far  as  it  uill  do  so,  the  expense  nec- 
essary to  the  operation  and  maintenance  of  the  business. 

1070  If  the  carrying  charges  are  less  than  the  income,  such  caiiying 
charges,  unless  they  be  for  improvements  and  betterments,  wil  not 

be  added  to  and  made  a part  of  the  cost  of  the  property  but  will  be 
deducted  from  the  gross  income  received,  in  which  case  it  would  appear  tha 
the  return  of  the  corporation  would  show  a net  income  subject  to  tax. 

1071  The  Treasury  Decision  (T.  D.  2005)  referred  to  is  not  intend^ed  to  be 
so  construed  that  the  carrying  charges,  if  ihey  consist  of  such  expen- 


168  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 


ditures  as  constitute  allowable  deductions  from  gross  income,  are  to  be 
added  to  the  cost  of  the  property,  if  there  is  a gross  income  from  which 
such  charges  as  constitute  allowable  deductions  may  be  deducted.  It  is 
intended,  however,  that  in  the  case  of  a holding  or  developing  company 
which  has  not  yet  reached  the  stage  of  having  an}^  income  of  consequence 
resulting  from  its  corporate  operations,  the  excess  of  the  carrying  charges 
over  the  incidental  income  received  may  be  added  to  and  made  a part  6i  the 
cost  of  the  property.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  W.  H.  Osborn,  and  dated  December  22,  1914.) 

1072  Method  of  Computing  Profit  or  Loss  from  Sale  of  Standing  Tim- 
ber or  of  Lumber  Manufactured  Therefrom. — In  compliance  with 
your  request  of  the  1st  instant,  you  are  advised  ihat  the  following  informa- 
tion is  furnished  you  in  regard  to  the  preparation  of  your  returns  of  annual 
net  income  under  the  provisions  of  the  Act  of  September  8,  1916,  as  far  as 
the  calculation  of  the  value  of  standing  timber  as  of  March  1,  1913,  is 
concerned,  and  it  also  represents  the  regulations  of  this  office  in  regard 
to  allowances  to  be  deducted  from  gross  income  for  the  value  of  stumpage: 
^Corporations  owning  timber  land  and  logging  oft  the  timber  and  manufac- 
turing it  into  lumber,  will,  if  the  timber  was  acquired  prior  to  March  1, 
1913,  be  permitted  to  exclude  from  gross  income  either  through  a deduction 
from  gross  receipts  or  through  a charge  into  the  cost  of  manufacturing  the 
timber  into  lumber,  an  amount  equivalent  to  the  fair  market  price  or  value 
of  the  standing  timber  as  of  March  1,  1913.  jjln  order  to  secure  the  benefit 
of  this  deduction  such  corporations  must  set  up  on  their  books  as  of  March 
1,  1913,  the  fair  market  price  en  bloc,  of  all  the  timber  then  owned  by 
them,  and  then,  by  dividing  this  eit  bloc  value  by  the  estimated  number  of 
feet  (board  measure)  in  the  entire  timber  holdings,  the  per  unit  value  or 
price  as  of  March  1,  1913,  will  be  ascertained,  which  per  unit  price  or 
value  will  be  the  basis  for  measuring  the  amo'unt  which  may  be  added  to 
the  cost  of  manufacture,  or  deducted  from  gross  income,  until  the  en  bloc 
value  of  the  entire  holdings  as  of  March  1,  1913,  shall  have  been  extin- 
guished, after  which  no  further  deduction  on  this  account  shall  be  allowed. 
l[The  same  rule  will  apply  in  the  case  of  timber  or  timber  lands  purchased 
subsequent  to  March  1,  1913,  the  only  difference  being  that  actual  cost,  that 
is  the  gross  purchase  price,  shall,  in  making  the  computations,  be  substi- 
tuted for  en  bloc  price  or  value  as  of  that  date.  If  the  entire  market  price 
or  value  of  both  timber  and  lands  as  of  March  1,  1913,  or  the  entire  cost, 
if  acquired  subsequent  to  that  date,  is  extinguished  through  a deduction 
from  gross  income  for  timber  used,  or  through  a per  unit  charge  to  cost 
of  manufacturing  lumber,  then  the  entire  amount  realized  from  the  logged- 
off  lands  or  for  other  salvage,  will  be  returned  as  income  of  the  year  in 
which  such  lands  are  sold  or  disposed  of.  ^If  the  timber  or  timber  lands  are 
sold  en  bloc,  the  gain  or  loss  will  be  ascertained  on  the  basis  of  the  differ- 
ence between  the  fair  market  price  or  cost  and  the  selling  price,  accordingly 
as  the  property  was  acquired  prior  or  subsequent  to  March  1,  1913.  IjThe 
fair  market  price  or  value  of  timber  or  timber  lands,  as  of  March  1,  1913,  is 
the  price  at  which  the  property  in  its  then  condition  and  with  the  circum- 
stances then  surrounding  it,  could  have  been  sold,  for  cash  or  its  equiva- 
lent. This  value  must  not  be  speculative,  but  must  be  determined  without 
taking  into  account  any  prospective  profits  that  may  result  from  the  manu- 
facture of  the  timber  into  lumber.  It  must  he,  as  the  law  contemplates, 
a fair-  market  value,  and,  once  determined,  must  be  set  up  on  the  books, 

169  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 

and  as  the  measure  of  a stumpage  deduction  for  income  tax  purposes  must 
remain  constant  and  cannot  be  increased.  The  value  so  set  up  as  of  March 

1,  1913,  -will  be  subject  to  the  approval  of  the  Commissioner  of  Internal 
Revenue.  ^[You  are  also  informed  that  this  office  is  not  prepared  to  express 
an  opinion  at  the  present  time  as  to  what  stumpage  value  would  constitute 
a fair  value  of  short  leaf  North  Carolina  pine  as  of  March  1,  1913,  and  in 
regard  to  your  further  request  you  are  informed  that  the  ruling  contained  in 
the  above  regulation  will  refer  equally  as  well  to  the  years  1913,  1914  and 
1915,  with  the  exception  that  the  cost  of  the  timber  shall  be  the  governing 
basis  instead  of  its  value  as  of  March  1,  1913.  (Letter  to  a subscriber, 
signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  March  3,  1917.) 

1073  In  reply  [to  your  further  inquiry]  you  are  informed  that  in  prepar- 
ing returns  of  annual  income  of  your  corporation  you  should  state 

therein  your  opinion  of  the  fair  market  price  or  value  of  your  timber  as  of 
March  1,  1913,  and  calculate  your  income  based  on  that  estimate.  When 
an  examination  of  your  return  is  made,  the  figure  given  therein  which 
represents  the  fair  market  price  or  value  of  your  timber  as  of  March  1,  1913, 
will  be  given  due  consideration,  and  in  the  event  that  it  appears  to  this  office 
that  it  does  not  represent  a fair  market  price  or  value  of  your  timber  as 
of  March  1,  1913,  you  will  be  advised  and  be  given  an  opportunity  to 
present  reasons  and  facts  as  to  why  the  figures  given  in  your  returns  should 
be  accepted.  (Letter  to  a subscriber — same  as  in  P072 — , signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  March  10,  1917.)  [Read  at  ^1445.] 

1074  Sale  of  Property  Acquired  by  Gift  or  Bequest. — In  the  case  of 
property  acquired  by  gift,  bequest,  devise  or  descent  the  basis  for 

computing  gain  or  loss  on  a sale  is  the  fair  market  price  or  value  of  the 
property  at  the  date  of  acquisition  or  as  of  March  1,  1913,  if  acquired  prior 
thereto.  For  the  purpose  of  determining  the  profit  or  loss  from  the  sale 
of  property  acquired  by  bequest,  devise  or  descent  since  February  28,^  1913, 
its  value  as  appraised  for  the  purpose  of  the  federal  estate  tax,  or  in  the 
case  of  estates  not  subject  to  that  tax  its  value  as  appraised  in  the  State 
court  for  the  purpose  of  State  inheritance  taxes,  should  be  deemed  to  be 
its  fair  market  value  when  acquired.  See  section  213  (b)  (3)  of  the  statute 
and  article  73  [for  nontaxability  of  gifts  and  bequests,  111129].  (Art.  1562, 
Reg.  45,  Rev.,  April  17,  1919.) 

1075  Sale  of  Stock  Acquired  by  Gift. — The  fair  market  price  or  value 
of  stock  acquired  by  gift  subsequent  to  March  1,  1913,  is  the  basis 

for  computing  gain  derived  or  loss  sustained  by  the  sale  thereof.  If  ac- 
quired by  gift  prior  to  March  1,  1913,  the  fair  market  price  or  value  as  of 
that  date  is  the  basis  for  computation.  (Art.  4,  lf41,  Reg.  33,  Rev.,  Jan. 

2,  1918.) 

1076  Lawlf46.  Property  Exchanged  for  Other  Property. — ''{h)  When 

property  is  exchanged  for  other  property,  the  property 
received  in  exchange  shall  for  the  purpose  of  determining  gain  or  loss  be 
treated  as  the  equivalent  of  cash  to  the  amount  of  its  fair  market  value, 
if  any;” 

1077  Exchanges  of  Property.— Gain  or  loss  arising  from  the  acquisi- 
tion and  subsequent  disposition  of  property  is  realized  when  as  the 

result  of  a transaction  between  the  owner  and  another  person  the 

170  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 


property  is  converted  into  cash  or  into  property  (a)  that  is  essen- 
tially different  from  the  property  disposed  ot  and  {b)  that  has  a market 
value.  In  other  words,  both  (a)  a change  in  substance  and  not  merely  in 
torm,  and  (b)  a change  into  the  equivalent  of  cash,  are  required  to  com- 
plete or  close  a transaction  from  which  income  may  be  realized.  By  way  of 
illustration,  if  a man  owning  ten  shares  of  listed  stock  exchanges  his  stock 
certificate  for  a voting  trust  certificate,  no  income  is  realized,  because  the 
conversion  is  merely  in  form;  or  if  he  exchanges  his  stock  for  stock  in  a 
small,  closely  held  corporation,  no  income  is  realized  if  the  new  stock  has  no 
market  value,  although  the  conversion  is  more  than  formal;  but  if  he  ex- 
changes his  stock  for  a liberty  bond,  income  may  be  realized,  because  the 
conversion  is  into  independent  property  having  a market  value.  The  prop- 
erty received  m exchange  may  be  real  estate,  personal  property,  or  a chose 
m action.  The  exchange  of  a so-called  convertible  bond  for  stock  pursuant 
to  such  a privilege  granted  in  the  bond  will  produce  income  if  the  stock 
received  m exchange  has  a fair  market  value  in  excess  of  the  cost  of  fair 
market  value  as  of  March  1,  1913,  of  the  bond.  (Art.  1563  Re?  45  Rev 
April  17,  1919.)  ^ ^ 


1078  Determination  of  Gain  or  Loss  from  Exchange  of  Property. (a) 

The  amount  of  income  derived  in  the  case  of  an  exchange  of*prV 
erty,  as  of  stock  for  a bond,  is  the  excess  of  the  fair  market  value  at  the 
time  of  exchange  of  the  bond  received  in  exchange  over  the  original  cost 
of  the  stock  exchanged  for  it,  or  over  the  fair  market  price  or  value  of  such 
stock  as  of  March  1,  1913,  if  acquired  before  that  date.  The  amount  of 
income  derived  from  a subsequent  sale  of  the  bond  for  cash  is  the  excess  of 
the  amount  so  received  over  the  fair  market  value  of  such  bond  when  ac- 
quired in  exchange  for  the  stock,  (b)  On  the  other  hand,  if  the  property 
received  in  exchange  is  substantially  the  same  property  or  has  no  market 
value,  then  no  gain  or  loss  is  realized,  but  the  new  property  is  to  be  regarded 
as  substituted  for  the  old  and  upon  a sale  of  the  new  property  the  amount 
of  income  derived  is  the  excess  of  the  amount  so  received  over  the  cost  or 
fair  market  value  as  of  March  1,  1913,  of  the  old.  (Art.  1564  Re?  45 
Rev.,  April  17,  1919.)  > s*  » 


1079  Exchange  for  Different  Kinds  of  Property.— (a)  If  property  is  ex- 
changed for  two  different  kinds  of  property,  such  as  bonds  and  stock, 
the  bonds  having  a market  value  and  the  stock  none,  the  value  of  the  bonds  is 
to  be  compared  with  the  cost  or  fair  market  value  as  of  March  1,  1913,  of  the 
original  property,  as  the  case  may  be.  If  the  market  value  of  the  bonds  is 
less  than  such  cost  or  value,  the  difference  represents  the  cost  of  the  stock. 
If  the  market  value  of  the  bonds  is  greater  than  such  cost  or  value,  the 
difference  is  taxable  income  at  the  time  of  the  exchange  and  whenever  sold 
the  entire  proceeds  of  the  stock  will  be  taxable,  (b)  If  property  is  ex- 
changed for  two  different  kinds  of  property,  such  as  bonds  and  stock,  neither 
having  a market  value,  the  cost  or  fair  market  value  as  of  March  1,  1913, 
of  the  original  property  should  be  apportioned,  if  possible,  between  the  bonds 
and  stock  for  the  purpose  of  determining  gain  or  loss  on  subsequent  sales. 
If  no  fair  apportionment  is  practicable,  no  profit  on  any  subsequent  sale  of 
any  part  of  the  bonds  or  stock  is  realized  until  out  of  the  proceeds  of  sales 
shall  have  been  recovered  the  entire  cost  or  fair  market  value  as  of  March 
1,  1913,  of  the  original  property.  (Art.  1565,  Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


171  TAX 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 


1080  Exchange  of  Property  and  Stock.— Article  1566  of  Regulations 
45,  first  authorized  April  17,  1919,  is  considered  as  not  being  war- 
ranted in  law,  and  is  hereby  modified  to  read : 

Exchange  of  property  and  stock. — Where  property  is  transferred  to  a 
corporation  in  exchange  for  its  stock,  the  exchange  constitutes  a closed 
transaction  and  the  former  owner  of  the  property  realizes  a gain  or  loss  if 
the  stock  has  a market  value,  and  such  market  value  is  greater  or  less 
than  the  cost  or  the  fair  market  value  as  of  March  1,  1913  (if  acquired  prior 
thereto),  of  the  property  given  in  exchange.  Foi*  the  rule  applicable  where  a 
corporation,  in  connection  with  a reorganization,  rnerger  or  consolidation, 
exchanges  property  for  stock,  see  Article  1567  []|1085].  (Art.  1566,  of  Reg. 
45,  Rev.,  as  amended  by  T.  D.  2924,  Sept.  26,  1919.) 

1081  Meaning  of  “Market  Value.” — Article  1566,  as  amended,  provides 
that  where  property  is  transferred  to  a corporation  in  exchange  foi 

its  stock  the  exchange  constitutes  a closed  transaction  and  the  former  owner 
of  the  property  realizes  a gain  or  loss  if  the  stock  has  a ^ market  value,  and 
such  market  value”  is  greater  or  less  than  the  cost  or  the  fair  market  value 
as  of  March  1,  1913  (if  acquired  prior  thereto),  of  the  property  given  in 
exchange.  The  question  raised  is  whether  the  words  ‘ market  value,  and  such 
market  value”  permit  a presumption  that  the  decision  contemplates  an  actual 
market  before  the  case  would  be  brought  within  the  provision  as  to  pront 
or  loss,  or  the  words  “market  value,  and  such  market  value  are  intended 
by  the  Treasury  Department  to  mean  “fair  value.”  The  use  of  the  words 
“Lir  market  value  as  of  March  1,  1913”  immediately  following  that  part 
of  the  Decision  under  discussion  would  indicate  that  the  word  fair  was 
deliberately  omitted  in  the  first  instance  and  that  the  words  “market  value 
were  intended  to  convey  the  thought  that  there  must  be  an  actual  market. 
This  interpretation  is  further  borne  out  by  the  fact  that  if  the  word  laii 
be  inserted  before  the  word  “market”  in  the  first  instance,  the  sentence 
mieht  properly  have  been  concluded  with  the  w'ord  lop.  We  can  con- 
ceive of  no  situation  in  which  property  could  be  transferred  m exchange 
for  corporate  stock  which,  under  the  rulings  of  the  Bupau,  would  be  con- 
sidered to  have  no  “fair  value.”  (Answer.)  In  your  letter  of  October  , 
1919  you  ask  whether  the  words  “market  value  as  used  m Treasury  De- 
cision 2924  are  used  as  an  equivalent  of  “fair  market  value  or  whether 
it  is  intended  that  an  exchange  of  property  for  stock  shall  not  be  regarded  as 
a closed  transaction  unless  there  was  an  actual  nprkp  for  the^ptock  so 
acquired.  ^.In  reply  I beg  to  say  that  the  words  ‘market  value  as  usea 
in^that  Treasury  Decision  are  used  as  the  equivalent  of  fair  market  value, 
and  that  stock  is  to  be  regarded  as  ordinarily  having  a mp-ket  value,  even 
though  no  actual  market  for  it  can  be  established.  .\Iarket  value  m this 
sense^may.  therefore,  be  regarded  as  the  price  whicn  might  reasonably  be 
presumed  would  be  agreed  upon  between  a 

r Letter  embodying  inquiries,  from  Baker  and  Baker,  W phmgton,  lJ.  C., 
and  the  letter  of  reply  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 

October  16,  1919.) 

1082  Law  1147.  Stocks  or  Bonds  Exchanged  for  Stocks  or  Bonds  of 
Equal  Aggregate  Face  Value  in  Connection  with  Re- 
organizations Mergers  or  Consolidations.— “but  when  in  connection 
with  the  reorganization,  merger,  or  consolidation  of  a corporation  a person 
receives  in  place  of  stock  or  securities  owned  by  him  new  stock  or  securi- 
ties of  no  greater  aggregate  par  or  face  value,” 

INC.  172  TAX 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 

1083  Law  j[48.  “no  gain  or  loss  shall  be  deemed  to  occur  from  the 

exchange,  and  the  new  stock  or  securities  received  shall 
be  treated  as  taking  the  place  of  the  stock,  securities,  or  property  ex- 
changed.” 

1084  Law  ][49.  Securities  Exchanged  for  Securities  of  Greater  Par  or 

Face  Value. — “When  in  the  case  of  any  such  reorgan- 
ization, merger  or  consolidation  the  aggregate  par  or  face  value  of  the  new 
stock  or  securities  received  is  in  excess  of  the  aggregate  par  or  face  value 
of  the  stock  or  securities  exchanged  a like  amount  in  par  or  face  value  of 
the  new  stock  or  securities  received  shall  be  treated  as  taking  the  place  of 
the  stock  or  securities  exchanged,  and  the  amount  of  the  excess  in  par  or 
face  value  shall  be  treated  as  a gain  to  the  extent  that  the  fair  market  value 
of  the  new  stock  or  securities  is  greater  than  the  cost  (or  if  acquired 
prior  to  March  1,  1913,  the  fair  market  value  as  of  that  date)  of  the  stock 
or  securities  exchanged.” 

1085  Exchange  of  Stock  for  Other  Stock  of  no  Greater  Par  Value. — 

Article  1567  of  Regulations  45,  as  amended  by  Treasury  Decision 
2870,  is  amended  to  read  as  follows : 

In  general,  where  two  (or  more)  corpoiations  unite  their  properties  by 
either  (a)  the  dissolution  of  corporation  B and  the  sale  of  its  assets  to  cor- 
poration A,  or  (b)  the  sale  of  its  property  by  B to  A and  the  dissolution  of 
B,  or  (c)  the  sale  of  the  stock  of  B to  A and  the  dissolution  of  B,  or  (d) 
the  merger  of  B into  A,  or  (e)  the  consolidation  of  the  corporations,  no 
taxable  income  is  received  from  the  transaction  by  A or  B or  the  stockhold- 
ers of  either,  provided  the  sole  consideration  received  by  B and  its  stock- 
holders in  (a),  (b),  (c),  and  (d)  is  stock  or  securities  of  A,  and  by  A and 
B and  their  stockholders  in  (e)  is  stock  or  securities  of  the  consolidated 
corporation,  in  any  case  of  no  greater  aggregate  par  or  face  value  than  the 
old  stock  and  securities  surrendered.  The  term  ‘reorganization’,  as  used  in 
Section  202  of  the  statute,  includes  cases  of  corporate  readjustment  where 
stockholders  exchange  their  stock  for  the  stock  of  a holding  corporation, 
provided  the  holding  corporation  and  the  original  corporation,  in  which  it 
holds  stock,  are  so  closely  related  that  the  two  corporations  are  affiliated  as 
defined  in  Section  240  (b)  of  the  statute  and  article  633  [P838],  and  are 
thus  required  to  file  consolidated  returns.  So-called  ‘no-par-value  stock’ 
issued  under  a statute  or  statutes  which  require  the  corporation  to  fix  in  a 
certificate  or  on  its  books  of  account  or  otherwise  an  amount  of  capital  or  an 
amount  of  stock  issued  which  may  not  be  impaired  by  the  distribution  of 
dividends,  will  for  the  purpose  of  this  section  be  deemed  to  have  a par 
value  representing  an  aliquot  part  of  such  amount,  proper  account  being 
taken  of  any  preferred  stock  issued  with  a preference  as  to  principal.  In 
the  case  (if  any)  in  which  no  such  amount  of  capital  or  issued  stock  is  so 
required,  ‘no-par-value  stock’  received  in  exchange  will  be  regarded  for 
purposes  of  this  section  as  having  in  fact  no  par  or  face  value,  and  conse- 
quently as  having  ‘no  greater  aggregate  par  or  face  value’  than  the  stock 
or  securities  exchanged  therefor.  (Art.  1567  of  Reg.  45,  Rev.,  as  amended, 
as  further  amended  by  T.  D.  2924,  Sept  26,  1919.) 

1080  Application  of  the  Limitation  as  to  “No  Greater  Aggregate  Par 
or  Face  Value.” — In  interpreting  Article  1567,  as  amended,  the 
opinion  has  been  expressed  that  the  phrase  “in  any  case  of  no  greater  aggre- 
gate par  or  face  value  than  the  old  stock  and  securities  surrendered”  is  a 

173  TAX 


INC. 


BASIS  FOR  DETERMINING  GAIN  OR  LOSS. 

limitation  governing  only  “(e)  the  consolidation  of  the  corporations/'  and 
not  a limitation  with  respect  to  (a),  (b),  (c)  and  (d).  The  statute  indicates 
that  the  limitation  intended  by  the  Regulations  is  applicable  to  (a),  (b),  (c), 

(d)  and  (e).  (Answer.)  You  also  ask  whether  in  interpreting  Article  1567 
of  Regulations  No.  45,  as  amended,  the  phrase  “in  any  case  of  no  greater 
aggregate  par  or  face  value  than  the  old  stock  and  securities  surrendered” 
is  a limitation  governing  only  “(e)  the  consolidation  of  the  corporation/’ 
or  a limitation  applying  to  each  of  the  subdivisions  (a),  (b),  (c),  (d)  and 

(e) .  tin  reply  you  are  advised  that  this  phrase  limits  not  only  subdivision 
(e),  but  also  the  preceding  subdivisions.  This  article  of  the  regulations  is 
founded  on  Section  202  (b)  of  the  Revenue  Act  of  1918,  which  would 
afford  no  basis  for  attaching  this  qualification  to  subdivision  (e)  only. 
(Letter,  embodying  inquiries,  from  Baker  and  Baker,  Washington,  D.  C., 
and  the  letter  of  reply  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
October  16,  1919.) 

1087  Determination  of  Gain  or  Loss  from  Subsequent  Sale. — The  new 

stock  and  securities  received  as  described  in  the  preceding  article 

[1ll085]  take  the  place  of  the  old  stock  and  securities.  For  the  purpose,  there- 
for, of  ascertaining  the  gain  derived  or  loss  sustained  from  the  subsequent 
sale  of  any  stock  of  A or  of  the  consolidated  corporation  so  received,,  the 
original  cost  to  the  taxpayer  or  the  fair  market  value  as  of  March  1,  1913, 
of  the  stock  of  B or  A in  respect  of  which  the  new  stock  was  issued,  less 
any  untaxed  distribution  made  to  the  taxpayer  by  A out  of  the  former 
capital  or  surplus  of  B,  or  by  the  consolidated  corporation  out  of  the  for- 
mer capital  or  surplus  of  A or  B,  is  the  basis  for  determining  the  amount 
of  such  gain  or  loss.  Similarly,  the  cost  after  reorganization,  merger  or 
consolidation  of  the  assets  of  A or  of  the  consolidated  corporation  is  the  sum 
of  the  cost  (or  the  fair  market  value  as  of  March  1,  1913)  of  the  assets  of 
A and  of  B for  the  purpose  of  ascertaining  the  gain  or  loss  upon  a subse- 
quent sale.  The  new  invested  capital  of  A or  of  the  consolidated  corpora- 
tion is  to  be  determined  as  if  A and  B were  rendering  a consolidated  return 
as  affiliated  corporations.  See  sections  240  and  326  of  the  statute  and  3^rti- 
cles  631-638  [for  consolidated  returns,  beginning  at  If 1826  ] and  864-869 
[for  invested  capital  of  affiliated  corporations  for  excess-profits  tax  pur- 
poses—War  Tax  Service].  (Art.  1568,  Reg.  45,  Rev.,  April  17,  1919.) 

1088  Exchange  of  Stock  for  Other  Stock  of  Greater  Par  Value. — If  in 

the  case  of  any  reorganization,  merger  or  consolidation  the  aggregate 
par  or  face  value  of  the  new  stock  or  securities  received  is  in  excess 
of  the  aggregate  par  or  face  value  of  the  stock  and  securities  exchanged, 
income  will  be  realized  from  the  transaction  by  the  recipients  of  the 
new  stock  or  securities  to  an  amount  limited  by  (a)  the  excess  of  the 
par  or  face  value  of  the  new  stock  or  securities  over  the  par  or  face  value 
of  the  old  and  (b)  the  excess  of  the  fair  market  value  of  the  new  stock  or 
securities  over  the  cost  or  fair  market  value  as  of  March  1,  1913,  of  the 
old  In  other  words,  the  taxable  profit  will  be  (a)  or  (b),  whichever  is 
less.  Upon  a subsequent  sale  of  the  new  stock  or  securities  their  cost  to  the 
taxpayer  will  be  the  cost  or  fair  market  value  as  of  March  1,  1913,  of-  the 
old  stock  and  securities,  plus  the  profit  taxed  on  the  exchange.  (Art.  1509, 
Reg.  45,  Rev.,  April  17,  1919.) 


% 

% 


(9 


INC. 


174  TAX 


INVENTORIES. 


lOSO  Readjustment  of  Partnership  Interests. — When  a partner  retires 
from  a partnership,  or  it  is  dissolved,  he  realizes  a gain  or  loss  meas- 
ured by  the  difference  between  the  price  received  for  his  interest  and  the  cost 
to  him  or  (if  acquired  prior  thereto)  the  fair  market  value  as  of  March  1, 
1913,  of  his  interest  in  the  partnership,  including  in  such  cost  or  value  the 
amount  of  his  share  in  any  undistributed  partnership  net  income  earned 
since  February  28,  1913,  on  which  the  income  tax  has  been  paid.  If,  how- 
ever, the  partnership  distributes  its  assets  in  kind  and  not  in  cash,  the  part- 
ner realizes  no  gain  or  loss  until  he  disposes  of  the  property  received  on 
distribution.  Whenever  a new  partner  is  admitted  to  a partnership,  or  any 
existing  partnership  is  reorganized,  the  facts  as  to  such  change  or  reorgani- 
zation should  be  fully  set  forth  in  the  next  return  of  income,  in  order  that 
the  Commissioner  may  determine  whether  any  gain  or  loss  has  been  real- 
ized bv  any  partner.  See  also  article  1563  [for  exchanges  of  property, 
P077].  (Art.  1570,  Reg.  45,  Rev.,  April  17,  1919.) 


1090  Law  ^50.  Inventories. — “Sec.  203.  That  whenever  in  the  opinion 

of  the  Commissioner  the  use  of  inventories  is  necessary  in 
order  clearly  to  determine  the  income  of  any  taxpayer,  inventories  shall  be 
taken  by  such  taxpayer  upon  such  basis  as  the  Commissioner,  with  the 
approval  of  the  Secretary,  may  prescribe  as  conforming  as  nearly  as  may 
be  to  the  best  accounting  practice  in  the  trade  or  business  and  as  most  clearly 
reflecting  the  income.” 

1091  Need  of  Inventories. — In  order  to  reflect  the  net  income  correctly, 
inventories  at  the  beginning  and  ending  of  each  year  are  necessary 

in  every  case  in  which  the  production,  purchase  or  sale  of  merchandise 
is  an  income  -producing  factor.  The  inventory  should  include  raw  materials 
and  supplies  on  hand  that  have  been  acquired  for  sale,  consumption  or 
use  in  productive  processes,  together  with  all  finished  or  partly  finished 
goods.  Title  to  the  merchandise  included  in  the  inventory  should  be 
vested  in  the  taxpayer  and  goods  merely  ordered  for  future  delivery  and 
for  which  no  transfer  of  title  has  been  effected  should  be  excluded.  The 
inventory  should  include  merchandise  sold  but  not  shipped  to  the  customer 
at  the  date  of  the  inventory,  together  with  any  merchandise  out  upon  con- 
signment, but  if  such  goods  have  been  included  in  the  sales  of  the  taxable 
year  they  should  not  be  taken  in  the  inventory.  It  should  also  include  mer- 
chandise purchased,  although  not  actually  received,  to  which  title  has  passed 
to  the  purchaser.  In  this  regard  care  should  be  exercised  to  take  into  the 
accounts  all  invoices  or  other  charges  in  respect  of  merchandise  properly 
included  in  the  inventory,  but  which  is  in  transit  or  for  other  reasons  has 
not  been  reduced  to  physical  possession.  (Art.  1581,  Reg.  45,  Rev.,  April 
17,  1919.) 

1092  Valuation  of  Inventories. — Inventories  should  be  valued  at  (a) 
cost  or  (b)  cost  or  market  whichever  is  lower.  Whichever  basis  is 

adopted  must  be  applied  to  each  item  and  not  merely  to  the  total  of  the 
inventory;  that  is,  if  for  instance  basis  (b)  is  I’dopted,  the  value  of  each 
item  in  the  inventory  will  be  measured  by  market  if  that  is  lower  than  cost, 
or  by  cost  if  that  is  lower  than  market.  A taxpayer  may,  regardless  of 
his  past  practice,  adopt  the  basis  of  cost  or  market,  whichever  is  lower, 
for  his  1918  inventory,  provided  a disclosure  of  the  fact  and  that  it  repre- 
sents a change  is  made  in  the  return.  Thereafter  changes  can  be  made 

175  TAX 


INC. 


INVENTORIES. 


only  after  permission  is  secured  from  the  Commissioner.  But  see  article 
1585  [P095]  for  inventories  by  dealers  in  securities.  Inventories  should 
be  recorded  in  a legible  manner  and  properly  computed  and  summarized 
and  should  be  preserved  as  a part  of  the  accounting  records  of  the  taxpayer. 
Goods  taken  in  the  inventory  which  have  been  so  intermingled  that  they  can 
not  be  identified  with  specific  invoices  will  be  deemed  to  be  the  goods  most 
recently  purchased.  (Art.  1582,  Reg.  45,  Rev.,  April  17,  1919.) 

1093  Inventories  at  Cost. — Cost  means  : 

(1)  In  the  case  of  merchandise  purchased,  the  invoice  price  less  trade 
or  otlier  discounts  except  strictly  cash  discounts  approximating  a fair  interest 
rate,  which  may  be  deducted  or  not  at  the  option  of  the  taxpayer  provided  a 
consistent  course  is  followed.  To  this  net  invoice  price  should  be  added 
transportation  or  other  necessary  charges  incurred  in  acquiring  possession 
of  the  goods. 

(2)  In  the  case  of  merchandise  produced  by  the  taxpayer,  (a)  the  cost  of 
raw  materials  and  supplies  entering  into  or  consumed  in  connection  with  the 
product,  (b)  expenditures  for  direct  labor,  (c)  indirect  expenses  incident 
to  and  necessary  for  the  production  of  the  particular  article,  including  in 
such  indirect  expenses  a reasonable  proportion  of  management  expenses, 
but  not  including  any  cost  of  selling  or  return  on  capital  whether  by  way 
of  interest  or  profit. 

In  any  industry  in  which  the  usual  rules  for  computation  of  cost  of  pro- 
duction are  inapplicable,  costs  inay  be  approximated  upon  such  basis  as  may 
be  reasonable  and  in  conformity  with  established  trade  practice  in  the  par- 
ticular industry.  (Art.  1583,  Reg.  45,  Rev.,  April  17,  1919.) 

1094  Inventories  at  Market. — Market  means  the  current  bid  price  pre- 
vailing at  the  date  of  the  inventory  for  the  particular  merchandise, 

and  is  applicable  to  goods  purchased  and  on  hand  and  to  basic  materials  in 
goods  in  process  of  manufacture  and  in  finished  goods  on  hand,^  exclusive, 
however,  of  goods  on  hand  or  in  process  of  manufacture  for  delivery  upon 
firm  sales  contracts  at  fixed  prices  entered  into  before  the  date  of  the  inven- 
tory. Where  no  open  market  quotations  are  available  the  taxpayer  must 
use  such  evidence  of  a fair  market  price  at  the  date  or  dates  nearest  the 
inventory  as  may  be  available  to  him,  such  as  specific  transactions  in  rea- 
sonable volume  entered  into  in  good  faith,  or  compensation  paid  for  can- 
cellation of  contracts  for  purchase  commitments.  The  burden  of  proof 
will  rest  upon  the  taxpayer  in  each  case  to  satisfy  the  Commissioner  of  the 
correctness  of  the  prices  adopted.  It  is  recognized  that  in  the  latter  part  of 
1918,  by  reason  among  other  things  of  governmental  control  not  haying 
been  relinquished,  conditions  were  abnormal  and  in  many  commodities 
there  was  no  such  scale  of  trading  as  to  establish  a free  market.  In  such 
a case,  when  a market  has  been  established  during  the  succeeding  year,  a 
claim  may  be  filed  for  any  loss  sustained  in  accordance  with  the  provisions 
of  section  214  (a)  (12)  or  section  234  (a)  (14)  of  the  statute.  See  articles 
261-268  [for  losses  in  1918  inventories  and  from  rebates,  111477].  (Art. 
1584,  Reg.  45,  Rev.,  April  17,  1919.) 

1095  Inventories  by  Dealers  in  Securities. — A dealer  in  securities,  who 
in  his  books  of  account  regularly  inventories  unsold  securities  on 

hand  either  (a)  at  cost  or  (b)  at  cost  or  market  value  whichever  is  lower, 
may  make  his  return  upon  the  basis  upon  which  his  accounts  are  kept;  pro- 
vided that  a description  of  the  method  employed  shall  be  included  in  or 

176  TAX 


INC. 


NET  LOSSES. 


attached  to  the  return,  that  all  the  securities  must  be  inventoried  by  the 
same  method,  and  that  such  method  must  be  adhered  to  in  subsequent  years 
unless  another  be  authorized  by  the  Commissioner.  For  the  purpose  of  this 
rule  a dealer  in  securities  is  a merchant  of  securities,  whether  an  individual 
partnership  or  corporation,  with  an  established  place  of  business,  regularly 
in  the  purchase  of  securities  and  their  resale  to  customers,  that  is, 
one  who  as  a merchant  buys  securities  and  sells  them  to  customers  with  a 
view  to  the  gains  and  profits  that  may  be  derived  therefrom.  If  such 
business  is  simply  a branch  of  the  activities  carried  on  by  such  person,  the 
securities  inventoried  as  here  provided  may  include  only  those  held  for  pur- 
poses of  resale  and  not  for  investment.  Taxpayers  who  buy  and  sell  or 
hold  securities  for  investment  or  speculation,  and  not  in  the  course  of  an 
established  business,  and  officers  of  corporations  and  members  of  partner- 
ships, vvffio  in  their  individual  capacities  buy  and  sell  securities,  are  not 
dealers  in  securities  within  the  meaning  of  this  rule.  (Art  1585  ^Re^-  45 
Rev.,  April  17,  1919.)  . . , 

1096  Inventories  of  Securities  by  a Bank  Maintaining  a Department 
for  the  Merchandising  thereof.— Reference  is  made  to  your  letter 
of  May  26,  1919,  wherein  you  ask  whether  a bank  that  maintains  a 
branch  for  the  purpose  of  buying  and  selling  securities  has  the  full  status 
of  a recognized  dealer  in  securities.  %ln  reply,  you  are  advised  that  a bank 
or  other  institution  having  a regularly  established  department  for  the  mer- 
chandising of  securities,  even  though  that  department  is  subordinate  in  im- 
portance to  other  departments,  is  entitled  to  the  same  benefit  of  using  the 
basis  provided  for  in  Article  1585  [P095]  of  inventorying  securities  ac- 
quired and  held  for  resale,  as  one  Avho  is  solely  a dealer  in  securities,  jfin 
so  far  as  the  bank  or  other  institution  carry  on,  with  an  established  place 
of  business,  a department  for  the  merchandising  of  securities,  it  is  in  respect 
of  such  department  treated  in  the  same  way  as  any  other  security  merchant. 
It  should  be  noted,  however,  that  the  method  of  inventorying  provided  for 
in  Article  1585  has  no  application  and  can  not  be  extended  to  taxpayers 
simply  buying  and  selling  securities  for  investment  or  speculation.  (Let- 
ter to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  June  28,  1919.) 


Law|T51.  A Net  Loss  Suffered  in  One  Year  to  Be  Allowed  as  a 
Deduction  in  Computing  Net  Income  of  the  Previous 
or  Succeeding  Year— *‘Net  Loss”  Defined.— “Sec.  204.  (a)  That  as  used 
in  this  section  the  term  “net  loss”  refers  only  to  net  losses  resulting^  from 
either”  ^ 

1098  Law  ^52.  “(1)  the  operation  of  any  business  regularly  carried 

on  by  the  taxpayer,  or” 

1099  Law  ^53.  “(2)  the  bona  fide  sale  by  the  taxpayer  of  plant,  build- 

ings, machinery,  equipm.ent  or  other  facilities,  con- 
structed, installed  or  acquired  by  the  taxpayer  on  or  after  April  6,  1917, 
for  the  production  of  articles  contributing  to  the  prosecution  of  the  present 
war ;” 


INC. 


177  TAX 


NET  LOSSES. 


1100  Law  ^54.  “and  when  so  resulting  means  the  excess  of  the  deduc- 

tions allowed  by  law  (excluding  in  the  case  of  corpora- 
tions amounts  allowed  as  a deduction  under  paragraph  (6)  [dividends, 
j[1325]  of  subdivision  (a)  of  section  234)  over  the  sum  of  the  gross  in- 
come plus  any  interest  received  free  from  taxation  both  under  this  title 
and  under  Title  III  [Excess-profits  tax]. 

1101  Law][55.  Net  Loss  as  a Deduction  for  the  Preceding  Taxable 

Year. — “(b)  If  for  any  taxable  year  beginning  after 
October  31,  1918,  and  ending  prior  to  January  1,  1920,  it  appears  upon  the 
production  of  evidence  satisfactory  to  the  Commissioner  that  any  taxpayer 
has  sustained  a net  loss,  the  amount  of  such  net  loss  shall  under  regulations 
prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary  be 
deducted  from  the  net  income  of  the  taxpayer  for  the  preceding  taxable 
year 

1102  Law][56.  Redetermination  of  Income  Tax  and  War  Excess  Tax 

for  the  Preceding  Year. — “and  the  taxes  imposed  by 
this  title  and  by  Title  III  [excess-profits  tax]  for  such  preceding  taxable 
year  shall  be  redetermined  accordingly.” 

1103  Law  j[57.  Credit  for  or  Refund  of  Amount  Found  to  Be  Due  the 

Taxpayer  by  Redetermination  of  Taxes  for  Prior  Year. 

—“Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis  of  such 
redetermination  shall  be  credited  or  refunded  to  the  taxpayer  in  accord- 
ance with  the  provisions  of  section  252  []j2121].” 

1104  Law  ]|58.  If  the  Net  Loss  to  Be  Deducted  Be  Greater  Than  the 

Net  Income  of  the  Preceding  Year,  the  Excess  May  be 
Deducted  from  the  Net  Income  of  the  Succeeding  Year. — “If  such  net 

loss  is  in  excess  of  the  net  income  for  such  preceding  taxable  year,  the 
amount  of  such  excess  shall  under  regulations  prescribed  by  the  Commis- 
sioner with  the  approval  of  the  Secretary  be  allowed  as^a  deduction  in  com- 
puting the  net  income  for  the  succeeding  taxable  year.” 

1105  Law  1|59.  Benefit  of  the  Net  Loss  Provision  Accrues  to  Members 

of  a Partnership  and  to  Beneficiaries  of  an  Estate  or 
Trust.— “(c)  The  benefit  of  this  section  shall  be  allowed  to  the  members 
of  a partnership  and  the  beneficiaries  of  an  estate  or  trust  under  regulations 
prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary.” 

1106  Scope  of  Net  Losses.— As  used  in  the  statute  the  term  “net  loss” 
means  either  a business  operating  loss  or  a loss  realized  by  a bona 

fide  sale  of  property  constructed,  installed  or  acquired  on  or  after  April 
6,  1917,  for  the  production  of  articles  contributing  to  the  prosecution  of  the 
war.  The  amount  of  net  loss  claimed  must  represent  an  actual  net  less  over 
and  above  all  income,  including  tax-free  income.  Such  losses  will  be  alW- 
able  only  in  respect  of  a taxpayer  having  a taxable  year  beginning  after  Oc- 
tober 31,  1918,  and  ending  prior  to  January  1,  1920,  and  after  one  claim  has 
been  allowed  no  further  claim  can  be  considered.  (Art.  1601,  Reg.  45, 
Rev.,  April  17,  1919.) 


178  TAX 


EXEMPT  INCOME. 


1107  Claim  for  Allowance  of  Net  Loss. — A taxpayer  having  such  a net 
loss  may  file  a claim  on  form  46  with  his  return  of  income  for  the 

taxable  year  1919.  Such  claim  should  contain  a concise  statement  setting 
forth  the  amount  of  the  loss  sustained,  in  accordance  with  the  accompanying 
return,  the  nature  of  the  loss,  the  amount  of  the  taxpayer’s  net  income  for 
the  taxable  year  1918,  the  taxes  paid  by  him  v/ith  respect  thereto,  and  all 
pertinent  facts  necessary  to  enable  the  Commissioner  to  determine  the  allow- 
ability of  the  claim.  (Art.  1602,  Reg.  45,  Rev.,  April  17,  1919.) 

1108  Allowance  of  Net  Loss. — The  amount  allowed  by  the  Commis- 
sioner in  respect  of  any  such  claim  shall  be  deducted  from  the  net 

income  for  the  taxable  year  1918  and  the  income  and  the  war  profits  and 
excess  profits  tax,  if  any,  for  such  year  shall  be  recomputed  accordingly. 
Any  amount  found  to  be  due  him  shall  be  credited  or  refunded  to  the  tax- 
payer. See  section  252  of  the  statute  and  articles  1034-1036  [for  claims 
for  credit  or  refund  of  taxes  erroneously  assessed,  beginning  at  j[2123]. 
In  any  case  in  which  it  is  found  by  the  Commissioner  that  such  net  loss  is 
in  excess  of  the  net  income  of  such  preceding  taxable  year,  the  taxpayer 
may  carry  forward  the  amount  of  such  excess  and  claim  it  as  a deduction  in 
computing  net  income  for  the  succeeding  taxable  year.  (Art.  1603,  Reg.  45, 
Rev.,  April  17,  1919.) 


1109  Law  ^94.  Certain  Items  Are  Excluded  from  Gross  Income. — “(b) 

[Gross  income]  Does  not  include  the  following  items, 
which  shall  be  exempt  from  taxation  under  this  title 

1110  What  Excluded  from  Gross  Income. — Gross  income  excludes  the 
items  of  income  specifically  exempted  by  the  statute  and  also  cer- 
tain other  kinds  of  income  by  statute  or  fundamental  law  free  from 
tax.  Such  tax-free  income  should  not  be  included  in  the  return  of 
income  and  need  not  be  mentioned  in  the  return,  unless  information  regard- 
ing it  is  specifically  called  for,  as  in  the  case,  for  example,  of  interest  on 
municipal  bonds.  See  article  402  [jfl773].  The  exclusion  of  such  income 
should  not  be  confused  with  the  reduction  of  taxable  income  by  the  applica- 
tion of  allowable  deductions.  See  section  212  of  the  statute  and  article  21 
[for  statement  as  to  statutory  deductions,  1|771].  As  to  exclusions  from 
gross  income  bv  corporations,  see  section  233  and  article  541  [|f809]. 
(Art.  71,  Reg.  45,  Rev.,  April  17,  1919.) 

1111  Law  105.  Accident  and  Health  Insurance  and  “Damages”  Re- 

ceived.— “(6)  [Gross  income  does  not  include] 
Amounts  received,  through  accident  or  health  insurance  or  under  work- 
men’s compensation  acts,  as  compensation  for  personal  injuries  or  sickness, 
plus  the  amount  of  any  damages  received  whether  by  suit  or  agreement  on 
account  of  such  injuries  or  sickness;” 

1112  Law  1195.  Proceeds  of  Certain  Life  Insurance  Policies  on  Death 

of  Insured  are  Exempt. — “(1)  [Gross  income  does  not 
include]  The  proceeds  of  life  insurance  policies  paid  upon  the  death  of  the 
insured  to  individual  beneficiaries  or  to  the  estate  of  the  insured 

ms  Law  lf96.  Returns  to  Insured  of  Premiums  Paid  Under  Life 
Insurance,  Endowment  or  Annuity  Contracts  Are 
Exempt. — ”(2)  [Gross  income  does  not  include]  The  amount  received 

179  TAX 


INC. 


EXEMPT  INCOME. 


by  the  insured  as  a return  of  premium  or  premiums  paid  by  him  imder  life 
insurance,  endowment,  or  annuity  contracts,  either  during  the  term  or  at  the 
maturity  of  the  term  mentioned  in  the  contract  or  upon  surrender  of  the 
contract 

1114  Proceeds  of  Insurance. — (a)  Upon  the  death  of  an  insured  the 
proceeds  of  his  life  insurance  policies,  whether  paid  to  his  estate  or 
to  individual  beneficiaries,  directly  or  in  trust  are  excluded  from  the 
gross  income  of  the  beneficiary.  See  article  541  [for  insurance  pay- 
able to  a corporation  T[809].  (b)  During  his  life  only  so  much  of  the 

amount  received  by  an  insured  under  life,  endowment  or  annuity  contracts 
as  represents  a return,  without  interest,  of  premiums  paid  by  him  therefor 
is  excluded  from  his  gross  income.  See  article  47  [for  annuities  and  insur- 
ance policies,  11938].  (c)  Whether  he  be  alive  or  dead,  the  amounts  re- 

ceived by  an  insured  or  his  estate  or  other  beneficiaries  through  accident^  or 
health  insurance  or  under  workmen’s  compensation  acts  as  compensation 
for  personal  injuries  or  sickness  are  excluded  from  the  gross  income  of 
the  insured,  his  estate  and  other  beneficiaries.  Any  damages  recovered  by 
suit  or  agreement  on  account  of  such  injuries  or  sickness  are  similarly 
excluded  from  the  gross  income  of  the  individual  injured  or  sick,  if  living, 
or  of  his  estate  or  other  beneficiaries  entitled  to  receive  such  damages,  if 
dead.  See  further  article  294  [for  premiums  on  business  insurance,  pi97]. 
Since  June  25,  1918,  no  assessment  of  any  federal  tax  may  be  made  on  any 
allotments,  family  allowances,  compensation,  or  death  or  disability  insur- 
ance payable  under  the  War  Risk  Insurance  Act  of  September  2,  1917,  as 
amended,  even  though  the  benefit  accrued  before  that  date.  (Art.  72, 
Reg.  45,  Rev.,  April  17,  1919.) 

1115  There  are  two  matters  relating  to  Income  Tax  on  Individuals  regard- 
ing which  I am  unable  to  find  any  mention  in  the  Law  itself  or  in  the 

Treasury  Decisions,  and  would  be  glad  to  have  you  inform  me  about  them 
at  this  time. 

First. 

1116  Second.  Cancelled  Life  Insurance : 

An  Endowment  Policy  and  a Straight  Life  Policy  are  surrendered  by 
the  Policyholder  to  the  Insurance  Company  and  cancelled,  not  at  maturity 
but  at  an  arbitrary  date,  and  the  “cash  surrender  value”  is  paid  by  the  com- 
pany to  the  policyholder.  This  amount  exceeds  the  total  of  premiums  there- 
tofore paid  on  the  respective  policies. 

Is  any  portion  of  this  difference  regarded  as  Taxable  Income?  If  so, 

what  proportion,  seeing  that  the  payment  of  premiums  and  conse- 
quent earning  thereon  by  the  Company  began  several  years  before  the  in- 
ception of  the  Income  Tax  Law?  (Answer.)  You  are  further  advised 
that  the  difference  between  the  amount  received  by  an  insurance  policy- 
holder upon  the  maturity  or  surrender  of  the  policy  and  the  aggregate 
amount  of  premiums  paid  during  the  lifetime  of  the  policy,  constitutes  tax- 
able income  which  should  be  included  in  any  personal  return  the  individual 
may  be  required  to  render  for  the  year  during  which  the  proceeds'  of  the 
policy  are  received.  (Part  of  letter  of  inquiry  to  the  Commissioner  of 
Internal  Revenue,  from  W.  W.  Bacon,  Philadelphia,  dated  Jan.  19,  191^ 
and  the  answer  thereto,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and 
dated  Feb.  8,  1917.) 


INC. 


180  TAX 


EXEMPT  INCOME. 


1118  Dividends  paid  on  life  insurance  policies  that  have  not  matured, 
whether  such  dividends  are  drawn  in  cash  by  the  insured  or  applied 

to  the  reduction  of  the  annual  premium  due,  are  not  considered  items  of 
--taxable  income  under  the  law,  and  should  be  excluded  from  a return  of 
income.  (T.  D.  2137,  Jan.  30,  1915.) 

1119  Dividends  on  paid-up  policies  are  in  the  nature  of  corporate  divi- 
dends and  are  to  be  accounted  for  as  income  for  the  purposes  of  the 

additional  tax  only.  (Art.  4,  ^[46,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


1120  Dear  Sir:  It  has  been  my  judgment  that  annuities  sold  by  the  Na- 
tional Life  Insurance  Company  and  othei  insurance  companies  were 
not  subject  to  tax  under  the  Income  Tax  Law,  but  I realize  that  the  statute 
is  not  entirely  free  from  doubt,  so  far  as  relates  to  such  portion  of  annuity 
payments  as  may  be  treated  as  income,  though  such  P9htions  are  com- 
paratively small  and  the  determination  of  their  amount  is  difficult  and  almost 
impracticable.  I would  like  to  know,  however,  whether  the  Department  has 
made  any  ruling  relative  to  the  taxation  of  annuities  and  if  any  ruling  has 
been  made,  would  be  glad  to  receive  a copy  of  it 

W.  H.  Osborn,  signed  by  Fred.  A.  Howland,  Counsel  National  Life  In- 
surance Company  and  dated  Feb.  5,  1914.)  (Answer.)  Sir:  In  ^epty  to 
your  letter  of  Feb.  5,  relative  to  the  taxation  of  annuities 
kx  Law,  you  are  informed  that  life  insurance  annuities  ^hall  not  be  m 
eluded  as  income.  (Signed  by  Deputy  Commissioner  L.  F.  Speer,  ana 
dated  Feb.  17,  1914.) 


1121  Dear  Sir : I should  have  made  earlier  acknowledgment  of  your  tele- 
gram of  December  27th  reading  as  follov/s: 

“As  at  present  advised,  this  office  holds  that  proceeds  of  life  insurance 
policies  paid  pursuant  to  terms  of  contract,  whether  upon  maturity  of 
policy,  death  of  insured  or  as  annuities  are  not  subject  to  tax  m hands  ot 
beneficiaries  * * * . Payment  of  deferred  dividends  in  so  far  as  they 
represent  portions  of  actual  premiums  received  are  proceeds  of  insurance 
policy  within  the  meaning  of  law.” 

1122  I thank  you  very  much  for  advising  of  the  ruling  on  the  subjects 
mentioned  and  in  communicating  with  the  counsel  of  other  insurance 

companies  I find  that  it  cleared  up  in  their  minds  some  important  points. 
There  is,  however,  one  further  question  which  I raised  in  my  letter  of 
November  17th  and  possibly  your  telegram  of  the  27th  covers  it.  The 
question  is  one  of  considerable  importance  and  one  which  we  are  called 
upon  to  deal  with  at  once.  I am  taking  the  liberty  of  bringing  the  matter 
to  your  attention  at  this  time  and  state  a concrete  case  with  which  we  must 
deal  very  shortly.  On  February  1,  1914,  this  company  will  be  called  upon 
to  pay  an  annuity  instalment  of  $3,448.46  under  annuity  contract  No.  . 
This  annuity  contract  was  purchased  for  cash  February  1,  1903,  the  con- 
sideration being  $40,985.  Annually  on  February  1st,  under  the  terms  of 
the  annuity  contract,  the  sum  of  $3,448.46  is  payable  to  the  annuitant. 

1123  The  query  is : Is  this  instalment  of  $3,448.46  which  the  company  must 
pay  to  the  annuitant  on  February  1,  1914,  and  future  annual  instal- 
ments, subject  to  the  income  tax?  It  is  my  opinion,  as  I expressed  it  in  my 
letter  to  you  of  November  17th,  that  the  proper  construction  of  the  income 
tax  law  of  1913  imposes  no  tax  in  such  a case. 


181  TAX 


INC. 


EXEMPT  INCOME. 


1124  I would  thank  you  very  much  indeed  if  you  would  give  me  a ruling 
in  the  matter.  As  the  company  is  constantly  having  to  answer  in- 
quiries of  annuitants  in  such  cases,  I would  appreciate  very  much  if  you 
would  send  me  a wire  on  the  subject  at  my  expense.  (Letter  to  Commis- 
sioner W.  H.  Osborn,  signed  by  Frederick  L.  Allen,  General  Solicitor, 
Mutual  Life  Insurance  Company  and  dated  Jan.  8,  1914.)  (Answer.) 
So  much  of  annuities  paid  to  annuitant  as  represents  payment  made  iDy  him 
on  annuity  contract  and  paid  back  to  him  shall  not  be  included  in  income 
of  annuitant.  Any  increment  on  purchase  price  of  annuity  is  taxable  in- 
come. * * * (Signed  by  Commissioner  W.  H.  Osborn,  and  dated  Jan. 
12,  1914.) 

1125  Sir:  In  reply  to  your  letter  of  January  28th,  in  which  you  request 
to  be  advised  whether  income  received  from  or  credited  to  policy- 

holders  of  life  insurance,  as  dividends,  shall  be  included  as  income,  you 
are  informed  that  dividends  paid  on  life  insurance  policies  that  have  not 
matured,  whether  such  dividends  are  paid  by  the  company  in  cash  or 
added  to  the  face  value  of  the  policy,  are  not  considered  items  of  taxable 
income  under  the  law,  and  should  be  excluded  in  making  the  annual  return. 

1126  Dividends  from  paid-up  policies  are  considered  income  to  the  recip- 
ient, and  must  be  included  in  the  annual  return.  (Letter  to  Robert 

Lynn  Cox,  General  Counsel  and  Manager,  Association  of  Life  Insurance 
Presidents,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  March 
5,  1914.) 

1127  Reimbursement  of  Expenses  Incident  to  an  Accident. — Amounts 
received  from  a railroad  company  by  way  of  reimbursement  for  ex- 
penses incident  to  an  accident  are  not  subject  to  the  income  tax.  (T.  D. 
2135,  Jan.  23,  1915.) 

1128  Law  ^97.  Value  of  Property  Acquired  by  Gift,  Bequest,  etc.,  is 

Exempt. — “(^)  [Gross  income  does  not  include]  The 
value  of  property  acquired  by  gift,  bequest,  devise,  or  descent  (but  the 
income  from  such  property  shall  be  included  in  gross  income) 

1129  Gifts  and  Bequests. — Money  and  real  or  personal  property  re- 
ceived as  gifts,  or  received  under  a will  or  under  statutes  of  descent 

and  distribution,  are  exempt  from  tax,  although  the  income  there- 
from derived  from  investment,  sale  or  otherwise  is  not.  See  section 
202  of  the  statute  and  articles  32  [for  pensions,  retiring  allowances,  etc., 
1^873],  51  [for  forgiveness  of  a debt  as  a gift,  1f943]  and  1562  [for  sale  of 
property  acquired  by  gift  or  bequest,  111074].  An  amount  of  principal  paid 
under  a marriage  settlement  is  a gift.  Neither  alimony  nor  an  allowance 
based  on  a separation  agreement  is  taxable  income.  See  article  291  [for 
non-deductibility  of  such  items  as  expense,  pl86].  (Art.  73,  Reg.  45,  Rev., 
April  17,  1919.) 

1180  Law  1|98.  Interest  on  United  States  Bonds,  etc..  Except  as  Other- 
wise Provided  in  the  Act  of  Authorization,  and  on 
Bonds  of  State  or  Political  Subdivision  Thereof  is  Exempt. — “(4)  [Gross 
income  does  not  include]  Interest  upon  (a)  the  obliptions  of  a State, 
Territorv,  or  any  political  subdivision  thereof,  or  the  District  of  Columbia ; 
or” 


INC. 


182  TAX 


EXEMPT  INCOME. 


1131  Law  |[99.  “(b)  securities  issued  under  the  provisions  of  the 

Federal  Farm  Loan  Act  of  July  17,  1916;  oF' 

1132  Law  poo.  “(c)  the  obligations  of  the  United  States  or  its  pos- 

sessions [Read  pi38  below] ; oF' 

1133  Law  |[101.  “(d)  bonds  issued  by  the  War  Finance  Corporation 

[Read  pi38  below] 

1134  Lawp02.  “Provided,  That  every  person  owning  any  of  the  obli- 

gations, securities  or  bonds  enumerated  in  clauses  (a), 
(b),  (c)  and  (d)  shall,  in  the  return  required  by  this  title,  submit  a 
statement  showing  the  number  and  amount  of  such  obligations,  securi- 
ties and  bonds  owned  by  him  and  the  income  received  therefrom,  in  such 
form  and  with  such  information  as  the  Commissioner  may  require.’' 

1135  Interest  Upon  State  Obligations. — Among  income  exempt  from 
tax  is  interest  upon  the  obligations  of  a State,  Territory,  or  any  poli- 
tical subdivision  thereof,  or  the  District  of  Columbia.  Obligations  issued 
for  a public  purpose  by  or  on  behalf  of  the  State  or  Territory 
or  a duly  organized  political  subdivision  acting  by  constituted  authorities 
duly  empowered  to  issue  such  obligations  are  the  obligations  of  a State  or 
Territory  or  a political  subdivision  thereof.  The  term  “political  subdivision” 
denotes  any  division  of  the  State  or  Territory  made  by  the  proper  authorities 
thereof  acting  within  their  constitutional  powers  for  the  purpose  of  carry- 
ing out  a portion  of  those  functions  of  the  State  or  Territory  which  by  long 
usage  and  the  inherent  necessities  of  government  have  always  been  regarded 
as  public.  Political  subdivisions  of  a State  or  Territory,  within  the  meaning 
of  the  exemption,  include  special  assessment  districts  so  created,  such  as 
road,  water,  sewer,  gas,  light,  reclamation,  drainage,  irrigation,  levee, 
school,  harbor,  port  improvement,  and  similar  districts  and  divisions  of  a 
State  or  Territory.  The  purchase  by  a State  of  property  subject  to  a mort- 
gage executed  to  secure  an  issue  of  bonds  does  not  render  the  bonds  obliga- 
tions of  the  State,  and  the  interest  upon  them  does  not  become  exempt 
from  taxation,  whether  or  not  the  State  assumes  the  payment  of  the  bonds. 
(Art.  74,  Reg.  45,  Rev.,  April  17,  1919.) 

1136  Dividends  and  Interest  from  Federal  Land  Bank  and  National 
Farm  Loan  Association. — As  section  26  of  the  Federal  Farm 

Loan  Act  of  July  17,  1916,  provides  that  every  federal  land  bank  and  every 
national  farm  loan  association,  including  the  capital  and  reserve  or  sur- 
plus therein  and  the  income  derived  therefrom,  shall  be  exempt  from  tax- 
ation, except  taxes  upon  real  estate,  and  that  farm  loan  bonds,  with  the  in- 
come therefrom,  shall  be  exempt  from  taxation,  the  income  derived  from 
dividend^  on  stock  of  federal  land  banks  and  national  farm  loan  associa- 
tions and  from  interest  on  such  farm  loan  bonds  is  not  subject  to  the  in- 
come tax.  See  also  section  231  (13)  of  the  statute  [for  exemption  of  the 
Farm  Land  Banks  and  the  Farm-Loan  Associations,  11752].  (Art.  75, 
Reg.  45,  Rev.,  April  17,  1919.)  . 

1137  Dividends  from  Federal  Reserve  Bank.— As  section  7 of  the  Fed- 
eral Reserve  Act  of  December  23,  1913,  provides  that  federal  reserve 

banks,  including  the  capital  stock  and  surplus  therein  and  the  income  de- 
rived therefrom,  shall  be  exempt  from  taxation,  except  taxes  upon  real 

183  TAX 


INC. 


EXEMPT  INCOME. 


estate  such  exemption  attaches  to  and  follows  the  income  derived  from 
dividends  on  stock  of  federal  reserve  banks  m.the  hands  of  the  stockholders^ 
si  thaf tirdiv^dends  received  on  the  stock  of  federal  reserve  banks  are 
not  subject  to  the  income  tax.  Dividends  paid  by  member  banks,  however, 
ari  tS  like  dividends  of  ordinary  corporations.  (Art.  76,  Reg.  45, 
Rev.,  April  17,  1919.) 

1138  Law  P03.  Taxable  Status  of  Interest  o”  Obligations  °f  the  United 

States  Issued  After  September  1,  1917.—  In  the  case 

of- oblieations  of  the  United  States  issued  after  September  1,  1917,  “<1  i 
tile  casfof  boilds  issued  by  the  War  Finance.  Corporation,  the  'ff^st  shall 
L exempt  only  if  and  to  the  extent  provided  in  Acts  au* 

izing  the  issue  thereof  as  amended  and  supplemented  ^dl  te 
from  gross  income  only  if  and  to  the  extent  it  is.  wholly  exempt  from 
ation  fo  the  taxpayer  both  under  this  title  and  under  Title  III, 

1139  Interest  Upon  United  States  Obligations.— Although  intere^ 
upon  the  obUgations  of  the  United  States  is  in  general  exempt  fr 

tax  in  Ae  case  of  such  obligations  issued  after  September  1 1917 

which  include  Treasury  certificates  of  indebtedness  war  savings  cei- 

"es  and  the  liberty  bond  issues  .^rst  Jerty 

.“.nd  to  the  bond,  of  th.  fir,,  liberty  loan  converted.  (Art.  77. 

Reg.  45,  Rev.,  April  17,  1919.) 

L“.5E?SS;33I.SrSSi 

s srLSprirs  r 

b'eSes!— 

by  any  individual,  partnership,  subdivision  (b)  of  this  section, 

exempt  from  the  ‘axe^provided  for  in  subdm^^^^^ 

trbotdrwhkh  s 

£t  l^rt7lln^e7on7coSvert^^^^  4/4  per  cent  bonds,  second  liberty  loan 


184 


TAX 


INC. 


EXEMPT  INCOME. 


4 per  cent  bonds,  second  liberty  loan  converted  4j4  cent  bonds,  third 
liberty  loan  4%.  per  cent  bonds,  and  fourth  liberty  loan  4%  per  cent  bonds, 
together  with  all  interest  on  United  States  certificates  of  indebtedness  and 
war  saving  certificates,  is  exempt  from  the  normal  tax.  Such  interest  in 
excess  of  the  interest  on  not  exceeding  $5,000  principal  amount  of  such 
bonds  and  certificates  may,  however,  be  subject  to  surtax  and  to  the  war 
profits  and  excess  profits  tax  and  may  accordingly  require  to  be  included 
in  gross  income.  (Art.  78,  Reg.  45,  Rev.,  April  17,  1919.) 

1142  Liberty  Bond  Exemption  from  Surtax  and  War  Profits  and  Excess 

Profits  Tax  in  1918. — Section  7 of  the  Second  Liberty  Bond  Act 
provides  that  the  interest  on  i an  aggregate  of  not  exceeding  $5,000 
principal  amount  of  liberty  bonds  of  issues  after  the  first,  owned  by  any 
person,  including  in  such  later  issues  bonds  of  the  first  liberty  loan  con- 
verted, Treasury  certificates  and  war  savings  certificates  shall  be  exempt 
from  surtaxes  and  war  profits  and  excess  profits  taxes,  as  well  as  the 
normal  tax.  The  Supplement  to  Second  Liberty  Bond  Act,  approved  Sep- 
tember 24,  1918,  provides: 

That  until  the  expiration  of  two  years  after  the  date  of  the  termina- 
tion of  the  war  between  the  United  States  and  the  Imperial  German 
Government,  as  fixed  by  "proclamation  of  the  President — ■ 

(1)  The  interest  on  an  amount  of  bonds  cf  the  Fourth  Liberty  Loan 
the  principal  of  which  does  not  exceed  $30,000  owned  by  any  individ- 
ual, partnership,  association,  or  corporation,  shall  be  exempt  from 
graduated  additional  income  taxes,  commonly  Lnown  as  surtaxes,  and 
excess-profits  and  war-profits  taxes,  now  or  hereafter  imposed  by  the 
United  States,  upon  the  income  or  profits  of  individuals,  partnerships, 
associations,  or  corporations; 

(2)  The  interest  received  after  January  1,  1918,  on  an  amount  of 
bonds  of  the  First  Liberty  Loan  Converted,  dated  either  November  15, 
1917,  or  May  9,  1918,  the  Second  Liberty  Loan,  converted  and  uncon- 
verted, and  the  Third  Liberty  Loan,  the  principal  of  which  does  not 
exceed  $45,000  in  the  aggregate,  owned  by  any  individual,  partnership, 
association,  or  corporation,  shall  be  exempt  from  such  taxes:  Pro- 
vided, however.  That  no  owner  of  such  bonds  shall  be  entitled  to  such 
exemption  in  respect  to  the  interest  on  an  aggregate  principal  amount 
of  such  bonds  exceeding  one  and  one-half  times  the  principal  amount 
of  bonds  of  the  Fourth  Liberty  Loan  originally  subscribed  for  by  such 
owner  and  still  owned  by  him  at  the  date  of  his  tax  return;  and 

(3)  The  interest  on  an  amount  of  bonds,  the  principal  of  which  does 
not  exceed  $30,000,  owned  by  any  individual,  partnership,  association, 
or  corporation,  issued  upon  conversion  of  31^  per  centum  bonds  of  the 
First  Liberty  Loan  in  the  exercise  of  any  privilege  arising  as  a conse- 
quence of  the  issue  of  bonds  of  the  Fourth  Liberty  Loan,  shall  be  ex- 
exempt from  such  taxes. 

The  exemptions  provided  in  this  section  shall  be  in  addition  to  the 
exemption  provided  in  section  7 of  the  Second  Liberty  Bond  Act  in  re- 
spect to  the  interest  on  an  amount  of  bonds  and  certificates,  authorized 
by  such  Act  and  amendments  thereto,  the  principal  of  which  does  not 
exceed  in  the  aggregate  $5,000,  and  in  addition  to  all  other  exemptions 
provided  in  the  Second  Liberty  Bond  Act. 

1143  Accordingly,  the  exemption  from  surtaxes  and  war  profits  and  excess 

profits  taxes  covers,  and  there  may  be  excluded  from  gross  income, 
the  interest  received  on  not  exceeding  $5,000  principal  amount  in  the  aggre- 

185  TAX 


INC. 


EXEMPT  INCOME. 


gate  of  first  liberty  loan  converted  4 per  cent  bonds,  first  liberty  loan  con- 
verted per  cent  bonds,  first  liberty  loan  second  converted  per  cent 
bonds,  second  liberty  loan  4 per  cent  bonds,  second  liberty  loan  converted 
4}i  per  cent  bonds,  third  liberty  loan  4^  per  cent  bonds,  fourth  liberty 
loan  4>4  per  cent  bonds,  and  treasury  certificates  and  war  savings  certifi- 
cates, apportioned  as  the  taxpayer  may  choose;  and  in  addition,  until  the 
expiration  of  two  years  after  the  termination  of  the  war,  (a)  the  interest 
received  on  not  exceeding  $30,000  principal  amount  of  fourth  liberty  loan 
4}i  per  cent  bonds;  plus  (b)  the  interest  received  on  an  aggregate  princi- 
pal amount  of  first  liberty  loan  converted  4 per  cent  bonds,  first  liberty  loan 
converted  4]4.  per  cent  bonds  (dated  May  9,  1918),  second  liberty  loan 
bonds,  converted  and  unconverted,  and  third  liberty  loan  4)4  per  cent  bonds, 
not  exceeding  $45,000  and  not  exceeding  150  per  cent  of  the  principal 
amount  of  bonds  of  the  fourth  liberty  loan  both  originally  subscribed  for 
by  the  taxpayer  and  still  owned  by  him  at  the  date  of  his  return;  plus  (c) 
the  interest  received  on  not  exceeding  $30,000  principal  amount  of  first 
liberty  loan  second  converted  4)4  cent  bonds  (dated  October  24,  1918). 
(Art.  79,  Reg.  45,  Rev.,  April  17,  1919.) 


1144  Liberty  Bond  Exemption  After  December  31,  1918. — The  Vic- 
tory Liberty  Loan  Act  of  March  3,  1919,  provides: 

Sec.  2.  (a)  That  until  the  expiration  of  five  years  after  the  date  of 
the  termination  of  the  war  between  the  United  States  and  the  Ger- 
man Government,  as  fixed  by  proclamation  of  the  President,  in  addition 
to  the  exemptions  provided  in  section  7 of  the  Second  Liberty  Bond 
Act  in  respect  to  the  interest  on  an  amount  of  bonds  and  certificates, 
authorized  by  such  Act  and  amendments  thereto,  the  principal  of  which 
does  not  exceed  in  the  aggregate  $5,000,  and  in  addition  to  all  other 
exemptions  provided  in  the  Second  Liberty  Bond  Act  or  the  Supple- 
ment to  Second  Liberty  Bond  Act,  the  interest  received  on  an  after 
January  1 1919,  on  an  amount  of  bonds  of  the  First  Liberty  Loan 
converted,  dated  November  15,  1917,  May  9,  1918,  or  October  24,  1918, 
the  Second  Liberty  Loan  converted  and  unconverted,  the  Third  Liberty 
! Loan  and  the  Fourth  Liberty  Loan,  the  principal  of  which  does  not 
exceed  $30,000  in  the  aggregate,  owned  by  any  individual,  partnership 
association,  or  corporation,  shall  be  exempt  from  graduated  acWitional 
income  taxes,  commonly  known  as  surtaxes,  and  excess-profits  and 
war-profits  taxes,  now  or  hereafter  imposed  by  the  United  States  upon 
the  income  or  profits  of  individuals,  partnerships,  associations,  or  cor- 

^°(b)  In  addition  to  the  exemption  provided  in  subdivision  (a),  and  m 
addition  to  the  other  exemptions  therein  referred  to,  the  interest  re- 
ceived on  and  after  January  1,  1919,  on  an  amount  of  the  bonds  therein 
specified  the  principal  of  which  does  not  exceed  $20,000  in  the  aggre- 
gate, owned  by  any  individual,  partnership,  association,  or  cor^ration, 
shall  be  exempt  from  the  taxes  therein  specified:  Provided,  That  no 
owner  of  such  bonds  shall  be  entitled  to  such  exemption  in  respect  to 
the  interest  on  an  aggregate  principal  amount  of  such  bonds  exceeding 
. three  times  the  principal  amount  of  notes  of  the  Victory  Liberty  Loan 
originally  subscribed  for  by  such  owner, and  still  owned  by  him  at 

the  date  of  his  tax  return.  , . . 

1145  Accordinglv,  with  respect  to  the  interest  on  liberty  bouds  received 
after.  December  31,  1918,  the  exemption  from  surtaxes  and  war 

profits  and  excess  profits  taxes  covers,  and  there  may  be  excluded  from 

'i8i5  TAX 


INC. 


EXEMPT  INCOME. 


gross  income,  in  addition  to  the  exemptions  specified  in  articles  77,  78  and 
79,  (a)  the  interest  received  on  and  after  January  1,  1919,  until  the  expira- 
tion of  five  years  after  the  termination  of  the  war,  on  not  exceeding  $30,000 
principal  amount  in  the  aggregate  of  first  liberty  loan  converted  4 per  cent 
bonds,  first  liberty  loan  converted  per  cent  bonds,  first  liberty  loan 
second  converted  4j4  per  cent  bonds,  second  liberty  loan  4 per  ( ent  bonds, 
second  liberty  loan  converted  4^4  per  cent  bonds,  third  liberty  loan  4j4  per 
cent  bonds,  and  fourth  liberty  loan  4j4  per  cent  bonds,  apportioned  as  the 
taxpayer  may  choose  : and  in  addition  (b)  the  interest  received  on  and  after 
January  1,  1919,  during  the  life  of  the  notes  of  the  victory  liberty  loan,  on 
an  aggregate  principal  amount  of  the  bonds  described  in  subdivision  ’ (a) 
not  exceeding  $20,000  and  not  exceeding  three  times  the  principal  amount 
of  notes  of  the  victory  liberty  loan  originally  subscribed  for  by  the  tax- 
payer and  still  owned  by  him  at  the  date  of  his  return.  The  specific  exemp- 
tions of  notes  of  the  victory  liberty  loan  will  be  prescribed  by  the  Secretary 
of  the  Treasury  pursuant  to  the 'Victory  Liberty  Loan  Act.  [See  Tfll46 
for  the  exemption  provisions.]  (Art.  80,  Reg.  45,  Rev.,  April  17,  1919.) 

1146  Exempt  Status  of  Interest  on  Victory  Liberty  Loan  Notes. The 

Victory  Liberty  Loan,  which  will  be  offered  for  popular  subscription 
on  April  21,  will  take  the  form  of  4J4%  three-four  year  Convertible 
Gold  Notes  of  the  United  States,  exempt  from  State  and  local  taxes,  except 
estate  and  inheritance  taxes,  and  from  normal  * Federal  income  taxes. 
The  Notes  will  be  convertible,  at  the  option  of  ihe  holder,  throughout  their 
life  into  three/four  year  Convertible  Gold  Notes  of  the  United  States 

exempt  from  all  Federal,  State  and  local  taxes,  except  estate  and  inheri- 
tance taxes.  In  like  manner  the  3J4%  Notes  will  be  convertible  into  the 
4J4%  Notes. 

1147  The  amount  of  the  issue  will  be  $4,500,000,000,  which,  with  the 

deferred  installments  of  income  and  profits  taxes  payable,  in  respect 

to  last  year’s  income  and  profits,  during  the  period  covered  by  the  maturity 
dates  of  Treasury  certificates  of  indebtedness  now  outstanding,  will  fully 
provide  for  the  retirement  of  such  certificates.  The  issue  will  be  limited 
to  $4,500,000,000  except  as  it  may  be  necessary  to  increase  or  decrease  the 
amount  to  facilitate  allotment.  Oversubscriptions  will  be  rejected  and  allot- 
ments made  on  a graduated  scale  similar  in  its  general  plan  to  that  adopted 
in  connection  with  the  First  Liberty  Loan.  Allotment  will  be  made  in  full 
on  subscriptions  up  to  and  including  $10,000. 


* In  answer  to  inquiries  the  Treasury  Department  to-day  stated  that 
the  interest  on  the  4j4  per  cent  notes  of  the  Victory  Liberty  Loan  is 
exempt  from  the  income  tax  on  corporations,  as  well  as  from  the  normal 
Federal  income  tax  on  individuals.  The  4%  per  cent  notes  are  exempt, 
under  the  terms  of  the  Department  Circular  offering  the  Victory  Liberty 
Loan  for  subscription,  “both  as  to  principal  and  interest,  from  all  taxation 
now  or  hereafter  imposed  by  the  United  States,  any  State,  or  any  of  the 
possessions  of  the  United  States,  or  by  any  local  taxing  authority,  except 
(a)  estate  or  inheritance  taxes,  and  (b)  graduated  additional  income  taxes, 
commonly  known  as  surtaxes,  and  excess-profits  and  war-profits  taxes,  now 
or  hereafter  imposed  by  the  United  States,  upon  the  income  or  profits  of 
individuals,  partnerships,  associations,  or  corporations.”  (Official  announce- 
ment by  the  Treasury  Department,  April  23,  1919.) 

TNO'.  187  TAX 


EXEMPT  INCOME. 


1148  The  notes  of  both  series  will  be  dated  and  bear  interest  from  Ma)r 
20,  1919,  and  will  mature  on  May  20,  1923.  Interest  will  be  payable 

on  December  15,  1919,  and  tliereafter  semi-annually  on  June  15  and  Decem- 
ber 15,  and  at  maturity.  All  or  any  of  the  Notes  may  be  redeemed  before  ' 
maturity  at  the  option  of  the  United  States  on  June  15  or  December  15, 
1922,  at  par  and  accrued  interest.  (Official  statement  by  Secretary  of  the. 
Treasury  Carter  Glass,  April  14,  1919.) 

1149  Original  Subscription  to  Victory  Notes.— For  the  purposes  of  the 

additional  tax  exemption  for  Liberty  Bonds  granted  by  Section  2 (b) 
of  the  Victory  Liberty  Loan  Act,  approved  March  3,  1919,  Victory 
notes  of  either  series  issued  upon  conversion  of  Victory  notes  of  the 
other  series  which  were  originally  subscribed  for  by  any  taxpayer  wdl  be 
deemed  to  have  been  originally  subscribed  for  by  such  taxpayer.  (1.  U, 
2857,  June  7,  1919.)  - 

1150  Interest  on  Victory  Notes.— All  interest  accrued  on  4)4  per  cent. 
Victory  notes  at  the  date  of  any  conversion  by  the  taxpayer  into  6/4 

ner  cent.  Victory  notes  will,  for  the  purposes  of  computing  net  income 
te  deemed  to  be  interest  upon  434  per  cent.  Victory  notes,  and 
will  be  entitled  only  to  the  exemptions  from  taxation  to  which  interest  on 
4)4  per  cent.  Victory  notes  is  entitled.  Any  and  all  amounts  received  by 
any  taxpayer  from  the  United  States  by  way  of  adjustment  of  accrued  mte^ 
est^upon  conversion  of  4)4  per  cent.  Victoy  notes  into  3)4  per  cent  Victory 
notes^ will  be  deemed  to  be  interest  upon  4)4  per  cent.  Victo^  riotes. 
llh  All  interest  accrued  on  3)4  per  cent.  Victory  notes  at  the  date  of  any 
conversion  by  the  taxpayer  into  4)4  per  cent.  Victory  notes  will, 
for  the  purposes  of  computing  net  income,  be  deemed  to  be  interest 
per  cent  Victory  notes,  and  will  be  entitled  to  the  pemp  ions  tax|tio« 

to  which  interest  on  3)4  per  cent.  Victory  notes  is  entitled.  (T.  D.  2865,. 
June  14,  1919.) 


INC. 


188  TAX- 


EXEMPT  INCOME. 


11^2  Summary  of  Tax  Exemptions  of  Liberty  Bonds  and  Victory 
Notes. — The  appended  circular,  issued  under  date  of  April  23, 
1919,  with  reference  to  the  tax  exemptions  of  Liberty  Bonds  and  Victory 
Notes,  is  published  for  Jthe  - information  of  internal-revenue  officers  and 
others  concerned.  (T.  D.  2836,  May  7,  1919.) 


1153  Tax  Exemptions  of  Liberty  Bonds  and  Victory  Notes. — Liberty 
Bonds  and  Victory  notes  issued  under  authority  of  the  acts  of  Con- 
gress approved  April  24,  1917,  September  24,  1917,  April  4,  1918,  July  9, 
1918,  September  24,  1918,  and  March  3,  1919,  are  entitled,  respectively,  to 
the  exemptions  from  taxation  set  forth  in  said  acts,  from  which  the  state- 
ments in  this  circular  are  summarized  and  to  which  they  are  subject. 

I.  4 per  cent  and  4)4  per  cent  bonds  are  exempt  from  all  Federal,  State, 
and  local  taxation,  except  (a)  estate  or  inheritance  taxes  and  (b) 
Federal  income  surtaxes  and  profits  taxes,  as  follows: 


1.  First  Liberty  loan  converted  4 per 

cent  bonds  of  1932-1947  (first 
4s). 

2.  First  Liberty  loan  converted  4)4 

per  cent  bonds  of  1932-1947 
(first  4)4 s,  issue  of  May  9, 
1918). 

3.  First  Liberty  loan  second  con- 

verted 4J4  per  cent,  bonds  of 
1932-1947  (first  4)4s,  issue  of 
October  24,  1918). 

4.  Second  Liberty  loan  4 per  cent 

bonds  of  1927-1942  (second  ► 

4s). 

5.  Second  Liberty  loan  converted 

4)4  per  cent  bonds  of  1927-1942 
(second  4)4s). 

6.  Third  Liberty  loan  4)4  per  cent 

bonds  of  1928  (third  4)4s). 

7.  Fourth  Liberty  loan  4)4  per  cent 

bonds  of  1933-1938  (fourth 

4)4s). 

8.  Victory  Liberty  loan  4J4  per  cent 

convertible  gold  notes  of  1922- 
1923  (4J4  per  cent  Victory 

notes). 


Are  exempt,  both  as  to  principal  and 
interest,  from  all  taxation  now  or 
hereafter  imposed  by  the  United 
States,  any  State,  or  any  of  the 
possessions  of^Jhe  United  States, 
or  by  any  local  taxing  authority 
except  (a)  estate  or  inheritance 
taxes,  and  (b)  graduated  addi- 
tional income  taxes,  commonly 
known  as  surtaxes,  and  excess- 
profits  and  war-profits  taxes,  now 
or  hereafter  imposed  by  the 
United  States,  upon  the  income  or 
profits  of  individuals,  partner- 
ships, associations,  or  corpora- 
tions. 


INC. 


189 


TAX 


EXEMPT  INCOME. 


^(1153)  II.  4 per  cent  and  per  cent  bonds  are  entitled  to  limited  exemp- 
tions from  Federal  income  surtaxes  and  profits  taxes,  as  follows:  4 
per  cent  and  4^  per  cent  Liberty  bonds  (but  not  per  cent  Victory 
notes)  are  entitled  to  certain  limited  exemptions  from  graduated  addi- 
tional income  taxes,  commonly  known  as  surtaxes,  and  excess-profits 
and  war-profits  taxes,  now  or  hereafter  imposed  by  the  United  States, 
upon  the  income  or  profits  of  individuals,  partnerships,  associations,  or 
corporations,  in  respect  to  the  interest  on  principal  amounts  thereof, 
as  follows: 

$5,000  in  the  aggregate  of  first  4s,  first  4)4 s (issues  of  May  9 and  Octo- 
ber 24,  1918)  second  4s  and  434s,  third  434s,  fourth  434s, 
Treasury  certificates,  and  war-savings  certificates. 

30,000  of  first  4)4s  (issue  of  October  24,  1918,  only),  until  the  expira- 
tion of  two  years  after  the  termination  of  the  war. 

30,000  of  fourth  434s,  until  the  expiration  of  two  years  after  the  termim 
ation  of  the  war. 

30.000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9 and  Octo- 
ber 24,  1918),  second  4s  and  434s,  third  434s,  and  fourth  434s, 
as  to  the  interest  received  on  and  after  January  1,  1919,  until 
the  expiration  of  five  years  after  the  termination  of  the  war. 

45.000  in  the  aggregate  of  first  4s,  first  434s  (issue  of  May  9,  1918, 
only),  second  4s  and  434s,  and  third  434s,  as  to  the  interest 
received  after  January  1,  1918,  until  the  expiration  of  two  years 
after  the  termination  of  the  war;  this  exemption  conditional  on 
original  subscription  to,  and  continued  holding  at  the  date  of  the 
tax  return  of  two-thirds  as  many  bonds  of  the  fourth  Liberty 
loan. 

20.000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9,  and  Octo- 
ber 24,  1918),  second  4s  and  434s,  third  434s,  and  fourth  434s, 
as  to  the  interest  received  on  and  after  January  1,  1919;  this 
exemption  conditional  upon  original  subscription  to,  and  con- 
tinued holding  at  the  date  of  the  tax  return  of  one-third  as  many 
notes, of  the  Victory  Liberty  loan,  and  extending  through  the 

^ life  of  such  notes  of’  the  Victory  Liberty  loan. 

$160,000  total  possible  exemptions  from  Federal  Income  surtaxes  and 
profits  taxes,  subject  to  conditions  above  summarized. 

III.  3J^  per  cent  bonds  and  3)4  per  cent  notes  are  exempt  from  all  Federal, 
State,  and  local  taxation,  except  estate  or  inheritance  taxes,  as 
follows 

1.  First  Liberty  loan 
3)4  per  cent  bonds 
of  1932-1947. 

2.  Victory  Liberty  loan 
3)4  per  cent  con- 
vertible gold  notes  of 
1922-1923. 


Are  exempt,  both  as  to  principal  and  interest, 
from  all  taxation  (except  estate  or  inheritance 
taxes)  now  or  hereafter  imposed  by  the 
> United  States,  any  State,  or  any  of  the  posses- 
sions of  the  L^nited  States,  or  by  any  local  tax- 
ing authority. 

(Circular  appended  to  T.  D.  2836.) 


i 


INC. 


'Qr 

190 


TAX 


EXEMPT  INCOME. 


1154  Effect  of  Conversion  in  Determining  Amount  of  Exempt  Interest 
from  Liberty  Bond  Holdings. — Referring  to  our  letter  March  9" 
and  your  telegraphic  reply  dated  March  15,  also  to  Instructions  K (b) 
at  bottom  of  page  2,  Form  1040  [for  calendar  year  1918],  particu- 
larly to  that  portion  of  paragraph  2 reading  “Periods  during  which 
your  holdings  of  that  class  of  obligations  remained  unchanged/^  Are 
we  to  understand  that  taxpayers  are  deemed  to  have  owned  bonds  of  various 
classes  during  the  periods  covered  by  coupons  clipped  from  such  classes^ 
of  bonds?  Example.  Taxpayer  bought  First  S^^s  in  1917  and  has  bought 
no  bonds  since.  On  May  15,  191S,  he  converted  his  3><s  into  First  4s.  In 
this  case  are  we  to  understand  that  so  far  as  taxation  is  concerned  the  tax- 
payer owned  dj/^s  until  December  15,  1917,  and  4s  thereafter?  Are  we 

1 ui^til  December  31  was  the  period  in 
1918  during  which  holdings  of  4%  bonds  remained  unchanged?  Please 
wire  reply.  (Answer.)  Answering  your  telegram  March  17.  Individual 
who  on  May  15,  1918,  converted  First  Liberty  3><%  Bonds  into  First  Lib- 
erty 4s  held  First  Liberty  4s  for  entire  year  1918  for  purposes  of  income'^ 
tax.  Any  amount  paid  at  time  of  conversion  for  adjustment  of  interest  to- 
be  subtracted  from  amount  received  at  first  interest  payment  after  con- 
version and  only  the  difference  between  amount  received  and  amount  paid' 
to  be  included  in  return  of  taxpayer.  (Telegram  from  Chas.  H.  Hubbell, 
First  National  Bank,  Cleveland,  Ohio,  and  the  answer  thereto,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  March  25,  1919.) 


1155  Exempt  Status  of  Interest  on  Liberty  Bonds  When  Purchased  on- 

. Plan  and  Not  Fully  Paid  for  on  December  31  1918 

[Applicable  to  Victory  Loan  in  case  of  certain  fiscal  year  taxpayers  1 ph- 
erence  is  made  to  your  telegram  dated  December  14,  1918-  “Please  wire 
collect  your  ruling  is  exemption  from  tax  on  interest  Second  and  Third! 
yberty  Bonds  based  on  holdings  Fourth  Liberty  Bonds  dependent  on 
fourth  subscription  being  fully  paid  and  bonds  delivered  prior  to  end  De- 
cember or  subscription  paid  on  government  plan  sufficient.”  Ifin  reply 
you  are  advised  that  an  individual  who  originally  subscribed  to  bonds  of  the 
hourth  Liberty  Loan  to  an  amount  not  exceeding  $30,000  in  accordance 
with  the  government  plan  and  made  payments  in  accordance  with  such  plan 
is  not  required  to  pay  for  such  bonds  in  full  on  or  before  December  31  1918 
in  order  to  obtain  the  exemption  provided  in  Section  1 of  the  Supplement 
to  the  Second  Liberty  Bond  Act,  or  of  interest  on  bonds  of  the  previous 
issues  referred  to  in  subdivision  2 of  said  Section  1.  ^Likewise  if  an 
individual  subscribed  for  bonds  of  the  Lourth  Liberty  Loan  through  a 
bank  1^  agreeing  to  pay  the  subscription  price  in  installments  acceptable 
to  the  bank,  and  made  payments  in  accordance  with  this  plan,  it  will  not  be 
necessary  for  such  individual  to  pay  for  the  bonds  in  full  on  or  before 
December  31,  1918,  in  order  to  obtain  the  exemption  mentioned  in  the 
preceding  paragraph.  (Letter  to  Clark  J.  Milliron,  Los  Angeles,  Cal., 
signed  by  Acting  Deputy  Commissioner  Homer  S.  Pace,  and  dated  fan- 
uary3,  1919.) 


Application  of  Exemption  When  Several  Members  of  Family  In- 
vest  in  Liberty  Bonds. — (Question.)  Please  answer  by  wire  at 
once  if  possible  our  telegram,  October  second,  as  follows:  “If  husband, 
wife  and  minor  children  each  hold  new  Liberty  fours  and  make  joint  in- 
return  will  each  member  of  such  family  be  tax  exempt  as  to* 
$5,000  bonds  each.  Wire  answer  to-day  if  possible.”  Information  very' 

191 


TNC. 


TAX 


exempt  income. 

in  n.,.p.ign  Lib.;J  “ ^An„.;)  « 

Wife  each  owning  m ?^xem  provided  by  Sec- 

exceeding  five  thousand  dollar  each  enth  ^ estates  each 

tion  Seven  B,  Loan  Act.  f^^ram  to  Commisfioner  of  Internal  Reve- 
entitled  to  same  ^emption.  (^elegr^m  t L 

nue  from  Lee.  Higgmson  & Co  Boston  J dated 

signed,  by  Acting  Secretary  of  the  treasury 
October  8,  1917.) 

1157  Liberty  Bond  Exemption  in  the  tSSome 

such  proportionate  part  ^ ^ liberty  loan,  or  notes  of  the  victory 

tion  by  a trustee  for  bonds  of  at  the  time  of  such  sub- 
liberty loan,  constitutes  proportionate  part  of  such  bonds 

scription  an  original  subscriber  P P beneficiary  to  the  appropriate 

or  notes,  as  the  case  may  be,  and  entitles^^^^^  ^j^^^ber 

collateral  exemption  of  writer  tj.„stee  as  if  the  beneficiary  had  him- 

owned  by  such  beneficiary  or  by  the  , bonds  or  notes; 

self  originally  subscribed  for  such  propor  i fourth  liberty  loan 

and  a subscription  by  such  benefaciary  ^ entitles  him  to  the 

or  notes  of  the  victory  bberty  loan  as  previous  issues 

- appropriate  collateral  exemp  lo  other  hand,  income  is  taxable  to 

held  by  the  trustee,  (b)  f on  the  oAer^ha^^;^^  accumulated  for 

the  trustee,  as  in  the  case  of  a trust  ^be  trustee  is  regarded  as 

the  benefit  of  unborn  ot  unascertained  p ^ entitled  to 

the  owner  of  all  the  bonds  „prchip  In  such  a case  a subscription 
exemption  on  account  of  such  o^nersh  p^  ^ original  subscriber  and  en- 
by  a trustee  constitutes  the  trustee  us  ®u  e g ^ j exemption 
titles  the  trust,  on  account  of  such  suteyiption  to^tn  ^ ^ 

of  interest  on  bonds  of  previous  issues.  ( 

17,  1919.) 

the  individual  Partners,  each  p ^rtnership  and  is  entitled  to  exemption 

tionate  part  of  the  bonds  held  by  t p P gj  guch  proportionate 

on  account  of  such  ownership  as  if  such  par  ner  ow  ^ 

part  of  the  bonds  directly.  Such  partner  if  apt 

original  subscription  by  case  may  be,  is  treated  as 

loan  or  notes  of  the  victory  I'^erty  notes  sub- 

an  original  subscriber  for  a pr  P entitled  to  the  appropriate  collateral 

scribed  for  by  the  partnership  u"^.“  '£t^Vn  accoLt  of  such  original 

sSiptfon^'^ronror  notes  as  ’{  p°ersontl 

„»  Liberty  Bond  Bde«P«=n  » «“  » *5 

Z^fr“ro,i-.ri.“reS!l..‘S  ^'r^fo.  .b.  bondAeld  by  .be 

INC.  192  tax 


EXEMPT  INCOME. 


-corporation  and  entitled  to  exemption  on  account  of  such  ownership.  When 
bonds  of  the  Fourth  Liberty  Loan  are  subscribed  for  by  the  corporation  it, 
and  not  the  stockholders,  is  the  original  subscriber  and  entitled  to  the  colla- 
teral exemption  of  interest  on  bonds  of  previous  issues  on  account  of  such 
original  subscription.  [See  ^1158.]  (T.  D.  2762,  Oct.  21,  1918.) 

1160  Interest  on  Food  Administration  Grain  Corporation  Notes.— Inter- 
est on  Food  Administration  Grain  Corporation  notes  is  not  exempt 

from  income  and  excess  profits  taxes.  (Telegram  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  April 
13,  1919.) 

1161  No  Ownership  Certificates  Required  in  Connection  With  United 
States  Bond  Interest. — [Read  at  p659.] 

1162  Lawp04.  Income  of  Foreign  Governments  from  United  States 

Sources. — “(5)  [Gross  income  does  not  include]  The 
income  of  foreign  governments  received  from  investments  in  the  United 
States  in  stocks,  bonds,  or  other  domestic  securities,  owned  by  such  foreign 
governments,  or  from  interest  on  deposits  in  banks  in  the  United-otates  of 
moneys  belonging  to  such  foreign  governments,  or  from  any  other  source 
within  the  United  States  C 

1163  The  exemption  of  income  of  foreign  governments  applies  also  to 
their  political  subdivisions.  Any  income  collected  by  foreign  gov- 

•ernments  from  investments  in  the  United  States  in  stocks,  bonds  or  other 
'domestic  securities,  which  are  not  actually  owned  by  but  are 
loaned  to  such  foreign  governments,  is  subject  to  tax.  The  income  of  for- 
eign ambassadors  and  ministers  from  investments  in  bonds  and  stocks  and 
from  interest  on  bank  balances,  and  the  fees  of  foreign  consuls,  are  exempt 
from  tax  but  income  of  such  foreign  officials  from  any  business  carried  on 
by  them  in  the  United  States  would  be  taxable.  The  compensation  of  citi- 
zens of  the  United  States  who  are  officers  or  employees  of  a foreign  gov- 
ernment is,  however,  not  exempt  from  tax.  (Art.  8^  Reg.  45,  Rev.,  April 
17,  1919.) 

1164  Lawp06.  Income  Arising  Through  the  Exercise  of  an  Essential 

Governmental  Function  and  Accruing  to  Any  State, 
etc. — “(7)  [Gross  income  does  not  include]  Income  derived  from  any 
public  utility  or  the  exercise  of  any  essential  governmental  function  and 
accruing  to  any  State,  Territory,  or  the  District  of  Columbia,  or  any  politi- 
cal subdivision  of  a State  or  Territory,  or  income  accruing  to  the  govern- 
ment of  any  possession  of  the  United  States,  or  any  political  subdivision 
thereof.” 

1165  Law  1jl07.  “Whenever  any  State,  Territory,  or  the  District  of 

Columbia,  or  any  political  subdivision  of  a State  or  Terri- 
tory, prior  to  September  8,  1916,  entered  in  good  faith  into  a contract  with 
any  person,  the  object  and  purpose  of  which  is  to  acquire,  construct,  operate, 
or  maintain  a public  utility,  no  tax  shall  be  levied  under  the  provisions  of  this 
title  upon  the  income  derived  from  the  operation  of  such  public  utility,  so  far 
as  the  payment  thereof  will  impose  a loss  or  burden  upon  such  State,  Ter- 
ritory, District  of  Columbia,  or  political  subdivision;  but  this  provision  is 

1 93  TAX 


INC. 


EXEMPT  INCOME. 


not  intended  to  confer  upon  such  person  any  financial  gain  or  exemption  or  to 
relieve  such  person  from  the  payment  of  a tax  as  provided  for  in  this  title 
upon  the  part  or  portion  of  such  income  to  which  such  person  is  entitled 
under  such  contract;” 

1166  Income  of  States. — In  general  income  accruing  to  any  State, 
Territory  or  possession  of  the  United  States,  or  to  any  political 

subdivision  thereof,  or  to  the  District  of  Columbia,  is  exempt  from  tax.  See 
article  74  [for  political  subdivisions  pi35].  The  income  of  .State  workmen  s 
compensation  insurance  funds  established  by  State  statutes  is  not  taxable. 
In  the  case  of  a public  utility  acquired,  constructed,  operated  or  maintained 
by  a taxpayer  under  contract  with  any  State,  Territory,  or  political  subdivis- 
ion thereof,  or  with  the  District  of  Columbia,  containing  an  agreement  that  a 
portion  of  the  net  earnings  of  such  public  utility  shall  be  paid  to  the  State, 
Territory,  or  political  subdivision  thereof,  or  the  District  of  Columbia,  the 
amount  so  paid  may  be  deducted  by  the  taxpayer  as  a necessary  expense  in 
transacting  business.  (Art.  84,  Reg.  45,  Rev.,  April  17,  1919.) 

1167  Compensation  of  State  Officers.— Compensation  paid  its  officers 
and  employees  by  a State  or  political  subdivision  thereof,  including 

fees  received  by  notaries  public  commissioned  by  States  and  the  commis- 
sions of  receivers  appointed  by  State  courts,  are  not  taxable.  Employees 
of  universities  receiving  salaries  paid  in  part  or  in  whole  from  funds  avail- 
able under  the  Smith-Lever  Act  of  May  8,  1914,  who  are  officers  or  em- 
ployees of  a State,  are  not  required  to  return  as  taxable  incomes 
so  received.  This  is  also  true  with  respect  to  the  Act  of  August  30,  1890, 
relating  to  colleges  for  the  benefit  of  agriculture  and  the  mechanic  arts,  and 
to  the  Act  of  March  2,  1887,  relating  to  agricultural  experiment  stations  in 
such  colleges.  (Art.  85,  Reg.  45,  Rev.,  April  17,  1919.) 

1168  Section  213  (a)  of  the  Revenue  Act  of  1918  provides  that  gross 
income  shall  include  “gains,  profits,  and  income  derived  from  salaries, 

wages,  or  compensation  for  personal  service  * * * of  whatever  kind  and  in 
whatever  form  paid.” 

1169  In  accordance  with  an  opinion  of  the  Attorney-General,  dated  May 
6,  1919,  and  based  on  the\vell-settled  rule  that  governmental  agencies 

of  the  States  are  not  subject  to  taxation  by  the  Federal  Government,  it  is 
held  that  salaries  of  State  officials  and  salaries  and  wages  of  employees  of 
a State  are  not  subject  to  the  income  tax  imposed  by  the  said  Revenue  Act 
of  1918.  (T.  D.  2843,  May  17,  1919.) 

1170  Compensation  as  Special  Counsel,  Received  from  a Municipality, 
is  Not  Exempt  Income. — A counsellor  at  law  is  engaged  by  a 

municipality  as  special  counsel,  to  act  in  connection  with  the  regular  City 
Attorney  in  handling  a certain  piece  of  litigation.  Is  he  regarded  as  an 
officer  or  employee  of  a political  subdivision  of  a state,  so  that 
his  compensation  for  his  services  are  not  taxable  under  Article  71  of 
Regulations  45,  sentence  2 [now  Art.  85]  ? (Answer.)  In  reply  to  the 
first  question,  you  are  advised  that  under  the  ruling  of  this  office,  the  corn- 
pensation  paid  by  a State  to  “special  counsel,”  such  as  described  above,  is 
taxable  income,  and  not  exempt  from  income  tax.  (Part  of  letter  from 
Collins  & Corbin,  Jersey  City,  N.  J.,  and  the  answer  thereto,  signed  by  J. 
H.  Callan,  Assistant  to  the  Commissioner,  and  dated  April  15,  1919.) 

194  TAX 


INC. 


EXEMPT  INCOME. 


1171  State  or  Municipal  Contract  Work. — [Read  at  1[893.] 

1172  Law  p 08.  Compensation  of  Soldiers  and  Sailors. — “(8)  [Gross 

income  does  not  include]  So  much  of  the  amount  received 
during  the  present  war  by  a person  in  the  military  or  naval  forces  of  the 
United  States  as  salary  or  compensation  in  any  form  from  the  United 
States  for  active  services  in  such  forces,  as  does  not  exceed  $3,500.” 

1173  Law]fl4.  “Military  and  Naval  Forces  of  the  United  States”  De- 

fined.— “The  term  ‘military  or  naval  forces  of  the  United 
States’  includes  the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse  Corps, 
Female,  and  the  Navy  Nurse  Corps,  Female,  but  this  shall  not  be  deemed  to 
exclude  other  units  otherwise  included  within  such  term ;” 

1174  Law][15.  The  “Present  War”  Defined. — “The  term  ‘present 

war’  means  the  war  in  which  the  United  States  is  now 
engaged  against  the  German  Government.” 

1175  Lawj[16.  The  “Termination  of  the  War.” — For  the  purposes 

of  this  Act  the  date  of  the  termination  of  the  present 
war  shall  be  fixed  by  proclamation  of  the  President.” 

1176  A person  of  either  sex  in  active  service  in  the  military  or  naval 
forces  of  the  United  States  may  exclude  from  gross  income  his  or 

her  compensation  received  from  the  United  States  up  to  the  amount 
of  $3,500  in  any  taxable  year,  except  that  this  exemption  does  not 
apply  to  compensation  received  either  before  or  after  the  present  war.  The 
date  of  the  termination  of  the  war  for  the  purpose  of  the  statute  will  be 
fixed  by  proclamation  of  the  President.  The  military  and  naval  forces  of 
the  United  States  include,  among  others,  army  contract  surgeons  and  the 
individuals  named  in  section  1 of  the  statute  [P173].  A person  is  in  active 
service  if  he  is  actually  serving  in  such  forces’",  not  necessarily  in  the  field  or 
in  the  theatre  of  war,  and  is  not  merely  on  the  retired  or  reserve  list.  Accord- 
ingly, if  such  a person  receives  compensation  from  the  United  States  of 
$3,o00  or  less  and  has  no  other  income  of  an  amount  sufficient  in  itself  to 
require  him  to  render  a return  of  income,  he  need  make  no  return.  Mem- 
bers of  draft  boards  are  not  as  such  entitled  to  this  exemption.  (Art  86 
Reg.  45,  Rev.,  April  17,  1919.)  v > 

1177  Income  Accruing  Prior  to  March  1,  1913.— Property  held  by 
the  taxpayer  on  March  1,  1913,  is  capital.  Included  in  this  capital 

are  all  claims,  whether  evidenced  by  writing  or  not,  and  all  interest  which 
had  accrued  thereon  before  that  date.  [No  withholding,  p631.]  Interest 
accruing  on  or  after  that  date  is  taxable  income.  Where  an  interest-bearing 
claim  contracted  prior  to  March  1,  1913,  is  paid  in  whole  or  in  part  after 
that  date,  any  gain  derived  from  the  conversion  of  the  claim  into  money  is 
taxable.  The  amount  of  such  gain  is  the  excess  of  the  proceeds  of  the 
claim  (both  principal  and  interest),  exclusive  of  any  interest  accrued  since 
February  28,  1913,  already  returned  as  income,  over  the  fair  market  value 
of  the  claim  as  of  March  1,  1913  (both  principal  and  interest  then  accrued). 
In  the  case  of  an  insurance  policy  its  surrender  value  as  of  March  1,  1913* 
may  be  used  as  a basis  for  the  purpose  of  ascertaining  the  gain  derived 
from  the  sale  or  other  disposition  of  Such  policy.  Where  services  were 

195 


INC. 


TAX 


DEDUCTIONS— EXPENSES. 

rendered  prior  to  March  1,  1913,  but  paid  for  thereafter,  the  J®: 

ceived  is  taxable  income  to  the  extent  of  the  excess  of  such  amount  over 
the  fair  market  value  on  March  1,  1913,  of  the  principal  of  the  claim  and 
anv  interest  which  had  then  accrued.  A claim  for  the  purpose  of  this  article 
means  a right  existing  unconditionally  on  March  1,  1913,  and  then  assign- 
able whether  presently  payable  or  not.  Interest  does  not,  of  course,  include 
dividends  on  corporate  stock.  See  section  201  of  the  statute  and  articles 
1541-1549  [for  dividends,  1[815].  (Art.  87,  Reg.  45,  Rev.,  April  17,  1919.) 

1178  Subtraction  for  Redemption  of  Trading  Stamps.—Where  a 
taxpayer,  for  the  purpose  of  promoting  his  business,  issues  with 
sales  trading  stamps  or  premium  coupons  redeemable  in  merchandis 
or  cash,  he  should  in  computing  the  income  from  such  sales  subtract 
only  the  amount  received  or  receivable  which  will  be  required  for 
demption  of  such  part  of  the  total  issue  of  trading  stamps  or  Premium 
coupons  issued  during  the  taxable  year  as  will  eventually  be  presented  fo 
redemption  This  amount  will  be  determined  in  the  light  of  the  experience 
of  the  taxpayer  in  his  particular  business  and  of  other  users  engaged  in 
similar  businesses.  The  taxpayer  shall  file  for  each  of  the  five  preceding 
years,  or  such  number  of  these  years  as  stamps  or  coupons  have  been  is- 
Led  by  him,  a statement  showing  (a)  the  total  issue  of  stamps  during  each 
year  (b)  the  total  stamps  redeemed  in  each  year,  and  (c)  the  percentage 
for  each  year  of  the  stamps  redeemd  to  the  stamps  issued  in  such  year. 
A similar  statement  shall  also  be  presented  showing  the  experiences  of  ot  er 
users  of  stamps  or  coupons  whose  experience  is  relied  upon  by  the  tax- 
payer to  determine  the  amount  to  be  subtracted  from  the  proceeds  of  sales. 
The  Commissioner  will  examine  the  basis  used  in  each  return,  and  in  any 
case  in  which  the  amount  subtracted  in  respect  of  such  stamps  or  coupons 
is  found  to  be  excessive  an  amended  return  or  amended  returns  will  be  re- 
quired. (Art.  88,  Reg.  45,  Rev.,  April  17,  1919.) 

Law  11112.  Deductions  Allowed.— “Sec.  214.  (a)  That  in  com- 

puting  net  income  there  shall  be  allowed  as  deductions . 


1179 


1180  Law  11287.  Items  Deducted  in  Computing  Net  Income  of  a Cor- 

poration.—“Sec.  234.  (a)  That  in  computing  Ae  net 

income  of  a corporation  subject  to  the  tax  imposed  by  section  230  there 
shall  be  allowed  as  deductions 

1181  In  general  the  deductions  from  gross  income  allowed  corporations 
are  the  same  as  allov/ed  individuals  except  that 

deduct  dividends  received  from  other  corporations  subject  to  the  tax  UlUZtiJ 
and  mav  not  deduct  charitable  contributions  [P447]  and  that  insurance 
companies  are  permitted  special  deductions.  [For  insurance  companies 

generally  see  11988.]  (Art.  561,  Reg.  45,  Rev.,  April  17,  1919.) 

1182  LawfllS.  All  Ordinary  and  Necessary  Business  Expenses  Are 

Deductible. — “(1)  All  the  ordinary  and  necessary  ex- 
penses  paid  or  incurred  during  the  taxable  year  in  carrying  on  any  trade  or 

1183  Law  11288.  [Corporations.]  “(1)  All  the  ordinary  and  neces- 

sary  expenses  paid  or  incurred  during  the  taxable  yeai  in 

carrying  on  any  trade  or  business, 


INC. 


196  TAX 


DEDUCTIONS— EXPENSES. 


1184  Law  p 51.  Certain  Items  of  “Expense”  Not  Deductible. — “Sec. 

215.  That  in  computing  net  income  no  deduction  shall  in 
any  case  be  allowed  in  respect  of — ” 

1184a  Law  j[326.  [Corporations.]  “Sec.  235.  That  in  computing  net  in- 
come no  deduction  shall  in  any  case  be  allowed  in 
respect  of  any  of  the  items  specified  in  section  215  [pi84].” 

1185  Lawp52.  Personal  Expenses  Are  Not  Deductible. — “(a)  Per- 

sonal, living,  or  family  expenses;” 

1186  Personal  and  Family  Expenses. — Insurance  paid  on  a dwelling 
owned  and  occupied  by  a taxpayer  is  a personal  expense.  Premiums 

paid  for  life  insurance  by  the  insured  are  not  deductible.  In  the  case  of  a 
professional  man  who  rents  a property  for  residential  purposes,  but  inci- 
dentally receives  there  clients,  patients,  or  callers  in  connection 
with  his  professional  work  (his  place  of  business  being  elsewhere), 
no  part  of  the  rent  is  deductible  as  a business  expense.  If,  however,  he 
uses  part  of  the  house  for  his  office,  such  portion  of  the  rent  as 
is  properly  attributable  to  such  office  is  deductible.  The  father  is  legally 
entitled  to  the  services  of  his  minor  children,  and  allowances  which  he  gives 
them,  whether  said  to  be  in  consideration  of  servi^s  or  otherwise,  are  not 
allowable  deductions  in  his  return  of  income.  Alimony  and  an  allowance 
paid  under  a separation  agreement  are  not  deductible  from  gross  income. 
See  article  73  [for  alimony  as  exempt  income,  ]I1129].  The  cost  of  the 
equipment  of  an  army  officer  to  the  extent  only  that  it  is  specially  required 
by  his  profession  and  does  not  merely  take  the  place  of  articles  required  in 
civilian  life  is  deductible.  Accordingly,  the  cost  of  a sword  is  an  allowable 
deduction,  but  the  cost  of  a uniform  is  not.  (Art.  291,  Reg.  45,  Rev.,  April 

1187  Traveling  Expenses. — Traveling  expenses  as  ordinarily  under- 
stood, include  railroad  fares  and  meals  and  lodging.  If  the  trip  is 

undertaken  for  other  than  business  purposes  such  railroad  fares  are  per- 
sonal expenses  and  such  meals  and  lodging  are  living  expenses.  If  the  trip 
is  on  business  the  railroad  fares  become  business  instead  of  personal  ex- 
penses but  the  meals  and  lodging  continue  to  be  living  expenses  and  are  not 
deductible  in  computing  net  income,  (a)  If,  then,  an  individual  whose 
business  requires  him  to  travel  receives  a salary  as  full  compensation  for 
his  services,  without  reimbursement  of  traveling  expenses,  his  expenses  for 
railroad  fares,  but  not  for  meals  and  lodging,  are  deductible  from  gross 
income,  (b)  If  such  an  individual  receives  a salary  and  is  also  repaid  his 
actual  traveling  expenses,  no  part  of  such  expenses,  is  deductible  from  gross- 
income  and  no  part  of  such  repayment  is  returnable  as  income,  (c)  If  such 
an  individual  receives  a salary  and  also  an  allowance  for  meals  and  lodg- 
ing,  as,  for  example,  a per  diem  allowance  in  lieu  of  subsistence,  any  ex- 
cess of  the  cost  of  such  meals  and  lodging  over  the  allowance  is  not  deducti- 
ble, but  any  excess  of  the  allowance  over  the  actual  expenses  is  taxable 
income.  Congressmen  and  others  who  receive  a mileage  allowance  for 
railroad  fares  should  return  as  income  any  excess  of  such  allowance  over 
their  actual  expenses  for  such  fares.  A payment  for  the  use  of  a sample 
room  at  a hotel  for  the  display  of  goods  is  a business  expense.  (Art.  292, 
Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


1 97  TAX 


DEDUCTIONS— EXPENSES. 

1188  Lawp53.  Amounts  Paid  Out  for  New  Buildings  or  for  Per- 

manent Improvements  Are  Not  Deductible. — “(b) 
Any  amount  paid  out  for  new  buildings  or  for  permanent  improvements  or 
betterments  made  to  increase  the  value  of  any  property  or  estate  f 

1189  Law  154.  Expenditures  Covered  by  Depreciation  Allowance 

Are  Not  Deductible.— “(c)  Any  amount  expended  in 
restoring  property  or  in  making  good  the  exhaustion  thereof  for  which 
an  allowance  is  or  has  been  made ; or” 

1190  Amounts  paid  for  increasing  the  capital  value  or  for  restoring  the 
depreciated  value  of  property  are  not  deductible  from  gross  income. 

See  section  214  (a)  (8)  of  the  statute  and  article  161  [for  depreciation 
P330].  Amounts  expended  for  securing  a copyright  and  plates,  which 
remain  the  property  of  the  person  making  the  payments,  are  investments  of 
capital.  The  cost  of  defending  or  perfecting  title  to  property  constitutes  a 
part  of  the  cost  of  property  and  is  not  a deductible  expense.  The  amount 
expended  for  architect’s  services  is  part  of  the  cost  of  the  building. 
Commissions  paid  in  purchasing  securities  are  a part  of  the 
price  of  such  securities.  Commissions  paid  in  selling  securities  are  an  offset 
against  the  selling  price.  Expenses  of  the  administration  of  an  estate,  such 
as  court  costs,  attorney’s  fees  and  executor’s  commissions,  are  chargeable 
against  the  corpus  of  me  estate  and  are  not  allowable  deductions.  Amounts 
to  be  assessed  and  paid  under  an  agreement  between  bondholders  or  stock- 
holders of  a corporation,  to  be  used  in  a reorganization  of  the  corporation, 
are  investments  of  capital  and  not  deductible  for  any  purpose  in  returns  of 
income.  See  article  543  [for  assessm.ents  received  not  income  to  corpora- 
tion, ^950].  An  assessment  paid  by  a stockholder  of  a national  bank  on 
account  of  his  statutory  liability  is  similarly  not  deductible.  As  to  items 
not  deductible  by  corporations,  see  section  235  and  articles  581  [[[1191] 
and  582  [[[1192].  (Art.  293,  Reg.  45,  Rev.,  April  17,  1919.) 

1191  Nfo  deduction  from  gross  income  may  be  made  for  any  amounts 
paid  out  for  new  buildings  or  for  permanent  improvements  or  better- 
ments made  to  increase  the  value  of  any  property,  or  for  any  amounts  ex- 
pended in  restoring  property  or  in  making  good  the  exhaustion  thereof  for 
which  an  allowance  for  depreciation  or  depletion  or  other  allowance  is  or  has 
been  made,  or  for  any  amounts  paid  for  premiums  on  any  life  insurance 
policy  covering  the  life  of  an  officer  or  employee  or  of  any  person  financially 
interested  in  the  business  of  the  corporation  when  the  corporation  is  directly 
or  indirectly  a beneficiary  under  such  policy.  (Art.  581,  Reg.  45,  Rev., 
April  17,  1919.) 

■ 1192  Expenses  of  the  organization  of  a corporation,  such  as  incorporation 
fees  and  attorneys’  and  accountants’  charges,  constitute  investments 
of  capital  and  are  not  deductible  from  gross  income  See  article  818 
[for  invested  capital— War  Tax  Service].  A holding  company  which 
guarantees  dividends  at  a specified  rate  on  the  stock  of  a subsidiary 
corporation  for  the  purpose  of  securing  new  capital  for  the  subsidiary  and 
increasing  the  value  of  its  stock  holdings  in  the  subsidiary  may  not  deduct 
amounts  paid  in  carrying  out  this  guaranty  in  computing  its  net  income, 
but  such  payments  may  be  added  to  the  cost  of  its  stock  in  the  subsidiary. 
But  see  article  868  [for  stock  of  subsidiary  acquired  for  stock:  Consoli- 

INC.  198  TAX 


1-19-20. 


DEDUCTIONS— EXPENSES. 


Service].  (Art.  582,  Reg.  45,  Rev., 

1193  Expenses  Incurred  in  Sale  of  Capital  Stock. — Any  and  all  ex- 
penses  incidental  to  or  connected  with  the  selling  of  the  capital  stock 

(c(^inon  or  preferred)  of  a corporation  for  the  purpose  of  raising  capital  ta 
be  by  It  invested  in  property  or  employed  in  the  business  for  which  the  cor- 
poration is  organized^  are  not  an  “expense  of  operation  and  mainten- 
ance  within  the  meaning  of  this  title  and  such  expense  is  not  an  allowable 
deduction  from  the  gross  income  for  the  reason  that  such  an  expense  is 
incurred  in  a capital  transaction ; that  is,  the  raising  of  capital  to  be  invested 
or  employed  in  the  business. 

1194  Such  expense,  like  the  discount  at  which  the  shares  of  stock  may  be 
^ sold,  has  the  effect  only  to  reduce  the  available  capital  of  the  cor- 
poration and  can  not  be  used  to  reduce  the  income  from  operations  * that 
IS  to  say,  any  expense  incident  to  the  bringing  of  capital  into  the  company, 
whether  it  be  a new  or  going  concern,  can  not  be  recouped  out  of  or 
charged  against  the  operating  income.  It  is  a capital  loss  or  expense  prop- 
erly chargeable  against  the  proceeds  of  the  sale  of  the  stock  and  reduces 

Reg^33^  Re^^Jan  company.  (Art.  145,  1f453-454, 

1195  Retirement  of  Bonds  at  a Discount.— [Read  at  1[953  and  P244.] 

1196  Law  j[155.  Premiums  Paid  on  Business  Life  Insurance  Are  Not 

. I^^ductible.  ‘'(d)  Premiums  paid  on  any  life  insur- 
ance policy  covering  the  life  of  any  officer  or  employee  or  of  any  person 
financially  interested  m any  trade  or  business  carried  on  by  the  taxpayer 
when  the  taxpayer  is  directly  or  indirectly  a beneficiary  under  such  policy.’’ 

9'  Preniiums  on  Business  Insurance. — Where  the  taxpayer  pays 
^ premiums  on  an  insurance  policy  on  the  life  of  an  officer,  employee 
or  individual  financially  interested  in  the  taxpayer’s  business,  for  the 
purpose  of  protecting  himself  from  loss  in  the  event  of  the  death  of  any 
^ic  1 person,  such  premiums  are  not  deductible  from  his  gross  income. 

ut  it  the  taxpayer  is  in  no  sense  a beneficiary  under  such  a policy,  except 
as  he  may  derive  advantage  from  the  increased  efficiency  of  the  employee, 
and  pays  the  premiums  purely  as  reasonable  additional  compensation  of 
such  employee,  they  are  allowable  deductions.  See  articles  33  [for  such 
as  income  to  employee,  118891  and  105-108  [for  compensation  for  personal 
services,  beginning  at  U1210].  In  either  case  whether  the  proceeds  of  such 
policies  paid  upon  the  death  of  the  insured  may  be  excluded  from  gross 
income  or  must  be  included  therein  depends  upon  whether  the  beneficiary 
is  an  individual  or  a corporation.  See  section  213  (b)  (1)  and  articles 
[for  proceeds  of  insurance  to  individual  P114]  and  541  [for  proceeds  of 
insurance  to  corporation,  1(809].  (Art.  294,  Reg.  45,  Rev.,  April  17  1919  ) 


•>«  Business  Expenses.— Business  expenses,  whether  subtracted  from 
total  receipts  in  computing  gross  income  or  deducted  from  gross 
income  in  computing  net  income,  include  all  items  entering  into  what 
is  oidinanly  known  as  the  cost  of  goods  sold,  together  with  selling 
and  management  expenses,  except  such  classes  of  items  as  are  treated  in 
aiticle;  .2\  to  268  [interest,  taxes,  losses,  etc.].  Among  the  items  to  be 

INC.  199 


TAX 


DEDUCTIONS— EXPENSES. 


treated  as  business  expenses  are  material,  labor,  supplies  and  repairs  in  the 
case  of  a manufacturer,  while  a merchant  would  include  his  purchases  of 
goods  bought  for  resale.  In  either  case  the  amount  to  be  taken  as  a deduc- 
tion in  any  year  should  be  determined  by  taking  into  consideration  the  in- 
ventory at  the  beginning  and  end  of  the  year.  Other  items  that  may^  be 
included  as  business  expenses  are  reasonable  compensation  for  the  services 
of  officers  and  employees,  advertising  and  other  selling  expenses,  together 
with  insurance  premiums  against  fire,  storm,  theft,  accident  or  other  similar 
losses  in  the  case  of  a business,  and  rental  for  the  use  of  business  property. 
A taxpayer  is  entitled  to  deduct  the  necessary  expenses  paid  in  carrying 
on  his  business  from  his  gross  income  from  whatever  source.  See  section 
215  of  the  statute  and  articles  291-294  [for  items  not  deductible,  beginning 
at  pi86].  As  to  deductions  by  corporations  see  section  234  [P180  and 
all  of  the  discussion  immediately  following  under  the  head  of  deduc- 
tions]. (Art.  101,  Reg.  45,  Rev.,  April  17,  1919.) 

1199  Cost  of  Materials. — Taxpayers  carrying  materials  and  supplies 
on  hand  should  include  in  expenses  the  charges  for  materials  and 

supplies  only  to  the  amount  that  they  are  actually  consumed  and  used  m 
operation  during  the  year  for  which  the  return  is  made,  provided  that  the 
cost  of  such  material  and  supplies  has  not  been  taken  into  account  in  de- 
termining the  net  income  for  any  previous  year.  If  a taxpayer  carries 
materials  or  supplies  on  hand  for  which  no  record  of  consumption  is  kept 
or  of  which  physical  inventories  at  the  beginning  and  end  of  the  year  are 
not  taken,  it  will  be  permissible  for  the  taxpayer  to  include  in  his  expenses 
and  deduct  from  gross  income  the  total  cost  of  such  supplies  and  materials 
as  were  purchased  during  the  year  for  which  the  return  is  made,  provided 
the  net  income  is  clearly  reflected  by  this  method.  (Art.  102,  Reg.  45,  Rev., 
April  17,  1919.) 

1200  Repairs.— The  cost  of  incidental  repairs  which  neither  materially 
add  to  the  value  of  the  property  nor  apprecial)ly  prolong  its  life, 

but  keep  it  in  an  ordinarily  efficient  operating  condition,  may  be  deducted  as 
expense,  provided  the  plant  or  property  account  is  not  increased  by  the 
amount  of  such  expenditures.  Repairs  in  the  nature  of  replacements,  to  the 
extent  that  they  arrest  deterioration  and  appreciably  prolong  the  life  of  the 
property,  should  be  charged  against  the  depreciation  reserve.  See  articles 
161-171  [for  depreciation,  beginning  at  ^1330].  (Art.  103,  Reg.  45,  Rev., 
April  17,  1919.) 

1201  Professional  Expenses. — A professional  man  may  claim  as  deduc- 
tions the  cost  of  supplies  used  by  him  in  the  practice  of  his  profes- 
sion, expenses  paid  in  the  operation  and  repair  of  an  automobile 
used  in  making  professional  calls,  dues  to  professional  societies  and 
subscriptions  to  professional  journals,  the  rent  paid  for  office  rooms,  the 
expense  of  the  fuel,  light,  water,  telephone,  etc.,  used  in  such  offices,  and 
the  hire  of  office  assistants.  Amounts  expended  for  books,  furniture  and 
professional  instruments  and  equipment  of  a permanent  character  are  not 
allowable  as  deductions.  See  section  215  and  articles  291-294  [for  items  not 
deductible,  beginning  at  pi86].  (Art.  104,  Reg.  45,  Rev.,  April  17,  1919.) 

1202  Premium  on  Fidelity  Bond.— Where  an  employee  is  required  to 
furnish  bond  and  pay  the  premium  on  such  bond,  as  a necessary 

incident  of  his  employment,  the  premium  on  the  bond  will  constitute  an  al- 
lowable deduction  in  computing  net  income.  (T.  D.  2090,  Dec.  14,  1914.) 

200  TAX 


INC. 


DEDUCTIONS— EXPENSES. 


1203  Business  Insurance. — Premiums  paid  in  advance,  covering  a 
period  of  several  years,  are  to  be  taken  as  a deduction  on  the  basis 

of  one  of  two  methods ; when  the  books  are  kept  on  a cash  basis,  the  entire 
amount  is  deductible  in  the  year  in  which  the  premium  is  paid.  Where  the 
books  are  kept  on  an  accrual  basis  the  premium  is  to  be  prorated  over  the 
period  covered  by  the  insurance.  Art.  8,  TjllO,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1204  Reserves  for  Insurance. — Funds  set  aside  by  a corporation  for  in- 
suring its  own  property  are  not  a proper  deduction,  but  if  such  funds 

are  set  aside,  or  a reserve  therefor  is  set  up,  any  loss  actually  sustained  and 
charged  to  such  funds  or  reserves  may  be  deducted.  (Art.  144,  ^[452,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

1205  Service  Connections  and  Pipe  Extensions  by  Public  Utility. — 
Moneys  so  received  for  seiwice  connections  and  pipe  extensions  are 

not  permitted  to  be  deducted  from  the  gross  amount  of  the  income,  for 
they  do  not  come  within  any  of  the  permitted  classes  of  deductions  men- 
tioned in  the  statute.  Moneys  so  expended  are  invested  in  permanent  im- 
provements, which  tend  to  enhance  the  rental  and  the  market  value  of  the 
water  system.  (Caption:  Union  Hollywood  Water  Co.  vs.  John  P.  Carter, 
collector,  case.  Act  of  Aug.  5,  1909  (238  Fed.  329).  (T.  D.  2475,  April  4, 

1917.) 

1206  Certain  Deductible  and  Non-Deductible  Expenses  of  Railroads. — 

The  appended  decision  [summary]  of  the  United  States  District 
Court  for  the  Western  District  of  Michigan,  .Southern  Division,  in  the  case 
of  the  Grand  Rapids  & Indiana  Railway  Company  v.  Doyle,  Collector.  (245 
Fed.  792.) 

1.  Deductions  from  Gross  Income. 

Deductions  for  expenditures  for  addition  and  betterments  to  the 
property,  such  as  expenditures  for  sidings  or  spur  tracks,  are  not 
authorized. 

2.  Operating  Expenses  Deductible. 

The  payment  for  labor  and  materials  which  go  into  the  actual  oper- 
ating of  the  road  and  the  property  are  deductible. 

3.  Expenses  of  Maintenance  Deductible. 

Maintenance  means  the  upkeep  or  preserving  of  the  condition  of  the 
property  to  be  operated  and  does  not  mean  additions  to  the  equipment, 
additions  to  the  property,  or  improvements  of  former  condition  of  the 
road. 

4.  Cost  of  Improvements. 

Where  old  rails  are  replaced  with  new  and  heavier  rails,  wooden 
bridges  and  culverts  with  concrete  and  steel  bridges  and  culverts,  the 
rule  is  that  the  cost  of  renewals  with  like  kind  and  quality  is  allowable, 
but  excess  cost  is  not  allowable  as  deduction. 

5.  Expenditures  Included  in  Income. 

Amounts  expended  for  improving  and  adding  to  the  j‘''opefty,  such 
as  building  new  stations  and  new  shops,  installing  new  n.dchinery,  and 
making  additions  to  equipment,  are  included  in  income.  i 

is  published  for  the  information  of  internal  revenue  officers  and  others  con- 
cerned (T.  D.  2210,  June  1,  1915.)  (245  Fed.  792.) 

1207  Depositors’  Guaranty  Fund. — Banking  corporations,  which  pur- 
suant to  the  laws  of  the  States  in  which  they  are  doing  business 

are  required  to  set  apart,  keep  and  maintain  in  their  banks  the 

INC.  201 


TAX 


DEDUCTIONS— EXPENSES. 


amount  levied  and  assessed  against  them  by  the  State  authorities  as  a 
^‘Depositors’  guaranty  fund,”  may  deduct  from  their  gross  income  the 
amount  so  set  apart  each  year  to  this  fund,  provided  that  such  fund,  when 
set  aside  and  carried  to  the  credit  of  the  State  banking  board  or  duly  author- 
ized State  officer,  ceases  to  be  an  asset  of  the  bank  and  may  be  withdrawn  in 
whole  or  in  part  upon  demand  by  such  board  or  State  officer  to  meet  the 
needs  of  these  officers  in  reimbursing  depositors  in  insolvent  banks,  and 
provided  further  that  no  portion  of  the  amount  thus  set  aside  and  credited 
is  returnable  under  the  laws  of  the  State  to  the  assets  of  the  banking  cc^- 
poration.  If,  however,  such  amount  is  simply  set  up  on  the  books  of  the 
bank  as  a reserve  to  meet  a contingent  liability  and  remains  an  asset  on^  the 
bank,  it  will  not  be  deductible  except  as  it  is  actually  paid  out  as  ^quired 
by  law  and  upon  demand  of  the  proper  State  officers.  (Art.  567,  Reg.  45, 
Rev.,  April  17,  1919.) 

1208  Law  ^114.  A Reasonable  Allowance  for  Salaries  is  Deductible. 

—“including  a reasonable  allowance  for  salaries  or  other 
compensation  for  personal  services  actually  rendered,  and 

1209  LawT[289.  [Corporations.] — “including  a reasonable  allowance 

for  salaries  or  other  compensation  for  personal  serv- 
ices actually  rendered,” 


1210  Compensation  for  Personal  Services.— Among  the  ordinary  and 
necessary  expenses  paid  or  incurred  in  carrying  on  any  trade  or 

business  may  be  included  a reasonable  allowance  for  salaries  or 
other  compensation  for  personal  services  actually  rendered.  The  test  ot 
deductibility  in  the  case  of  compensation  payments  is  whether  they  are 
reasonable  and  are  in  fact  payments  purely  for  services.  This  test  and  its 
practical  application  may  be  further  stated  and  illustrated  as  follows . 

1211  (1)  Any  amount  paid  in  the  form  of  compensation,  but  not  in  tact 
as  the  purchase  price  of  services,  is  not  deductible.  (3-)  An  osten- 
sible salarv  paid  by  a corporation  may  be  a distribution  of  a dividend  on 
stock.  This  is  likely  to  occur  in  the  case  of  a corporation  having  few 
stockholders,  practically  all  of  whom  draw  salaries.  If  m such  a case  the 
salaries  are  based  upon  or  bear  a close  relationship  to  the  stockholdings  of 
the  officers  or  employees,  it  would  seem  likely  that  the  salaries,  if  m excess 
of  those  ordinarily  paid  for  similar  services,  are  not  paid  wholly  for  services 
rendered,  but  in  part  as  a distribution  of  earnings  upon  the  stock,  (b)  An 
ostensible  salary  paid  by  a corporation  may  be  in  part  a waste  or  appropria- 
tion of  assets  of  the  corporation.  This  may  occur  where  salaried  em- 
•ployees  are  in  control  of  the  corporation  through  holding  directly  or  in- 
ffirectly  a majority  of  its  stock  or,  in  the  case  of  a large  corporation  with 
many  stockholders,  owning  a substantial  minority  of  its  stock,  and  the 
tendency  of  the  officers  unduly  to  inflate  their  salaries  must  be  taken  into 
account  (c)  An  ostensible  salary  may  be  in  part  payment  for  property. 
This  may  occur,  for  example,  where  a partnership  sells  out  to  a corporation, 
the  former  partners  agreeing  to  continue  in  the  service  of  the  corporation. 
In  such  a case  it  mav  be  found  that  the  salaries  of  the  former  partners  are 
not  merely  for  services  but  in  part  constitute  payment  for  the  transfer  of 

their  business.  . . ^ i • • 

1212  (2)  The  form  or  method  of  fixing  compensation  is  not  decisive  as 

to  deductibility.  While  any  form^  of  contingent  compensation  in- 
vites scrutiny  as  a possible  distribution  of  earnings  of  the  enter- 


202  TAX 


TNC. 


DEDUCTIONS— EXPENSES. 


prise,  it  does  not  follow  that  payments  on  a contingent  basis  are  to  be 
treated  fundamentally  on  any  basis  different  from  that  applying  to  com- 
pensation at  a flat  rate.  Generally  speaking,  if  contingent  compensation  is 
paid  pursuant  to  a free  bargain  between  the  enterprise  and  the  individual 
made  before  the  services  are  rendered,  not  influenced  by  any  consideration 
on  the  part  of  the  employer  other  than  that  of  securing  on  fair  and  advant- 
ageous terms  the  services  of  the  individual,  it  should  be  allowed  as  a de- 
duction even  though  in  the  actual  working  out  of  the  contract  it  may 
prove  to  be  greater  than  the  amount  which  would  ordinarily  be  paid. 

1213  (3)  In  any  event  the  allowance  for  compensation  paid  may  not 
exceed  what  is  reasonable  in  all  the  circumstances.  It  is  in  general 

just  to  assume  that  reasonable  and  true  compensation  is  only  such 
amount  as  would  ordinarily  be  paid  for  like  services  by  like  enterprises  in 
like  circumstances.  The  circumstances  to  be  taken  into  consideration  are 
those  existing  at  the  date  when  the  contract  for  services  was  made,  not  those 
existing  at  the  date  when  the  contract  is  questioned.  See  article  32  [for 
compensation  for  personal  services,  as  income,  1[873].  (Art.  105,  Reg.  45, 
Rev.,  April  17,  1919.) 

1214  Treatment  of  Excessive  Compensation. — As  to  the  treatment 
of  amounts  ostensibly  paid  as  compensation  but  not  allowed  to  be 

deducted  as  such,  the  following  rules  apply : 

1215  fi)  In  the  case  of  excessive  payments  by  corporations,  if  such 
payments  correspond  or  bear  a close  relationship  to  stockholdings, 

the  amount  of  the  excess  should  be  treated  as  dividends  and  would 
thus  be  exempt  from  the  normal  tax  in  the  hands  of  the  recipients ; or  if 
such  payments  represent  an  appropriation  of  assets  of  the  corporation  by 
officers  who  control  it  and  fix  their  compensation  in  violation  of  the  rights 
of  the  corporation,  the  amount  of  the  excess,  Avhile  disallowed  as  a deduc- 
tion by  the  corporation,  should  be  treated  as  compensation  of  the  individuals 
subject  to  the  normal  tax,  compensation  illegally  secured  being  none  the  less 
subject  to  tax  in  all  respects ; or  if  such  payments  constitute  in  part  payment 
for  property,  the  amount  of  the  excess  should  be  treated  by  the  corpora- 
tion as  a capital  expenditure  and  by  the  recipient  as  part  of  the  purchase 
price. 

1216  ^2)  In  case  of  excessive  payments  by  individuals  or  partner- 
ships, the  amounts  disallowed  should  ordinarily  be  treated  as  shares 

of  the  profits  of  a partnership,  except  that  a payment  for  property 
should  be  treated  by  the  individual  or  partnership  as  a capital  expenditure 
and  by  the  recipient  as  part  of  the  purchase  price.  (Art.  106,  Reg.  45,  Rev., 
April  17,  1919.) 

Salaries  of  officers  or  employees  who  are  stockholders  will  be  sub- 
ject to  careful  analysis,  and  if  they  are  found  to  be  out  of  proportion 
to  the  volume  of  business  transacted,  or  excessive  when  compared  with  the 
salaries  of  like  officers  or  employees  of  other  corporations  doing  a similar 
kind  or  volume  of  business,  the  amount  so  paid  in  excess  of  reasonable 
compensation  for  the  services  will  not  be  deductible  from  gross  income, 
but  will  be  treated  as  a distribution  of  profits.  [Read  at  jfl215.]  (Art.  138, 
^^443,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1218  The  appended  decision  of  the  United  States  Circuit  Court  of  Ap- 
peals for  the  Second  Circuit  in  the  case  of  Jacobs  & Davies  (Inc.) 
v.  Anderson,  collector  of  internal  revenue,  is  published  for  the  informa- 
tion of  internal-revenue  officers  and  others  concerned. 

203  TAX 


TNT, 


DEDUCTIONS— EXPENSES. 

Jacobs  and  Davies  (Inc.)  v.  Anderson. 

(228  Fed.  SOS.) 

1.  Deductions  from  Gross  Income.  divided  the  profits 

When  a company  composed  of  two  stockholders  d deducted  as  an 
between  them,  calling  it  compensation,  the  same'  can  not  be  deducted 

expense  of  business. 

'“ey  paid  out  under  these  circumstances  is  equivalent  to  dividend  and 
must  be  treated  as  income  of  the  corporatmn. 

»• 

Appeals-  D 2262,  Nov.  IS,  1919.) 

1319  Bonuses  to  Employees.-Gifts  or  bonuses  to  employees  will 
constitute  allowabk  deductions  from  gross  income  when  such  pay 

do  have  'i„  ST 

£,iT?rr“.'T.  "a-..  10^. 

taWronVepoirSh  the  company  to  »««"  'k'  “;“'’“yrS' 
„eh  iLse,  .1  may  be  b,  Tf  ^mia'et'"'  ’ 

ofdeSftfh  rSSnfm  f t 

ber  30,  1917.) 

1333  Compensation  Paid  in  Stock-Compensation  paid  an  enrp^^^^^^^ 

so  charletlto^ks  it^’lL^araf;^^^^  |Jfoctand  the  Jcipient 


INC. 


204  TAX 


DEDUCTIONS— EXPENSES. 


Commissions  Paid  to  Salesmen. — Commissions  paid  to  salesmen 
as  a part  of  the  expense  of  conducting  business  are  allowable  de- 
ductions to  the  payer  of  the  commission.  (T.  D.  2090,  Dec.  14,  1914.) 

1224  Commissions  Paid  Real  Estate  Agents.— A commission  paid  to  a 
real  estate  agent  for  collecting  rents  and  management  of  property 

is  a legitimate  business  expense  and  constitutes  an  allowable  deduction 
m computing  net  income.  (T.  D.  2090,  Dec.  14,  1914.) 

1225  Commissions  to  Salesmen  Paid  in  Stock.— Commissions  allowed 
salesmen,  paid  in  stock,  may  be  deducted  as  expense  if  so  charg-ed 

1914)°^*  the  actual  value  of  such  stock.  (Art.  117,  Reg.  33,  Jan!  5, 

1226  Pensions.— Amounts  paid  for  pensions  to  retired  employees  or  to 
their  families  or  others  dependent  upon  them,  or  on  account  of 

injuries  received  by  employees,  and  lump  sum  amounts  paid  as  compen- 
sation for  injuries,  are  proper  deductions  as  ordinary  and  necessary  ex- 
penses. Such  deductions  are  limited  to  the  amount  not  compensated  for 
by  insurance  or  otherwise.  No  deduction  shall  be  made  for  contribu- 
tions to  a pension  fund  held  by  the  corporation,  the  amount  deductible 
in  such  case  being  the  amount  actually  paid  to  the  employee.  When  the 
amount  of  the  salary  of  an  officer  or  employee  is  paid  for  a limited  period 
after  his  death  to  his  widow  or  heirs  in  recognition  of  the  services  rend- 
ered by  the  individual  such  payments  may  be  deducted.  Salaries  paid 
by  employers  during  the  continuance  of  the  war  to  employees  who  are 
absent  in  the  military  or  naval  service  or  are  serving  the  Government  in 
other  ways  at  a nominal  compensation,  but  who  intend  to  return  at  the 
ReT  TprU  17  191^)'^’  a^owable  deductions.  (Art.  108,  Reg.  45, 

1227  Donations  by  Corporations. — Donations  made  by  a corporation  for 

ir.H  r s '^o.^^ected  with  the  operation  of  its  business,  when  lim- 

d,!r  f hospitals  or  educational  institutions  con- 

ij*  5 ^ benefit  of  its  emplo}^ees  or  their  dependents,  are  a proper 

deduction  as  oidmary  and  necessary  expenses.  Donations  which  legit- 
imately represent  a consideration  for  a benefit  flowing  directly  to  the 
corporation  as  an  incident  of  its  business  are  allowable  deductions 

income,  hor  example,  a street  railway  corporation  may 
donate  a sum  of  money  to  an  organization  intending  to  hold  a convention 
in  the  city  in  which  it  operates,  with  the  reasonable  expectation  that  the 
°f  such  conyentioii  will  augment  its  income  through  a greater 
number  of  peop  e using  the  cars.  Expenses  incurred  in  advertising  and 
piornoting  the  sale  of  liberty  bonds  and  war  savings  stamps  over  the  cofpora- 
deductible.  Sums  of  money  expended  for  lobbying  m r- 
^anda  O’-,  defeat  of  le,gislation,  the  exploitation  of  propa- 

bon«  fo  advertising  other  than  trade  advertising,  and  contriL- 

donatffins  expenses,  are  not  deductible  from  gross  income.  [For 

STe”  S,  Ee.  Ap?™'.  S',''"'’'  ' "•»  « (An. 

Donations  by  Agricultural  Corporations  to  Fairs.-A  corporation 
HpH  agricultural  business  cannot  be  allowed  to  make  a 

deduction  from  gross  income  on  account  of  donations  to  fairs,  churches 


INC. 


205 


TAX 


DEDUCTIONS— INTEREST. 

and  associations,  such  donations  being  tnade  for  tte  purpose  of  obtam- 
ine  and  preserving  the  good  will  of  the  farmers  who  raise  crops  for  it, 
“Lfthe  amounts  so  expended  are  clearly  in  the  nature  of  gratuities 
and  are  not  necessary  expenses  of  operation  and 

no  such  consideration  in  this  case  as  is  contemplated  [122/b  ( 

tract  from  letter  to  Carey,  Piper  and  Hall,  Attorneys  at  Law,  Balti 
more,  Maryland,  signed  by  Acting  Commissioner  G.  E.  Fletcher,  and 
dated  March  25,  1915.) 

1329  Law  mis.  Certain  Rentals  Are  Deductible.— “including  rentals 
or  other  payments  required  to  be  made  as  a condi- 
tion to  the  continued  use  or  possession,  for  purposes 
business,  of  property  to  which  the  taxpayer  has  not  taken  or  not 
taking  title  or  in  which  he  has  no  equity ; 

1230  Law  11290.  [Corporations.] — “and  including  rentals  or  other  pay- 

ments required  to  be  made  as  a condition  to  the  con- 
tinned  use  or  possession  of  property  to  which  the  corporation  has  not 
taken  or  is  not  taking  title,  or  in  which  it  has  no  equity, 

1231  Rentals.— Where  a leasehold  is  acquired  for  a specified  term,  the 
purchaser  may  take  as  a deduction  in  his  return  an  abquot  part 

of  such  sum  each  year,  based  on  the  number  of  years  the  lease  has  to  ru  . 
XaLs  paid  by  a tenant  to  or  for  a landlord  for  business  property  are  ad- 
ditional rent  and  constitute  a deductible  item  to  the  tenant  and 
“e  to  the  landlord,  the  amount  of  the  tax  being  deductible 
by  the  latter.  The  cost  of  erecting  buildings  or  permanent  im 
provements  on  ground  leased  by  a taxpayer  ^ is  additional  rental 
Ld  is  therefore  a proper  deduction  from  gross  income,  provided  such 
ddinS  and  improvements  under  the  terms  of  the  ease  rever  to  the 
owner  of  the  ground  at  the  expiration  of  the  lease.  In  such  a case  the 
cost  will  be  prorated  according  to  the  number  of  years  constituting 
the  term  of  the  lease.  The  lessee  will  not  ^e  Permitted  o deduct  froni 
e-ross  income  any  depreciation  with  respect  to  such  buildmgs,  but  t 
Sm  of  incklental  repMrs  necessary  to  keep  them  in  an  efficient  condi- 
tion for  the  purposes  of  their  use  may  be  deducted.  If,  however,  the  life 
of  ffie  Uprovement  is  less  than  the  life  of  the  lease,  depreciation  may 
be  taken  by  the  lessee  instead  of  treating  the  cost  as  rent  See  arte 
48  [for  improvements  made  by  the  lessee  as  income  to  lessoi,  [[939].  ( 

109,  Reg.  45,  Rev.,  April  17,  1919.) 

1232  Law  111  16  All  Interest  Paid  or  Accrued  on  Indebtedness  With 
Law  11116.  Deductible.-"  (2)  All  interest  paid 

or  accrued  within  the  taxable  year  on  indebtedness,” 

1333  Law  [[117.  Interest  Paid  in  Connection  With  Holdings  m Certain 
Tax-Free  Obligations  and  Securities  Is  Not  Deducti- 
ble.-“except  on  indebtedness  incurred  or  continued  ^ 

carry  obligations  or  securities  (other  than  obligations  of  the  United 
StatL  Tss^d  after  September  24,  1917),  the  interest  ^pon  which  is 
wholly  exempt  from  taxation  under  this  title  as  income  to  the  ta 

payer/^ 

1234  Law  1[291.  [Corporations.]-" (2)  All  interest  paid  or  accrued 
within  the  taxable  year  on  its  indebtedness, 


206 


TAX 


INC. 


DEDUCTIONS— INTEREST. 


1235  Law  |f292.  [Corporations.] — “except  on  indebtedness  incurred  or 

continued  to  purchase  or  carry  obligations  or  securi- 
ties (other  than  obligations  of  the  United  States  issued  after  September 
24,  1917)  the  interest  upon  which  is  wholly  exempt  from  taxation  under 
this  title  as  income  to  the  taxpayer/' 

1236  Interest  paid  or  accrued  within  the  year  on  indebtedness  may 
be  deducted  from  gross  income.  But  interest  on  indebtedness  in- 
curred or  continued  to  purchase  or  carry  securities,  such  as  municipal 
bonds,  the  interest  upon  which  is  exempt  from  tax,  is  not  deductible. 
However,  this  exception  does  not  apply  to  obligations  of  the 
United  States  issued  after  September  24,  1917,  which  include  the  lib- 
erty bonds  of  the  second  and  subsequent  issues,  and  interest  on  in- 
debtedness incurred  to  purchase  such  obligations  is  deductible  pursuant 
to  the  general  rule.  See  articles  77-80  [for  interest  on  Liberty  Bonds 
and  Victory  Notes,  ^1139].  Interest  paid  by  the  taxpayer  on  a mort- 
gage upon  real  estate  of  which  he  is  the  legal  or  equitable  owner,  even 
though  the  taxpayer  is  not  directly  liable  upon  the  bond  or  note  secured 
by  such  mortgage,  may  be  deducted  as  interest  on  his  indebtedness. 
Payments  made  for  Maryland  or  Pennsylvania  ground  rents  are  not 
deductible  as  interest.  (Art.  121,  Reg.  45,  Rev.,  April  17,  1919.) 

1237  Interest  on  Indebtedness  Incurred  for  the  Payment  of  Dividend 
Paying  Stock  Is  Deductible  for  Both  Normal  Tax  and  Supertax 

Purposes. — Would  you  be  good  enough  to  advise  us  by  telegram  at 
our  expense,  whether  interest  upon  a note  the  proceeds  of  which  were 
used  for  the  purchase  of  dividend-paying  stock  would  be  allowed  as  a 
full  deduction  or  only  as  a deduction  in  arriving  at  the  amount  of 
income  subject  to  the  surtax?  (Answer.)  Interest  upon  a note  the 
proceeds  of  which  are  used  to  purchase  dividend-paying  stock  allow- 
able as  a deduction  for  normal  and  additional  tax  purposes.  (Letter 
of  inquiry  from  Harris,  Forbes  & Company,  New  York,  N.  Y.,  and 
telegram  of  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  Nov.  19,  1917.) 

1238  Interest  paid  by  a corporation  on  scrip  dividends  is  an  allowable 
deduction.  So-called  interest  on  preferred  stock,  which  is  in 

reality  a dividend  thereon,  cannot  be  deducted  in  arriving  at  net  income.  In 
the  case  of  banks  and  loan  or  trust  companies  interest  paid  within  the  year 
on  deposits  or  on  moneys  received  for  investment  and  secured  by  interest- 
bearing  certificates  of  indebtedness  issued  by  such  bank  or  loan  or  trust 
company  may  be  deducted  from  gross  income.  (Art.  564,  Reg.  45,  Rev., 
April  17,  1919. 

1239  Car-Trust  Certificates. — Equipment  or  car-trust  certificates  issued 
by  or  for  railroad  companies  are  a means  by  which  such  com- 
panies secure  cars  or  other  equipment,  or  the  money  with  which  such 
equipment  is  purchased. 

1240  The  equipment  becomes  at  once  an  asset  of  the  company  and 
the  trust  certificates  secured  by  such  assets  are  obligations  of 

the  railroad  companies,  similar  to  corporate  bonds,  mortgages,  and  like  obli- 
gations. The  trustees  in  whose  names  legal  title  to  the  equipment  stands, 
are  not  an  association  within  the  meaning  of  tliis  title,  and  are  therefore  not 
a taxable  entity,  but  they  are,  for  the  purpose  of  this  title,  a fiscal  agenb 

INC.  207 


TAX 


DEDUCTIONS— TAXES. 


paying  off  the  obligations,  both  principal  and  interest,  of  the  railroad  com- 
panies with  funds  appropriated  by  such  companies.  ^ 

1241  The  railroad  companies  * * include  these  trust  certificatt^s 

in  the  amount  of  their  bonded  or  other  indebtedness  » 

and  the  interest  paid  thereon,  * * * , will  be  deductible,  * \ * ; 

1242  If  the  certificates  contain  a contract  or  provision  by  wnicti  me 
obligor  agrees  to  pay  any  portion  of  the  tax  imposed  by  this 

title  upon  the  obligee  or  reimburse  the  obligee  for  any  portion  oi 
the  tax,  or  to  pay  the  interest  without  deduction  for  any  tax  which 
the  obligor  may  be  required  to  pay,  the  trustees  in  such  cases,  in 
making  interest  payments  on  these  certificates,  will,  in  the  absence  of 
claims  for  exemption  when  interest  payments  are  made  to  individual's, 
withhold  the  normal  income  tax  on  such  parents 
amount  thereof.  (Art.  188,  11573-576,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1243  Interest  on  Capital. — Interest  calculated  as  being  a charge 
against  income  on  account  of  capital  or  surplus  invested  in  t e 

business  but  which  does  not  represent  a payment  on  an  interest- 
bearing’ obligation,  is  not  an  allowable  deduction  from  gross  mcorne; 
that  is  to  say,  the  interest  which  the  money  might  earn 
invested  is  not  a deductible  charge  against  income.  (Art.  122,  Keg.  4a, 
Rev.,  April  17,  1919.) 

1244  Sale  of  Capital  Stock,  Bonds  and  Capital  Assets.— A corporation 

sustains  no  deductible  loss  from  the  sale  of  its  capital  stock 
See  article  542  [for  sale  of  capital  stock  generally,  11949J.  it  it 
sells  its  bonds  at  a discount,  the  amount  of  such  ^ discount  is 
treated  as  interest  paid,  and  if  it  retires  its  bonds  at  a price  in  excess 
of  the  issuing  price,  such  excess  may  usually  be  deducted  as  expense 
See  articles  544  [for  sale  and  retirement  of  corporate  bonds,  li^IJ 
and  848  [discount  on  bonds  in  relation  to  invested  capital— War  Tax 
Service!  If  the  corporation  sells  its  capital  assets  for  less  than  their 
cost  or  fair  market  value  as  of  March  1,  1913, 

deductible.  See  article  545  [for  sale  of  capital  assets,  1[966].  (Art.  563, 
Reg.  45,  Rev.,  April  17,  1919.) 

1245  Law  11119.  Taxes  Paid  or  Accrued  Are  Deductible. — “(3)  Taxes 

paid  or  accrued  within  the  taxable  year  imposed 

1246  Law  11120.  United  States  Taxes  Except  Income  and  Excess- 

Profits  Taxes,  Are  Deductible.— “(a)  by  the  author- 
ity of  the  United  States,  except  income,  war-profits  and  excess-profits 
taxes ; or” 


1247  Law  ^121.  Taxes  Imposed  by  United  States  Possessions  Are 

“ Deductible  or  Allowed  as  a Credit.— ‘(b)  by  the  au- 
thority of  any  of  its  possessions,  except  the  amount  of  income,  war- 
profits  and  excess-profits  taxes  allowed  as  a credit  under  section 
[1[1283]  ; or” 

1248  Lawp22.  State  and  Municipal  Taxes  Are  Deductible. — “(c)  by 

the  authoritv  of  any  State  or  Territory,  or  any  county, 
school  district,  municipality,  or  other  taxing  subdivision  of  any  State  or 
Territory,” 


INC 


208  TAX 


DEDUCTIONS— TAXES. 


1249  Law  ][294.  [Corporations.] — ‘'(3)  Taxes  paid  or  accrued  within 

the  taxable  year  imposed” 

1250  Law  jf295.  [Corporations.] — ‘'(a)  by  the  authority  of  the  United 

States,  except  income,  war-profits  and  excess-profits 
taxes  [P529] ; or” 

1251  Law][296.  [Corporations.]— “(b)  by  the  authority  of  any  of  its 

possessions,  except  the  amount  of  income,  war-profits 
and  excess-profits  taxes  allowed  as  a credit  under  section  238  [P295]  ; or” 

l2o2  Lawj[297.  [Corporations.] — “(c)  by  the  authority  of  any  State 
or  Territory,  or  any  county,  school  district,  munici- 
pality, or  other  taxing  subdivision  of  any  State  or  Territory,” 

1253  Federal  taxes  (except  income,  war  profits  and  excess  profits 
taxes),  State^  and  local  taxes  (except  taxes  assessed  against 

local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  as- 
sessed) , and  taxes  imposed  by  possessions  of  the  United  .States  or  by  foreign 
countries  (except  the  amount  of  income,  war  profits  and  excess  profits  taxes 
allowed  as  a credit  against  the  tax),  are  deductible  from  gross  income.  See 
section  222  of  the  statute  and  articles  381-384  as  to  tax  credits  [P290]. 
Postage  is  not  a tax.  Amounts  paid  to  States  under  secured  debts  laws  in 
order  to  render  securities  tax  exempt  are  deductible.  Automobile  license 
fees  are  ordinarily  taxes.  (Art.  131,  Reg.  45,  Rev.,  April  17,  1919.) 

1254  Federal  Duties  and  Excise  Taxes. — Import  or  tariff  duties  paid 
to  the  proper  customs  officers,  and  business,  license,  privilege, 

excise  ^ and  stamp  taxes  paid  to  internal  revenue  collectors,  are 
deductible  as  taxes  imposed  by  the  authority  of  the  United  States,  pro- 
vided they  are  not  added  to  and  made  a part  of  the  expenses  of  the 
business  or  the  cost  of  articles  of  merchandise  with  respect  to  which 
they  are  paid,  in  which  case  they  can  not  be  separately  deducted.  (Art. 
132,  Reg.  45,  Rev.,  April  17,  1919.) 

i25o  Additional  Capital  Stock  Tax  Imposed  by  Revenue  Act  of  1918 
as  a Deduction.— In  reply  to  your  letter  of  May  21,  1919,  you 
are  advised  that  the  capital  stock  tax  imposed  by  Section  1000 
(a)  of  the  Revenue  Act  of  1918,  may,  for  the  purpose  of  computing 
other  income  subject  to  income,  excess  profits  and  war  profits  taxes,  be 
deducted  from  the  gross  income  for  the  year  for  which  such  taxes 
accrue,  if  accounts  of  the  corporate  taxpayers  are  kept  on  the  accrual 
basis,  or  may  be  deducted  from  gross  income  for  the  year  in  which 
paid,  if  accounts  are  kept  on  the  disbursements  basis.  (Letter  to  The 
Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  June  7,  1919.) 

i2o6  Tax  on  Bank  Stock. — Banks  paying  taxes  assessed  against  their 
stockholders  on  account  of  their  ownership  of  the  shares  of  stock 
issued  by  such  banks  can  not  deduct  the  amount  of  taxes  so  paid. 
The  shares  of  stock  being  the  property  of  the  stockholders,  to 
the  extent  that  the  taxes  assessed  on  the  value  of  the  shares  of  stock 
are  propeity  taxes  the  holders  arc  primarily  liable  for  their  payment. 
As  federal  statutes  prohibit  States  from  imposing  any  tax  upon  na- 

209  TAX 


INC. 


DEDUCTIONS— TAXES. 


tional  banks  except  upon  the  value  of  their  real  estate,  in  cases  where 
States  levy  a tax  on  the  stock  of  such  banks  and  make  it  the  duty  of 
the  banks  to  pay  such  tax  for  me  stockholders  it  is  clear  that  such  pay- 
ments are  not  deductible  from  the  gross  income  of  such  banks.  This 
rule  applies  also  in  the  case  of  corporations  other  than  banks,  upon 
the  value  of  whose  stock  taxes  are  assessed  to  the  stockholders.  Such 
payments  by  banks  or  other  corporations  are  regarded  as  in  the  nature 
of  ^additional  dividends  and  must  be  included  by  the  stockholder  in 
his  dividends  received,  if  he  deducts  the  taxes  paid  on  his  behalf.  See 
articles  565  [P280]  and  134  [P264,  for  further  discussion  of  taxes  paid 
for  another”].  (Art.  566,  Reg.  45,  Rev.,  April  17,  1919.) 

1257  A bank  in  Massachusetts  held  not  authorized  to  deduct  from  its 
s-ross  income  taxes  paid  on  its  shares  on  behalf  of  its  stockholders 

under  Rev.  Laws,  Mass.  c.  14,  Secs.  9-18,  in  ascertaining  its  net  income 
subject  to  special  excise  tax  under  Tariff  Act  ^ng.  5,  1909,  c.  6,  Sec.  38, 
par.  2,  36  Stat.  112.— Eliot  Nat.  Bank  y.  (Ell,  210  F.  833  (Affirmed  by 
Circuit  Court  of  Appeals,  First  Circuit,  December  21,  1914  [218  Fed. 
600].) 

1258  The  United  States  Circuit  Court  of  Appeals,  Eighth  Circuit 
(No.  4260,  December  Term,  1914),  in  error  to  the  District  (.ourt 

of  the  United  States  for  the  Eastern  District  of  Missouri  [March 
25  1919]  in  the  case  of  the  National  Bank  of  Commerce  m St. 

Louis,  plaintiff  in  error,  v.  E.  B.  Allen,  U.  S.  Collector  of  Internal 
Revenue  for  the  First  District  of  Missouri,  defendant  in  error,  attirms 
the  decision  of  the  court  below  (211  Fed.  743)  in  which  judgment  was 
rendered  by  the  Court  against  the  bank 

1259  The  Court  of  Appeals  held  that  (233  Fed.  472)  : 1.  Under  the 
State  law,  where  banks  pay  the  State  tax  imposed  on  share- 
holders, but  have  a lien  until  reimbursed  on  the  shares  of  stock 
and  ail  dividends,  the  tax  is  not  imposed  on  the  banks;  2.  State  taxes 
so  paid  can  not  be  legally  deducted  from  gross  income  on  returns  made 
by  banks  under  the  corporation  tax  act;  3.  The  commissioner  has 
power  to  make  a new  assessment  within  three  years  in  case  an  incor- 
rect return  has  been  made ; 4.  There  is  no  necessity  of  construing  the 
word  “false,”  where  it  is  used  with  reference  to  the  time  in  which  the 
commissioner  shall  act,  to  mean  fraudulently  false.  (T.  D.  2198,  May 

5,  United  States  Supreme  (Tourt  for  a writ  of  cer- 

tiorari to  the  Court  of  Appeals  for  the  Eighth  District  denied.  October 
25,  1915.] 

1260  Lawp23.  Certain  Assessments  Against  Local  Benefits  Are  Not 

Deductible. — “not  including  those  assessed  against 
local  benefits  of  a kind  tending  to  increase  the  value  of  the  property 
assessed;  or” 


1261 


Lawp98.  [Corporations.] — “not  including  those  assessed  against 
local  benefits  of  a kind  tending  to  increase  the  value 
of  the  property  assessed ; or” 

1262  Article  133  of  Regulations  45  is  hereby  amended  to  read  as  fol- 
lows : So-called  taxes,  more  properly  assessments,  paid  for  local 
benefits,  such  as  street,  sidewalk  and  other  like  improvements, 

210  TAX 


INC. 


DEDUCTIONS— TAXES. 


imposed  because  of  and  measured  by  some  benefit  inuring  directly  to 
the  property  against  which  the  assessment  is  levied,  do  not  constitute 
an  allowable  deduction  from  gross  income.  A tax  is  considered  assessed 
against  local  benefits  when  the  property  subject  to  the  tax  is  limited 
to  the  property  benefited.  Special  assessments  are  not  deductible,  even 
though  an  incidental  benefit  may  inure  to  the  public  welfare.  The  taxes 
deductible  are  those  levied  for  the  general  public  welfare  by  the  proper 
taxing  authorities  at  a like  rate  against  all  property  in  the  territory 
over  which  such  authorities  have  jurisdiction.  Assessments  under  the 
statutes  of  California  relating  to  irrigation  and  of  Iowa  relating  to 
drainage,  and  under  certain  statutes  of  Tennessee  relating  to  levees, 
are  limited  to  property  benefited,  and  when  it  is  clear  that  the  assess- 
ments are  so  limited,  the  amounts  paid  thereunder  are  not  deductible 
as  taxes.  When  assessments  are  made  for  the  purpose  of  maintenance 
or  repair  of  local  benefits,  the  taxpayer  may  deduct  the  assessments 
paid  as  an  expense  incurred  in  business,  if  the  payment  of  such  assess- 
ments is  necessary  to  the  conduct  of  his  business.  When  the  assess- 
ments are  made  for  the  purpose  of  constructing  local  benefits,  the 
payments  by  the  taxpayer  are  in  the  nature  of  capital  expenditures  and 
are  not  deductible.  Where  assessments  are  made  for  the  purpose  of 
both  construction  and  maintenance  or  repairs,  the  burden  is  on  the 
taxpayer  to  show  the  allocation  of  the  amounts  assessed  to  the  dif- 
ferent purposes.  If  the  allocation  can  not  be  made,  none  of  the  amounts 
so  paid  is  deductible.  (T.  D.  2937,  October  16,  1919,  amending  Art. 
133,  Reg.  45,  Rev.) 

1263  Taxable  Status  of  Amount  Refunded  by  Government  in  One 
Year,  Representing  Tax  Paid  for  Which  Credit  Has  Been  Taken 

as  a Deduction  in  a Previous  Year. — Receipt  is  acknowledged  of  your 
letter  of  December  16,  1918,  in  which  you  ask  whether  an  individual 
who  has  claimed  a deduction  for  taxes  [such  as  Federal  Excise  Taxes] 
paid  during  the  year  in  his  income  tax  return  for  1917  and  in  the  fol- 
lowing year  it  develops  that  these  taxes  were  improperly  assessed  and 
collected,  and  a refund  is  made  to  the  taxpayer  in  1918,  should  consider 
“the  amount  of  such  refund  gross  income  for  the  year  1918,  or  is  it  in 
the  nature  of  additional  income  for  1917  and  should  the  additional  tax 
liability  on  the  amount  of  the  refund  be  taken  care  of  as  1917  income 
by  means  of  an  amended  return  for  1917  and  by  an  additional  tax 
payment  as  of  that  year?”  ^Iln  reply  you  are  advised  that  this  taxpayer 
will  not  be  required  to  include  in  his  return  for  1918  the  amount  re- 
ceived as  refund  of  taxes  erroneously  paid  in  the  preceding  year.  He 
should,  however,  file  an  amended  return  for  1917  and  claim  a deduction 
therein  for  the  correct  amount  of  taxes  due  for  that  year.  The  further 
amount  of  income  tax  due  for  1917  as  a result  of  the  reduction  in  the 
item  of  taxes  paid  during  the  year  and  a letter  of  explanation  should 
accompany  the  amended  return  when  it  is  forwarded  the  Collector  of 
Internal  Revenue.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  January  8,  1919.) 

1264  Inheritance  and  Federal  Estate  Taxes. — State  inheritance  taxes 
paid  by  the  executor  or  administrator  of  an  estate  of  a deceased 

person,  which  are  provided  by  law  to  be  deducted  from  the  respective 
legacies  or  distributive  shares,  are  not  allowable  deductions  in  com- 
puting the  net  income  of  such  estate  subject  to  tax,  even  though  the 

INC.  211 


TAX 


DEDUCTIONS— TAXES. 


will  contains  a direction  to  pay  inheritance  taxes  out  of  the  residue. 
An  inheritance  tax  is  upon  the  transfer  of  the  property  and  not  upon 
the  estate  of  the  decedent  or  upon  the  executor  or  administrator,  al- 
though the  latter  is  required  to  pay  it.  In  general,  taxes  paid  or 
accrued  within  the  year  imposed  by  the  authority  of  any  State,  or 
otherwise,  are  limited  to  those  imposed  upon  the  taxpayer  and  do  not 
include  taxes  paid  by  him  on  behalf  of  another,  even  though  he  is 
required  by  law  to  make  such  payment.  See  articles  565  and  566. 
[for  further  discussion  of  “taxes  paid  by  another,’’  j[1280,  and  ]fl256]. 
Since,  moreover,  the  tax  is  imposed  upon  the  transfer  before  the  prop- 
erty reaches  the  legatee  or  distributee,  and  merely  diminishes  the 
capital  share  of  the  estate  received  by  him,  such  tax  is  not  imposed 
upon  the  legatee  or  distributee  and  is  not  an  allowable  deduction  from 
his  income.  Similarly,  Federal  estate  taxes  are  not  deductible.  (Art. 
134,  Reg.  45,  Rev.,  April  17,  1919.) 

1265  New  York  State  Transfer  (Inheritance)  Tax  Not  Deductible  as 
a “Tax”. — The  appended  decision  of  the  United  States  District 
Court  for  the  Southern  District  of  New  York  in  the  case  of  Elizabeth  S. 
Prentiss  vs.  Mark  Eisner,  Collector  of  Internal  Revenue,  is  published  for  the 
information  of  internal-revenue  officers  and  others  concerned.  The  decision 
confirms  and  supports  the  ruling  contained  in  Article  134  [^1264]  of 
Regulations  No.  45.  (T.  D.  2933,  October  9,  1919.) 

Decision  of  United  States  District  Court. 

[Act  of  Oct.  3,  1913.] 

Elizabeth  S.  Prentiss  vs.  Mark  Eisner,  Collector. 

1.  The  tax  imposed  by  the  laws  of  New  York  upon  the  transfer  of 
property  by  will  or  under  the  intestate  laws  is  not  deductible  in  ascer- 
taining the  taxable  net  income  of  the  legatee  or  distributee  under  the 
act  of  October  3,  1913.  It  is  not  a “tax”,  within  the  meaning  of  the 
provision  permitting  the  deduction  of  “all  national,  State,  county,  school, 
and  municipal  taxes  paid  within  the  year”.  (Sec.  II,  par.  B). 

2.  A tax  upon  the  right  to  receive  an  interest  in  the  estate  of  a 
decedent  is  not  a charge  either  against  the  person  receiving  the  interest 
or  the  property  or  right  accruing  to  him.  The  legatee  or  distributee 
merely  receives  the  balance  due  after  payment  of  the  tax.  He  does  not 
receive  the  entire  interest,  and  then  pay  the  tax ; and  he  is  consequently 
not  entitled  to  deduct  the  amount  as  a tax  paid  by  him. 

1266  Augustus  N.  Hand,  District  Judge:  This  is  a^  demurrer  to  a 
complaint  whereby  the  plaintiff  seeks  to  recover  income  taxes  for 

the  year  1913,  paid  under  protest.  The  objection  urged  is  that  the 
Commissioner  refused  to  allow  as  a deduction  transfer  taxes  which 
were  paid  to  the  State  of  New  York  on  December  12,  1913,  upon  an 
inheritance  which  vested  June  25,  1913. 

1267  Paragraph  B,  Section  H of  the  Act  of  October  3,  1913,  [Revenue 
Act  of  1918,  Sec.  213  (A)  (3)-(C)  111248],  provides: 

“That  in  computing  net  income  for  the  purpose  of  the  normal  tax 
there  shall  be  allowed  as  deductions  ^ Third,  all  national, 

state,  county,  school  and  municipal  taxes  paid  within  ^ the  year, 
not  including  those  assessed  against  local  benefits;  * ” 

1268  The  Commissioner  of  Internal  Revenue  has  ruled  that: 

“A  collateral  inheritance  tax  levied  under  the  laws  of  the  State 
of  New  York  being,  as  it  is,  a charge  against  the  corpus  of  the 

212  TAX 


TXC. 


DEDUCTIONS— TAXES. 


estate,  does  not  constitute  such  an  item  as  can  be  allowed  as  a 
deduction  in  computing  income  tax  liability  to  either  the  estate  or 
a beneficiary  thereof.’^ 

1269  The  plaintiff  contends  that  the  New  York  transfer  taxes  are 
excise  taxes  imposed  by  the  State  upon  the  right  to  receive  an 

interest  in  a decedent’s  estate,  and  as  such,  are  within  the  deductions 
allowed  by  statute.  The  Government,  on  the  other  hand,  says  that 
these  taxes  are  an  appropriation  by  the  State  of  a portion  of  the  de- 
cedent’s estate  before  the  remainder  vests  in  the  legatee.  This  latter 
contention  is  in  accordance  with  the  decision  in  United  States  v. 
Perkins,  163  U.  S.  625,  where  the  Court  said  at  page  630 : 

‘‘The  legacy  becomes  the  property  of  the  United  States  only  after 
it  has  suffered  a diminution  to  the  amount  of  the  tax  and  it  is  only 
upon  this  condition  that  the  legislature  consents  to  a bequest  of  it.” 

1270  This  decision,  which  so  far  as  I know  has  not  been  questioned, 
cannot  be  reconciled  with  any  theory  that  the  tax  is  refused  a 

right  of  succession  already  vested  in  the  legatee. 

1271  At  the  outset  we  have  the  important  fact  that  property  inherited 
or  transmitted  by  will  is  not  treated  as  income  in  the  income  tax 

act,  but,  on  the  contrary,  is  not  only  not  included,  but  specifically  ex- 
empted. In  other  words,  in  the  hands  of  a legatee,  devisee,  heir  or 
distributee,  such  property  is  capital  and  not  income.  Under  these  cir- 
cumstances, it  would  seem  inconsistent  with  charges  against  this  capi- 
tal, which  accrued  prior  to,  or  simultaneously  with,  the  devolution  of 
it  could  be  deducted  from  income  tax  returns.  Notwithstanding  this, 
the  language  of  the  Act  would  apparently  make  the  transfer  taxes  a 
necessary  deduction  if  they  are  charges  against  the  person  receiving 
the  property,  or  against  either  the  property  or  the  right  accruing  to 
him. 

1272  The  cases  are  extremely  confused  and  their  reasoning  is  unsatis- 
factory. It  is  admitted  by  them  all  that  the  tax  is  not  upon  the 

property  itself  which  is  transmitted.  To  avoid  the  unconstitutionality  of  a 
direct  tax  upon  the  property  itself  which  was  not  apportioned  among  the 
States,  the  Court  of  Appeals  of  New  York  said  as  to  the  Federal  Tax  of 
1898,  in  Matter  of  Gihon,  169  N.  Y.  443: 

* * * l^he  full  amount  of  the  legacy  is  in  law  paid  to  the 

legatee  and  the  deduction  made  from  it  and  paid  to  the  State  or 
federal  government  is  paid  on  account  of  the  legatee  from  the 
legacy  which  he  receives.” 

1273  It  is  argued  that  the  personal  liability  of  the  executor  or  adminis- 
trator  under  the  New  York  law  for  the  payment  of  the  tax  makes 

the  view  taken  by  the  foregoing  case  erroneous,  but,  as  Judge  Cullen 
there  said,  the  obligation  of  the  executor  or  administrator  to  nay  the 
tax  IS  a mere  rule  of  administration  to  insure  its  payment,  and  not 

proof  that  the  tax  is  either  on  the  right  to  transmit  or  upon  the  oropertv 
itself.  I IT  j 

1274  I think  it  follows  because  the  right  to  transmit  or  the 

right  to  receive  the  property  of  a decedent  is  a privilege  granted 

by  the  State,  and  not  a common  right,  that  the  tax  is  imposed  upon 
either  right.  Judge  Gray’s  statement  in  Matter  of  Swift,  137  N.  Y.  77 
is  an  accurate  description  of  what  occurs: 

“WhaJ  has  the  State  done,  in  effect,  by  the  enactment  of  this 
tax  law.-^  It  reaches  out  and  appropriates  for  its  use  a portion  of 

213 


INC. 


TAX 


DEDUCTIONS— TAXES. 


the  property  at  the  moment  of  its  owner  s decease , allowing"  only 
the  balance  to  pass  in  the  way  directed  by  the  testator,  or  per- 
mitted by  its  intestate  law.”  ^ • t, 

1275  To  say  that  the  legatee,  devisee,  heir  or  distributee  receives  the 
property  without  any  deduction  and  then  pays  the  tax  is  really  a 

most  artificial  way  of  viewing  the  transaction.  In  the  case  of  personal 
property  he  really  only  gets  the  balance  with  a credit  as  a matter  of  con- 
venient bookkeeping  to  the  amount  of  the  tax.  In  the  case  of  real  est^e 
he  receives  properly  speaking  an  equity.  He  can  pay  the  tax  and  get  the 
land  unencumbered,  or  the  State  can  foreclose  the  lien  and  he  wi^ 
receive  the  balance.  In  either  case  the  only  natural  way  to  treat  hun  is 
as  a recipient  of  a net  amount.  The  condition  of  the  devolution  of  the 
property  is  the  receipt  of  the  transfer  tax  b}^  the  State. 

1276  In  United  States  v.  Perkins,  163  U.  S.  625,  the  testator  bequeathed 
his  property  to  the  United  States.  The  Supreme  Court  held  tkat 

the  New  York  transfer  tax  was  upon  the  testator’s  right  to  dispose  of 
his  property,  and  thus  sustained  the  tax_  for,  if  it  had  been  treated  as 
upon  any  right  of  succession  of  the  United  States,  the  tax  could  not 
have  been  lawfully  imposed.  This  case  has  been  cited  with  approval 
in  New  York  decisions  both  under  the  old  and  new  transfer  tax  acts. 

1277  I have  carefully  examined  the  interesting  briefs  submitted  by 
counsel  and  am  convinced  that  the  tax  cannot  properly  be  re- 
garded as  an  imposition  upon  either  the  property  or  the  right  to  receive 
a gross  amount  of  the  property  of  a decedent  represented  by  a legacy, 
devise  or  distributive  share,  but  that  the  property  and  the  right  to  re- 
ceive it  passed,  reduced  by  the  amount  of  the  tax  measured  by  a 
centage  of  the  value  of  the  gross  share.  It  is  impossible  to  reconcile  the 
conflicting  expressions  in  judicial  opinions,  but  this  treatment  of  the 
situation  will,  I think,  accord  with  the  results  reached  by  the  various 
cases.  I can  see  no  substantial  difference  between  the  New  York 
Transfer  Tax  Act  in  operation  in  1913,  and  the  earlier  Act,  and  I do  not 
regard  any  of  the  Acts  as  imposing  a tax  upon  the  plaintiff  s right  of 
succession  which  is  deductible  in  her  income  tax  return. 

1278  The  demurrer  is  sustained.  (Opinion  appended  to  and  made  a 
part  of  T.  D.  2933,  October  9,  1919. 


1279  LawpOl.  Taxes  Withheld  at  the  Source  on  Account  of  Tax- 
Free-Covenant  Obligations  Are  Not  Deductible. — 

“Provided,  That  in  the  case  of  obligors  specified  in  subdivision  (b)  of 
section  221  [TflSSS]  no  deduction  for  the  payment  of  the  tax  imposed  by 
this  title  or  any  other  tax  paid  pursuant  to  the  contract  or  provision 
referred  to  in  that  subdivision,  shall  be  allowed 


1280  Effect  of  Tax-Free  Covenant  in  Bonds.— Corporations  may  deduct 
taxes  from  gross  income  to  the  same  extent  as  individuals,  except 
that  in  the  case  of  corporate  bonds  or  obligations  containing  a tax-free 
covenant  clause  the  corporation  paying  a Federal  tax,  or  any  part  of  it,  for 
someone  else  pursuant  to  its  agreement,  is  not  entitled  to  deduct  such  pay- 
ment from  gross  income  on  any  ground.  In  the  case,  however,  of  corporate 
bonds  or  obligations  containing  an  appropriate  tax-free  covenant  clause, 
the  corporation  paying  a State  tax  or  any  other  than  a Federal  tax  for 
someone  else  pursuant  to  its  agreement  may  deduct  such  payment  as 
interest  paid  on  indebtedness.  (Art.  565,  Reg.  45,  Rev.,  April  17,  1919.) 


214  TAX 


INC. 


CREDIT  FOR  TAXES. 


1281  Lawp24.  Taxes  Imposed  by  Foreign  Countries  Are  Either  De- 

ductible by  or  Allowed  as  a Credit  to  Citizens  and 
Residents. — “(d)  in  the  case  of  a citizen  or  resident  of  the  United 
States,  by  the  authority  of  any  foreign  country,  except  the  amount  of 
income,  war-profits  and  excess-profits  taxes  allowed  as  a credit  under 
section  222  [P283] 

1282  Lawjf299.  All  Foreign  Taxes  Are  Deductible  or  Allowed  as  a 

Credit  to  Domestic  Corporations. — “(d)  in  the  case 
of  a domestic  corporation,  by  the  authority  of  any  foreign  country, 
except  the  amount  of  income,  war-profits  and  excess-profits  taxes  al- 
lowed as  a credit  under  section  238  []fl295]  ; or” 


1283  Law  |[226.  Credit  for  Taxes. — “Sec.  222.  (a)  That  the  tax  com- 

puted under  Part  II  [individual  normal  and  surtax] 
of  this  title  shall  be  credited  with 

1284  Law  \221.  Certain  Income  and  Excess-Profits  Taxes  Paid  to 

Foreign  Countries  and  All  Such  Taxes  Paid  to  Pos- 
sessions of  the  United  States  by  Citizens  to  be  Credited. — “(1)  In  the 
case  of  a citizen  of  the  United  States,  the  amount  of  any  income,  war- 
profits  and  excess-profits  taxes  paid  during  the  taxable  year  to  any 
foreign  country,  upon  income  derived  from  sources  therein,  or  to  any 
possession  of  the  United  States;  and” 

1285  Law  j[228.  Income  and  Excess-Profits  Taxes  Paid  to  Possessions 

of  the  United  States  by  Residents  Are  to  be  Credited. 

— “(2)  In  the  case  of  a resident  of  the  United  States,  the  amount  of  any 
such  taxes  paid  during  the  taxable  year  to  any  possession  of  the  United 
States;  and” 

1286  Law  T[229.  Certain  Income  and  Excess-Profits  Taxes  Paid  to  For- 

eign Countries  by  Alien  Residents  Are  to  be  Credited. 

—“(3)  In  the  case  of  an  alien  resident  of  the  United  States  who  is  a 
citizen  or  subject  of  a foreign  country,  the  amount  of  any  such  taxes 
paid  during  the  taxable  year  to  such  country,  upon  income  derived  from 
sources  therein,  if  such  country,  in  imposing  such  taxes,  allows  a similar 
credit  to  citizens  of  the  United  States  residing  in  such  country;  and” 

1287  Law  1(230.  Proportionate  Parts  of  Certain  Income  and  Excess- 

Profits  Taxes  Paid  to  Foreign  Countries  and  of  All 
Such  Taxes  Paid  to  Possessions  of  the  United  States  to  be  Credited 
to  Members  of  Partnerships  and  to  Beneficiaries  of  Estates  or  Trusts. 
— “(4)  In  the  case  of  any  such  individual  who  is  a member  of  a part- 
nership or  a beneficiary  of  an  estate  or  trust,  his  proportionate  share 
of  such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the 
taxable  year  to  a foreign  country  or  to  any  possession  of  the  United 
States,  as  the  case  may  be.” 

1288  Law|[231.  Adjustment  of  Any  Difference  Between  Amount  of 

Tax  Paid  and  Amount  Accrued. — “(b)  If  accrued  taxes 
when  paid  differ  from  the  amounts  claimed  as  credits  by  the  taxpayer, 
or  if  any  tax  paid  is  refunded  in  whole  or  in  part,  the  taxpayer  shall 

215 


INC. 


TAX 


CREDIT  FOR  TAXES. 


notify  the  Commissioner  who  shall  redetermine  the  amount  of  the  tax 
due  under  Part  II  of  this  title  for  the  year  or  years  affected,  and  the 
amount  of  tax  due  upon  such  redetermination,  if  any,  shall  be  paid  by 
the  taxpayer  upon  notice  and  demand  by  the  collector,  or  the  amount 
of  tax  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in 
accordance  with  the  provisions  of  section  252  [^2121].  In  the  case  of 
such  a tax  accrued  but  not  paid,  the  Commissioner  as  a condition  pre- 
cedent to  the  allowance  of  this  credit  may  require  the  taxpayer  to  give 
a bond  with  sureties  satisfactory  to  and  to  be  approved  by  the  Com- 
missioner in  such  penal  sum  as  the  Commissioner  may  require,  con- 
ditioned for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found 
due  upon  any  such  redetermination ; and  the  bond  herein  prescribed  shall 
contain  such  further  conditions  as  the  Commissioner  may  require/’ 

1289  Law  lf232.  Credits  for  Income  and  Excess-Profits  Taxes  Paid  to 

Foreign  Countries  and  to  Possessions  of  the  United 
States  to  be  Allowed  Only  if  Satisfactory  Evidence  be  Furnished. — ‘'(c) 
These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence 
satisfactory  to  the  Commissioner  showing  the  amount  of  income  derived 
from  sources  within  such  foreign  country  or  such  possession  of  the 
United  States,  and  all  other  information  necessary  for  the  computation 
of  such  credits.” 

1290  Analysis  of  Credit  for  Taxes.— (1)  In  the  case  of  a citizen  of  the 
United  States,  whether  resident  or  nonresident,  the  basis  of  the  credit 

for  taxes  is  as  follows:  (a)  ‘‘The  amount  of  any  income,  war-profits 
and  excess-profits  taxes  paid”  or  accrued  “during  the  taxable  year 
* * * to  any  possession  of  the  United  States”;  (b)  “the  amount  of 

any”  such  taxes  paid  or  accrued,  “during  the  taxable  year  to  any  foreign 
country,  upon  income  derived  from  sources  therein’^ ; and  (c)  the  “pro- 
portionate share  of”  any  “such  taxes  of”  a partnership  of  which  he  is  a 
partner  or  of  an  estate  or  trust  of  which  he  is  a beneficiary  paid  or 
accrued,  “during  the  taxable  year  to  a foreign  country  or  to  any  posses- 
sion of  the  United  States,  as  the  case  may  be.” 

1291  (2)  In  the  case  of  an  alien  resident  of  the  United  States  the  basis 
of  the  credit  for  taxes  is  as  follows:  (a)  “The  amount  of  any 

income,  war-profits  and  excess-profits  taxes  paid”  or  accrued  “during 
the  taxable  year  * * * possession  of  the  United  States” 

(identical  with  (1)  (a)  above);  (b)  “the  amount  of  any  such  taxes 

paid”  or  accrued  “during  the  taxable  year  to”  the  country  of  which  he 
is  a citizen  or  subject,  “upon  income  derived  from  sources  therein,  if  such 
country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the 
United  States  residing  in  such  country”;  and  (c)  the  “proportionate  share 
of”  any  “such  taxes  of”  a partnership  of  which  he  is  a partner  or  of  an 
estate  or  trust  of  which  he  is  a beneficiary  paid  or  accrued  “during  the 
taxable  year  to”  the  country  of  which  he  is  a citizen  or  subject  (“if  such 
country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the 
United  States  residing  in  such  country”),  “or  to  any  possession  of  the 
United  States,  as  the  case  may  be.”  (Art.  381,  Reg.  45,  Rev.,  April  17, 
1919.) 

1292  Meaning  of  Terms. — “Amount  of  * * * taxes  paid  during  the 
taxable  year”  means  taxes  proper  (no  credit  being  given  for  amounts 

representing  interest  or  penalties)  paid  or  accrued  during  the  taxable  year 

INC.  216  TAX 


CREDIT  FOR  TAXES. 


on  behalf  of  the  individual  claiming  credit.  “Foreign  country”  includes 
within  its  meaning  any  foreign  sovereign  state  or  self-governing  colony 
(for  example,  the  Dominion  of  Canada),  but  does  not  include  a foreign 
municipality  (for  example,  Montreal)  unless  itself  a sovereign  State  (for 
example,  Hamburg).  “Any  possession  of  the  United  States”  includes, 
among  others,  Porto  Rico,  the  Philippines  and  the  Virgin  Islands.  As  to 
the  meaning  of  “sources,”  see  articles  91-93  [beginning  at  jfl545].  See 
also  Section  1 of  the  statute.  (Art.  382,  Reg.  45,  Rev.,  April  17,  1919.) 

1293  Conditions  of  Allo^vance  of  Credit. — (a)  When  credit  is  sought 
for  income,  war  profits  or  excess  profits  taxes  paid  other  than  to 

the  United  States,  the  income  tax  return  of  the  individual  must  be  accom- 
panied by  form  1116,  carefully  filled  out  with  all  the  information  there 
called  for  and  with  the  calculation  of  credits  there  indicated,  and  duly 
signed  and  sworn  to.  or  affirmed.  When  credit  is  sought  for  taxes  already 
paid  the  form  must  have  attached  to  it  the  receipt  for  each  such  tax 
payment.  When  credit  is  sought  for  taxes  accrued  the  form  must  have 
attached  to  it  the  return  on  which  each  such  accrued  tax  was  based.  This 
receipt  or  return  so  attached  must  be  either  the  original,  a duplicate  original, 
a duly  certified  or  authenticated  copy,  or  a sworn  copy.  In  case  only  a 
sworn  copy  of  a receipt  or  return  is  attached,  there  must  be  kept  readily 
available  for  comparison  on  request  the  original,  a duplicate  original  or  a 
duly  certified  or  authenticated  copy,  (b)  In  the  case  of  a credit  sought 
for  a tax  accrued  but  not  paid,  the  Commissioner  may  require  as  a condition, 
precedent  to  the  allowance  of  credit  a bond  from  the  taxpayer  in  addition 
to  form  1116.  If  such  a bond  is  required,  form  1117  shall  be  used  for  iU 
It  shall  be  in  such  penal  sum  as  the  Commissioner  may  prescribe,  and  shall 
be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax 
found  due  upon  any  redetermination  of  tax  made  necessary  by  such  credit 
proving  incorrect,  with  such  further  conditions  as  the  Commissioner  may 
require  This  bond  shall  be  executed  by  the  taxpayer,  his  agent  or  repre- 
sentative, as  principal,  and  by  sureties  satisfactory  to  and  approved  by  the 
Commissioner.  See  also  section  1320  of  the  statute  [for  acceptance  of 
United  States  bonds  in  lieu  of  sureties,  p500].  (Art.  383,  Reg.  45,  Rev., 
April  17,  1919.) 

1294  Redetermination  of  Tax  When  Credit  Proves  Incorrect. — In  case 
credit  has  been  given  for  taxes  accrued,  or  a proportionate  share 

thereof,  and  the  amount  that  is  actually  paid  on  account  of  such  taxes,  or 
a proportionate  share  thereof,  is  not  the  same  as  the  amount  of  such 
credit,  or  in  case  any  tax  payment  credited  is  refunded  in  whole  or  in  part, 
the  taxpayer  shall  immediately  notify  the  Commissioner.  The  Commis- 
sioner will  thereupon  redetermine  the  amount  of  the  income  tax  of  such 
taxpayer  for  the  year. or  years  for  which  such  incorrect  credit  was  granted. 
The  amount  of  tax,  if  any,  due  upon  such  redetermination  shall  be  paid  by 
the  taxpayer  upon  notice  and  demand  by  the  collector.  The  amount  of 
tax,  if  any,  shown  by  such  redetermination  to  have  been  overpaid  shall  be 
credited  against  any  income,  war  profits  or  excess  profits  taxes,  or  install- 
ment thereof,  then  due  from  such  taxpayer  under  any  other  return,  and 
any  balance  of  such  amount  shall  be  immediately  refunded  to  him.  See 
section  252  of  the  statute  and  articles  1031-1038  [for  abatement,  credit  and 
refund  of  taxes,  1J2115].  (Art.  384,  Reg.  45,  Rev.,  April  17,  1919.) 


INC.  217 


TAX 


CREDIT  FOR  TAXES. 


1295  Law  T|337.  Credit  to  a Domestic  Corporation  Against  Federal  In- 

come and  War  and  Excess-Profits  Taxes  for  Certain 
Income  and  Excess-Profits  Taxes  paid  to  Foreign  Countries  and  for  all 
Such  Taxes  Paid  to  United  States  Possessions  During  the  Taxable  Year. 
— “Sec.  238.  (a)  That  in  the  case  of  a domestic  corporation  the  total 

taxes  imposed  for  the  taxable  year  by  this  title  and  by  Title  III  [war  and 
excess-profits  tax]  shall  be  credited  with  the  amount  of  any  income,  war- 
profits  and  excess-profits  taxes  paid  during  the  taxable  year  ” 

1296  Law  T[338.  “to  any  foreign  country,  upon  income  derived  from 

sources  therein,” 

1297  Law  ]f339.  “or  to  any  possession  of  the  United  States.” 

1298  Law  ^340.  “If  accrued  taxes  when  paid  differ  from  the  amounts 

claimed  as  credits  by  the  corporation,  or  if  any  tax  paid 
is  refunded  in  whole  or  in  part,  the  corporation  shall  at  once  notify  the 
Commissioner  who  shall  redetermine  the  amount  of  the  taxes  due  under 
this  title  and  under  Title  III  for  the  year  or  years  affected,  and  the 
amount  of  taxes  due  upon  such  redetermination,  if  any,  shall  be  paid  by 
the  corporation  upon  notice  and  demand  by  the  collector,  or  the  amount 
of  taxes  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  corporation 
in  accordance  with  the  provisions  of  section  252  [j[2121].  In  the  case  of 
such  a tax  accrued  but  not  paid,  the  Commissioner  as  a condition  pre- 
cedent to  the  allowance  of  this  credit  may  require  the  corporation  to  give 
a bond  with  sureties  satisfactory  to  and  to  be  approved  by  him  in  such 
penal  sum  as  he  may  require,  conditioned  for  the  payment  by  the  taxpayer 
of  any  amount  of  taxes  found  due  upon  any  such  redetermination;  and 
the  bond  herein  prescribed  shall  contain  such  further  conditions  as  the  Com- 
missioner may  require.” 

[For  United  States  bonds  as  security  see  p500.] 

1299  Lawp41.  “(b)  This  credit  shall  be  allowed  only  is  the  taxpayer 

furnishes  evidence  satis factoi*y  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources  within  such  foreign 
country  or  such  possession  of  the  United  States,  as  the  case  may  be,  and 
all  other  information  necessary  for  the  computation  of  such  credit.” 

1300  Lawp42.  Credit  to  a Domestic  Corporation  Making  Return  for 

Fiscal  (Not  Calendar)  Year  Ending  in  1918. — “(c)  If 
a domestic  corporation  makes  a return  for  a fiscal  year  beginning  in  1917 
and  ending  in  1918,  only  that  proportion  of  this  credit  shall  be  allowed 
which  the  part  of  such  period  within  the  calendar  year  1918  bears  to  the 
entire  period.” 

1301  Credit  for  Foreign  Taxes. — For  the  meaning  of  the  terms  used 
in  section  238  of  the  statute  see  section  1 and  article  382  [^292]. 

To  secure  such  a credit  a domestic  corporation  must  pursue  the  same 
course  as  that  prescribed  for  an  individual  by  article  383  [][1293],  ex- 
cept that  form  1118  is  to  be  used  for  claiming  credit  and  form  1119 
for  the  bond,  if  a bond  be  required.  For  the  redetermination  of  the  tax, 
when  a credit  for  such  taxes  has  been  rendered  incorrect  by  later  develop- 
ments, see  article  384  [P294],  all  of  the  provisions  of  which  apply  with 
equal  force  to  a corporation  taxpayer.  For  credit  where  taxes  are  paid 
bv  a foreign  corporation  controlled  by  a domestic  corporation  see  article 
636  [1T18451.  A claim  for  credit  in  such  a case  is  also  to  be  made  on 
form  1118.  (Art.  611,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  218  TAX 


DEDUCTIONS— LOSSES. 


1302  Credit  for  Taxes  Paid  at  the  Source.— Read  p719. 


1303  Lawp26.  All  Business  Losses  Not  Compensated  For  Are  De- 
ductible  by  Individuals. — “(4)  Losses  sustained  dur- 
ing the  taxable  year  and  not  compensated  for  by  insurance  or  otherwise 
if  incurred  in  trade  or  business”;  ' 

Losses  Sustained  by  Corporations  Are  Deducted.— 
Losses  sustained  during  the  taxable  year  and  not  compensated 
tor  by  insurance  or  otherwise,” 

1305  Losses.— Losses_  sustained  during  the  taxable  year  and  not  com- 
pensated  for  by  insurance  or  otherwise  are  fully  deductible  (except 

by  noniesident  aliens)  if  (a)  incurred  in  the  taxpayer’s  trade  or  busi- 
ness, or  (b)  incurred  in  any  transaction  entered  into  for  profit,  or  (c) 
arising  from  fires,  storms,  shipwreck  or  other  casualty,  or  from  theft. 
They  must  usually  be  evidenced  by  closed  and  completed  transactions. 
In  the  case  of  the  sale  of  assets  the'  loss  will  be  the  difference  between  the 
cost  thereof,  less  depreciation  sustained  since  acquisition,  or  the  fair  market 
value  as  of  March  1,  1913,  if  acquired  before  that  date,  less  depreciation 
since  sustained,  and  the  price  at  which  they  were  disposed  of.  See  Section 
^oiii  statute  and  articles  39-46  [for  .sale  of  certain  assets,  beginning  at 
and  1561  [for  basis  for  determining  gain  or  loss  from  sale,  IflOSSl. 
v\  hen  the  loss  is  claimed  through  the  destruction  of  property  by  fire  flood  or 
other  casualty,  the  amount  deductible  will  be  the  difference  between  the  cost 
of  the  property,  or  its  fair  market  value  as  of  March  1,  1913,  and  the  salvage 
value  thereof,  after  deducting  from  the  cost  or  value  as  of  March  1 1913 
the  amount,  if  any,  which  has  been  or  should  have  been  set  aside  and 
deducted  in  the  current  year  and  previous  years  from  gross  income  on 
account  of  depreciation  and  which  has  not  been  paid  out  in  making  good 
the  depreciation  sustained.  But  the  loss  should  be  reduced  by  the  amount 
of  any  insurance  or  other  compensation  received.  See  articles  49  [for  com- 
pensation for  loss,  T[941]  and  50  [for  replacement  fund  for  loss  ^[9421 
A loss  in  the  sale  of  an  individual’s  residence  is  not  deductible.  Losses  in 
“p^^l^jansactions  are  not  deductible.  (Art.  141,  Reg.  45,  Rev.,  April 

1306  Voluntary  Removal  of  Buildings.— Loss  due  to  the  voluntary  re- 
moval or  demolition  of  old  buildings,  the  scrapping  of  old  ma- 

chmery  equipment,  etc.,  incident  to  renewals  and  replacements  will  be 
deductible  from  gross  income  in  a sum  representing  the  difference  be- 
tween the  cost  of  such  property  demolished  or  scrapped  and  the  amount 
of  a reasonable  allowance  for  the  depreciation  which  the  property  had 
undergone  prior  to  its  demolition  or  scrapping;  that  is  to  say,  the  deductible 
loss  IS  only  so  much  of  the  original  cost  of  the  property,  less  salvage,  as 
would  have  remained  unextinguished  had  a reasonable  allowance  been 
charged  off  for  depreciation  during  each  year  prior  to  its  destruction 
When  a taxpayer  buys  real  estate  upon  which  is  located  a building  which 
he  proceeds  to  raze  with  a view  to  erecting  thereon  another  building,  it  will 
be  considered  that  the  taxpayer  has  sustained  no  deductible  loss  by  reason 
of  the  demolition  of  the  old  building,  and  no  deductible  expense  on  account 
of  the  cost  of  such  removal,  the  value  of  the  real  estate,  exclusive  of  old 
improvements,  being  presumably  equal  to  the  purchase  price  of  the  land 

INC.  219 


TAX 


DEDUCTIONS— LOSSES. 


and  building  plus  the  cost  of  removing  the  useless  building.  (Art.  142, 
Reg.  45,  Rev.,  April  17,  1919.) 

1307  Loss  of  Useful  Value.— When  through  some  change  in  business 
conditions  ,th.Q  usefulness  in  the  business  of  some  or  all  of  the 

capital  assets  is  suddenly  terminated,  so  that  the  taxpayer  discontinues 
the  business  or  discards  such  assets  permanently  from  use  in  the  busii^ss, 
he  may  claim  as  a loss  for  the  year  in  which  he  takes  such  action  the  differ- 
ence between  the  cost  or  the  fair  market  value  as  of  March  1,  1913,  of  any 
asset  so  discarded  (less  any  depreciation  allowances)  and  its  salvage  value 
remaining.  This  exception  to  the  rule  requiring  a sale  or  other  disposition 
of  property  in  order  to  establish  a loss  requires  proof  of  some  unforeseen 
cause  by  reason  of  which  the  property  must  be  prematurely  discarded,  as, 
for  example,  where  machinery  or  other  property  must  be  replaced  by  a new 
invention,  or  where  an  increase  in  the  cost  of  or  other  change  in  the  manu- 
facture of  any  product  makes  it  necessary  to  abandon  such  manufacture, 
to  which  special  machinery  is  exclusively  devoted,  or  where  new  legislation 
directly  or  indirectly  makes  the  continued  profitable  use  of  the  property  im- 
possible. This  exception  does  not  extend  to  a case  where  the  useful  fife  of 
property  terminates  solely  as  a result  of  those  gradual  processes  for  which 
depreciation  allowances  are  authorized.  It  does  not  apply  to  inventories  or 
to  other  than  capital  assets.  The  exception  applies  to  buildings  only  when 
they  are  permanently  abandoned  or  permanently  devoted  to  a radically 
different  use,  and  to  machinery  only  when  its  use  as  such  is  permanently 
abandoned.  Any  loss  to  be  deductible  under  this  exception  must  be  charged 
off  on  the  books  and  fully  explained  in  returns  of  income.  But  see  articles 
181-188  [for  the  special  amortization  provisions,  P385].  (Art.  143,  Reg. 
45,  Rev.,  April  17,  1919.) 

1308  Shrinkage  in  Securities  and  Stocks. — A person  possessing  securi- 
ties. such  as  stocks  and  bonds,  can  not  deduct  from  gross  income 

any  amount  claimed  as  a loss  on  account  of  the  shrinkage  in  value  of 
such  securities  through  fluctuation  of  the  market  or  otherwise.  The  loss 
allowable  in  such  cases  is  that  actually  suffered  when  the  securities 
mature  or  are  disposed  of.  See,  however,  article  154  [for  worthless 
securities  as  bad  debts,  111323].  In  the  case  of  banks  or  other  corpora- 
tions which  are  subject  to  supervision  by  State  or  federal  authorities, 
and  which  in  obedience  to  the  orders  of  such  supervisory  officers  charge 
off  as  losses  amounts  representing  an  alleged  shrinkage  in  the  value  of 
property,  the  amounts  so  charged  off  do  not  constitute  allowable  deduc- 
tions. The  foregoing  applies  only  to  owners  and  investors,  and  not  to 
dealers  in  securities,  as  to  whom  see  article  1585  [If  1095].  However,  if 
stock  of  a corporation  becomes  worthless,  its  cost  or  its  fair  market  value 
as  of  March  1,  1913,  if  acquired  prior  thereto,  may  be  deducted  by  the 
owner  in  the  taxable  year  in  which  the  stock  was  ascertained  to  be  worth- 
less and  charged  off,  provided  a satisfactory  showing  of  its  worthlessness 
be  made  as  in  the  C3se  of  bad  debts.  See  article  151  [for  bad  debts, 
111318].  (Art.  144,  Reg.  45,  Rev.,  April  17,  1919.) 

1309  Irrigation  Bonds. — District  irrigation  bonds  generally  are  a lien 
upon  the  real  estate  affected  by  the  irrigation  project,  and  until  a 

corporation  holding  such  bonds  has  taken  the  necessary  action  to^  protect 
its  interest  and  enforce  the  collection  of  the  bonds  the  corporation  will 

220  TAX 


% 


INC. 


DEDUCTIONS— BAD  DEBTS. 

pnv  income,  as  a loss,  the  face  value  or 

value  orsurh  ^ represent  a loss  or  shrinkage  in  the 

value  of  such  bonds.  Any  estimated  shrinkage  in  the  value  of  bonds  or 
other  securities  does  not  constitute  a loss  within  the  meaning  of^this 

can  not  hi°T  j security  is  uncertain  or  unknown  a loss 

;?ri?7iV.?;5  ^aSTras'*)"'*  “ 

1810  Law1[127.  Losses  in  Transaction  Entered  Into  for  Profit  Out- 

ductible  T Business,  if  Not  Compensated  for,  Are  De- 

auctiDle.  (5)  Losses  sustained  durine  the  taxable  4- 

pensated  for  by  insurance  or  otherwisf  ^ inctmred  fn  hv  t-” 

runhf  connected  with  the  trade  L busfnes^-^ 

se^e  P304.]°  general  provisions  applicable  to  corporations 

1311  Law  p29.  Property  Losses  Outside  of  Business,  if  not  Com- 
dmdng  the  taxable  fear'^ol  prS’er'trnJt'SrnecteTwUh  the'trade'orZ?. 
13-  LawpSL  “H^ari.ng^from  fires  -™s 

^ to  IVEake  Return  Even  ThnncrVi  Mrt  t 

Deductible  Losses  SustaiLZ-RSl  "t  P772 

1314  Basis  of  Determining  Gain  or  Loss. — Read  at  flOSS. 

1315  Net  Losses.— Read  at  P097. 


1316  Lawp32.  Worthless  Debts  Are  Deductible.-“(7)  Debts  ascer- 
able  year”;  worthless  and  charged  off  within  the  tax- 

indicate  that  a debt  is  worthless  and^  and  attendant  circumstances 

sufficient  evidence  of  the  worthlessness  of  Z k!  *®®\f^cts  will  be 

IS  sometimes  possible  before  nnrl  Lmessness  in  such  a case 

bankruptcy  shall  have  been  had  Where  ^ ^ settlement  in 

be  worLe^ss  and  changed  it  Sin  -^Tear, 
proceedings  mstituted  against  the  debhr  ^re  terSnaZ  in  a 
confirming  the  conclusion  that  the  debt  is  worthless  wiZnt  E. 

INC.  221 


TAX 


DEDUCTIONS— BAD  DEBTS. 


March  1,  1913,  only  their  value  on  that  date  may  be  deducted  upon  sub- 
sequently ascertaining  them  to  be  worthless.  See  article  52  [for  recoveries 
of  bad  debts,  11945].  If  a taxpayer  computes  his  income  upon  the  basis 
of  valuing  his  notes  or  accounts  receivable  at  their  fair  market  value  when 
received,  which  may  be  less  than  their  face  value,  the  aniount  deductible 
for  bad  debts  in  any  case  is  limited  to  such  original  valuation.  (Art.  151, 
Reg.  45,  Rev.,  April  17,  1919.) 


1319  Examples  of  Bad  Debts.— Worthless  debts  arising  from  unpaid 
v/ages,  salaries,  rents  and  similar  items  of  taxable  income  will  not 

be  allowed  as  a deduction  unless  the  income  such  items  represent  has  been 
included  in  the  return  of  income  for  the  year  in  which  the  deduction  as  a 
bad  debt  is  sought  to  be  made  or  in  a previous  year.  Only  the  difference 
between  the  amount  received  in  distribution  of  the  assets  of  a baimmpt 
and  the  amount  of  the  claim  may  be  deducted  as  a bad  debt.  The  differ- 
ence between  the  amount  received  by  a creditor  of  a decedent  m distribution 
of  the  assets  of  the  decedent’s  estate  and  the  amount  of  his  claim  may  be 
considered  a worthless  debt.  A purchaser  of  accounts  receivable  which 
can  not  be  collected  and  are  consequently  charged  off  the  books  as  bad 
debts  is  entitled  to  deduct  them,  the  amount  of  deduction  to  be  based  ig)on 
the  price  he  paid  for  them  and  not  upon  their  face  value.  (Art.  152,  Reg. 
45,  Rev.,  April  17,  1919.) 

1320  Worthless  Mortgage  Debt. — Where  under  foreclosure  a mortgagee 
buys  in  the  mortgaged  property  and  credits  the  indebtedness  with  the 

purchase  price,  the  difference  between  the  purchase  price  and  the  indebted- 
ness will  not  be  allowable  as  a deduction  for  a bad  debt,  for  the  property 
which  was  security  for  the  debt  stands  in  the  place  of  the  debt.  The  determ- 
ination  of  loss  in  such  a situation  is  deferred  until  the  property  is  disposed 
of,  except  where  a purchase  money  mortgage  is  foreclosed  by  the  vendor 
of  the  property.  See  article  46  [for  losses  in  connection  with  deferred 
payments  on  sales  of  real  estate  on  the  installment  plan,  [[937].  Only  where 
a purchaser  for  less  than  the  debt  is  another  than  the  mortgagee  may  the 
difference  between  the  debt  and  the  net  proceeds  from  the  sale  be  deducted 
as  a bad  debt.  (Art.  153,  Reg.  45,  Rev.,  April  17,  1919.) 


1331  Compromise.— Where  an  indebtedness  is  claimed  and  contested 
and  a settlement  is  had  by  way  of  compromise  whereby  an  amount, 
less  than  the  debt  claimed,  is  accepted  in  full  payment  and  satisfaction  of 
the  debt  the  difference  between  the  amount  paid  and  that  claimed  is  not 
allowable  as  a deduction  for  bad  debts.  Where  the  settlement  in  com- 
promise consists  of  a promise  to  pay  an  amount  lep  than  the  debt 
claimed  the  amount  promised  to  be  paid  forms  the  basis  of  a ne'w  trans- 
action,  and  upon  failure  to  make  good  this  promise  the  question  will  arise 
as  to  the  deductibility  of  the  new  amount  only.  (Art.  8,  ]|93,  Reg.  33, 
Rev.,  Jan.  2,  1918.) 


1322  Reserves  for  Losses  Not  Deductible.— Reserves  to  take  care  of 
anticipated  or  probable  losses  are  not  a proper  deduction  from  gross 
income.  (Art.  126,  Reg.  .33,  Jan.  5,  1914.) 


1323  Worthless  Securities. — Where  bonds  purchased  before  March  1, 
1913  depreciated  in  value  between  the  date  of 'purchase  and  that 
date,  and  were  in  a later  year  ascertained  to  be  worthless  and  charged  off. 


INC.  222  TAX 


DEDUCTIONS— DEPRECIATION. 


the  owner  IS  entitled  to  a deduction  in  that  year  equal  to  the  value  of  the 
bonds  on  March  1,  1913.  Bonds  purchased  since  February  28,  1913  when 
ascertained  to  be  worthless,  may  be  treated  as  bad  debts  to  the  amount 
actually  paid  for  them,  but  not  exceeding  their  amortized  value  if  purchased 
at  a prernium.  Bonds  of  an  insolvent  corporation  secured  only  by  a mort- 
from  which  on  foreclosure  nothing  is  realized  for  the  bondholders  are  re- 
garded as  ascertained  to  be  worthless  not  later  than  the  year  of  the  fore- 
c osure  sale,  and  no  deduction  for  a bad  debt  is  allowable  in  computing  a 
j ^ income  for  a subsequent  year.  To  authorize  a deduction  for 
a bad  debt  on  account  of  notes  held  prior  to  March  1,  1913,  their)  value  on 
that  date  must  be  established.  (Art.  154,  Reg.  45,  Rev.,  April  17,  1919.) 


1324 


1325 


Amounts  Received  as  Dividends  by  Individuals  as  a Credit  for 
Normal  Tax  Purposes.— [p 5 16.] 


Law  p04.  Amounts  Received  as  Dividends  by  Corporations  Are 
Deductible.  ‘(6)  Amounts  received  as  dividends  from 
a corporation  which  is  taxable  under  this  title  upon  its  net  income,  and” 

1326  Law  P05.  ‘‘amounts  received  as  dividends  from  a personal  service 

corporation  out  of  earnings  or  profits  upon  which  income 
tax  has  been  imposed  by  Act  of  Congress  [read  at  j|813] 

1327  Earnings  of  Subsidiary  Company. — In  a case  wherein  a holding 
company  actually  takes  up  each  month  on  its  books  and  credits  sur- 
plus or  profit  and  loss  with  its  proportionate  share  of  the  earnings  of  the 
underlying  companies,  such  holding  company  will  be  required  to-  include  in 
its  gross  income  the  amounts  thus  taken  up,  regardless  of  the  fact  that  the 
same  may  not  have  been  actually  paid  to  or  received  by  it  in  cash.  The 
fact  that  the  underlying  companies  credit  the  holding  company  with  the 
amount  of  earnings  to  which  it  is  entitled  on  the  basis  of  the  stock  it  holds 
together  with  the  fact  that  the  holding  company  takes  up  on  its  books  the 
amount  thus  ci  edited,  renders  it  incumbent  upon  the  holding  company  to 

^ income.  [But  see  “Consolidated  returns,” 

P821.]  (Art.  115,  T[386,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


1328  Lawp33.  Reasonable  Allowance  for  Depreciation  of  Business 

Property  is  Deductible.— “(8)  A reasonable  allowance 
tor  the  exhaustion,  wear  and  tear  of  property  used  in  the  trade  or  business 
including  a reasonable  allowance  for  obsolescence;’ 

1329  LawpOe.  [Corporations.]-‘'(7)  A reasonable  allowance  for  the 

exhaustion,  wear  and  tear  of  property  used  in  the  trade 
or  business,  including  a reasonable  allowance  for  obsolescence;” 

1.330  Depreciation.— A reasonable  allowance  for  the  exhaustion,  wear 
and  tear  and  obsolescence  of  property  used  in  the  trade  or  business 
may  be  deducted  from  gross  income.  For  convenience  such  an  allow- 
ance will  usually  be  referred  to  as  covering  depreciation,  excluding  from 
the  terrn  any  idea  of  a mere  reduction  in  market  value  not  resulting 
from  exhaustion,  wear  and  tear  or  obsolescence.  The  proper  allowance  for 
such  depreciation  of  any  property  used  in  the  trade  or  business  is  that 
amount  which  should  be  set  aside  for  the  taxable  vear  in  accordance  with 
a consistent  plan  by  which  the  aggregate  of  such  amounts  for  the  useful 
life  of  the  property  in  the  business  will  suffice,  with  the  salvage  value,  at 

INC.  223 


TAX 


DEDUCTIONS— DEPRECIATION. 


the  end  of  such  useful  life  to  provide  in  place  of  the  property  its  cost,  or 
its  value  as  of  March  1,  1913,  if  acquired  by  the  taxpayer  before  that  date. 
See  further  articles  839  and  844  [for  depreciation  in  connection  with  in- 
vested capital. — War  Tax  Service].  (Art.  161,  Reg.  45,  Rev.,  April  17, 
1919). 

1331  Depreciable  Property. — The  necessity  for  a depreciation  allow- 
ance arises  from  the  fact  that  certain  property  used  in  the  business 

gradually  approaches  a point  where  its  usefulness  is  exhausted.  The  al- 
lowance should  be  confined  to  property  of  this  nature.  In  the  case  of 
tangible  property,  it  applies  to  that  which  is  subject  to  wear  and  tear,  to  de- 
cay or  decline  from  natural  causes,  to  exhaustion,  and  to  obsolescence  due 
to  the  normal  progress  of  the  art  or  to  becoming  inadequate  to  the  growing 
needs  of  the  business.  It  does  not  apply  to  inventories  or  to  stock  in  trade; 
nor  to  land  apart  from  the  improvements  or  physical  development  added  to 
it.  It  does  not  apply  to  bodies  of  minerals  which  through  the  process  of 
removal  suffer  depletion,  other  provision  for  this  being  made  in  the  statute. 
See  articles  201-233  [for  depletion  p407].  Property  kept  in  repair  may, 
nevertheless,  be  the  subject  of  a depreciation  allowance.  See  article  103 
[for  repairs,  ][1200].  The  deduction  of  an  allowance  for  depreciation  is 
limited  to  property  used  in  the  taxpayer’s  trade  or  business.  No  such  al- 
lowance may  be  made  in  respect  of  automobiles  or  other  vehicles  used  chiefly 
for  pleasure,  a building  used  by  the  taxpayer  solely  as  his  residence,  nor  in 
respect  of  furniture  or  furnishings  therein,  personal  effects,  or  clothing;  but 
properties  and  costumes  used  exclusively  in  a business,  such  as  a theatrical 
business,  mav  be  the  subject  of  a depreciation  allowance.  (Art.  162,  Reg.  45, 
Rev.,  April  17,  1919.) 

1332  Depreciation  of  Intangible  Property. — Articles  163,  Regulations 
No.  45,  is  modified  to  read  as  follows  by  eliminating  therefrom  the 

last  sentence  reading.  “There  can  be  no  such  allowance  in  respect  of 
good  will,  trade  names,  trademarks,  trade  brands,  secret  formulae  or 
processes” : 

Art.  163.  Depreciation  of  intangible  property.  Intangibles,  the  use  of 
which  in  the  trade  or  business  is  definitely  limited  in  duration,  may  be  the 
subject  of  a depreciation  allowance.  Examples  are  patents  and  copyrights, 
licenses  and  franchises.  Intangibles,  the  use  of  which  in  the  business  or  trade 
is  not  so  limited,  will  not  usually  be  a proper  subject  of  such  an  allowance. 
If,  however,  an  intangible  asset  acquired  through  capital  outlay  is  known 
from  experience  to  be  of  value  in  the  business  for  only  a limited  period,  the 
length  of  which  can  be  estimated  from  experience  with  reasonable  certainty, 
such  intangible  asset  may  be  the  subject  of  a depreciation  allowance,  pro- 
vided the  facts  are  fully  shown  in  the  return  or  prior  thereto  to  the  satis- 
faction of  the  Commissioner.  (T.  D.  2929,  October  7,  1919,  amending  Art. 
163,  Reg.  45,  Rev.) 

1333  Allowance  for  Obsolescence  of  Good-will,  Trade-marks,  and  Trade 
Brands  in  the  Case  of  Distillers,  Dealers  in  Liquors,  etc. — Receipt 

is  acknowledged  of  your  letter  of  March  12,  1919,  in  which  you  re- 
quest a ruling  to  the  effect  that  distillers  and  dealers  in  liquors  may 
for  the  year  1918  take  a reasonable  amount  of  obsolescence  of  good- 
will, trade-marks,  and  trade  brands,  the  value  of  which  has  been  impaired 
or  destroyed  by  prohibition  legislation.  In  reply  you  are  advised  that  a 

224  TAX 


INC. 


DEDUCTIONS— DEPRECIATION. 

reasonable  allowance  for  obsolescence  of  such  assets  may  be  taken  by  dis- 
tillers and  dealers  in  liquors  against  earnings  between  November  21,  1918, 
the  date  upon  which  the  Agricultural  Appropriation  act,  providing  for  war- 
time prohibition  was  enacted,  and  July  1,  1919,  the  date  upon  which  the  war- 
time prohibition  is  to  become  effective.  To  sustain  a claim  for  a deduction 
for  obsolescence  in  respect  of  good-will,  trade-marks,  or  trade  brands,  the 
taxpayer  must  show  that  the  value  of  the  property  in  question  has  been 
destroyed  or  will  be  destroyed  not  later  than  June  30,  1919,  and  that  the 
taxpayer  is  not  continuing  in  any  similar  trade  or  business.  An  allowance 
will  be  made  only  in  respect  of  such  assets  as  are  assignable  as  distinguished 
from  those  attaching  to  the  individuals  owning  or  conducting  the  business 
or  to  the  premises  at  which  it  is  being  or  has  been  conducted.  No  allowance 
for  obsolescence  will  be  made  in  any  case  where,  in  connection  with  the 
operation  of  his  previous  business,  the  taxpayer  has  developed  a good-will, 
trade-mark,  or  trade  brand  that  will  be  valuable  in  continuing  a lawful 
business  after  June  30,  1919. 

1334  The  values  will  be  based  on  those  as  at  March  1,  1913,  if  the  good- 
will, trade-marks,  or  trade  brands  were  acquired  or  established  prior 
to  that  date,  or  atMie  actual  cost  thereof,  if  acquired  subsequent  to  February 
28,  1913. 

133o  Information  helpful  in  establishing  the  values  would  be  of  the  fol- 
lowing general  character  : 

1336  A.  Where  the  good-will,  trade-marks,  or  trade  brands  were  ac- 
quired prior  to  March  1,  1913: 

1.  The  nature  of  business  (whether  distillers,  wholesalers,  or 
retailers,  or  a combination  thereof.) 

2.  Date  of  foundation  of  business  and  whether  organized  as 
an  individual,  partnership,  or  corporation.  Also  date  and  par- 
ticulars of  each  change  in  the  ownership  or  form  of  organiza- 
tion of  the  business,  such  as  the  admission  or  retirement  of  a 
partner  or  partners;  the  incorporation  of  a company  and  of  each 
reorganization  thereof. 

3.  In  respect  to  the  trade-marks  or  trade  brands  for  which  a 
deduction  is  claimed  : 

(a)  The  date  established  and  by  whom. 

(b)  The  date  of  acquisition  by  the  present  owners. 

(c)  The  price  paid  therefor  and  whether  paid  in  cash  or 
stock;  if  the  latter,  state  the  basis  of  the  valuation  on  which 
the  purchase  price  was  determined. 

(d)  For  each  year  from  1900  or  the  date  of  the  establish- 
ment of  the  trade-mark  or  trade  brand,  if  subsequent  to  that 
year  to  1919  inclusive: 

(I)  Annual  sales  (quantity  and  amount). 

(TT)  The  gross  profit  on  sales  (i.  e.,  the  difference  be- 
tween the  selling  price  and  the  cost  price  of  the  mer- 
chandise sold). 

nil)  The  total  expenses  and  losses  of  the  business 
which,  when  deducted  from  the  gross  profit  on  sales,  will 
produce — 

fIV)  The  net  income. 

Where  the  records  permit,  the  sales  and  gross  profit  on 
sales  should  be  submitted  for  each  class  of  merchandise 


INC. 


225 


TAX 


DEDUCTIONS— DEPRECIATION. 


(1336)  sold  and,  if  possible,  for  each  trade-mark  or  trade  brand 
in  respect  of  which  a deduction  is  claimed. 

(V)  The  amount  of  capital  invested  in  the  business 
(i.  e.,  capital  or  capital  stock  and  paid  in  or  earned  surplus 
and  undivided  profits)  as  at  the  beginning  of  each  year. 

(VI)  The  amount  included  in  the  invested  capital  at 
the  beginning  of  the  period  in  respect  of  good-will,  trade- 
marks, or  trade  brands  and  the  date  and  amount  of  each 
subsequent  addition  to  the  good-will,  trade-marks,  or  trade 
brands. 

(e)  Full  details  of  each  offer  to  purchase  any  of  the  trade- 
marks or  trade  brands,  setting  forth  in  particular  the  date  of 
each  offer,  by  whom  and  on  whose  behalf  made;  the  amount 
of  each  offer,  and  whether  payable  in  cash  or  stock ; and  the 
date  or  dates  on  which  the  purchase  price  was  proposed  to 
be  paid,  and  the  amounts  to  be  paid  on  each  such  date. 

4.  Where  a deduction  is  claimed  in  respect  of  good-will,  as 
distinct  from  trade-marks  or  trade  brands,  the  following  informa- 
tion should  be  submitted : 

(a)  The  date  of  acquisition,  and  from  whom  acquired. 

(b)  The  amount  paid  therefor  and  whether  paid  in  cash 
or  in  stock.  If  the  latter,  state  the  basis  of  the  valuation  on 
which  the  purchase  price  was  arrived  at. 

(c)  For  each  year  from  1900  or  the  date  of  acquisition,  if 
subsequent  to  that  year,  to  1919,  inclusive: 

(I)  The  annual  sales  of  the  business  (quantity  and 
amount)  classified,  if  possible,  as  to  the  various  kinds  of 
merchandise  sold. 

(II)  Gross  profit  on  each  class  of  merchandise  sold, 
or  if  the  records  do  not  disclose  the  information,  the 
gross  profit  of  the  business  as  a whole. 

(III)  Total  yearly  expenses  and  losses  of  the  business 
which,  when  deducted  from  the  gross  profit  on  sales,  will 
produce — 

(IV)  The  net  income  from  the  business. 

(V)  The  amount  of  capital  invested  in  the  business 
(i.  e.,  capital  or  capital  stock  and  paid  in  or  earned  surplus 
and  undivided  profits),  as  at  the  beginning  of  each  year. 

(VI)  The  amount  included  in  invested  capital  at  the 
beginning  of  the  period  in  respect  of  good-will  and  the 
date  and  amount  of  each  subsequent  addition  to  good- 
will, trade-marks,  or  trade  brands. 

(d)  Full  details  of  each  offer  to  purchase  the  good-will, 
setting  forth  in  particular  the  date  of  each  offer;  by  whom 
and  in  whose  behalf  made;  the  amount  of  each  offer  and 
whether  payable  in  cash  or  in  stock,  and  the  date  or  dates  on 
which  the  purchase  price  was  proposed  to  be  paid,  and  if  on 
more  than  one  date,  the  amount  payable  on  each  such  date. 

1337  B.  Where  good-will,  trade-marks,  or  trade  brands  were  acuired 
subsequent  to  February  28,  1913 : 

(1)  Dates  of  acquisition  of  good-will  or  of  each  trade-mark 
or  trade  brand. 

(2)  From  whom  acquired. 


INC. 


226  TAX 


arlj  : si: 


vioiTAio3Hq3a--aMOiT3uaaa 

DEDUCTIONS— DEPRECIATION. 

Lin  aib  ,8JQI  Jc  \ '£ijnrJ 


lO 


3JBb  -d^^cje-niark  ar.-Uad^  r-vrf 


^ brand? 

rrfr  * 


3LrmfffCA2rb  am  vinoiA  37£D  iLi>  ^ 

'4'f  ^?the^yaluatipn0Qnj\v^^  was  -arrived 


cax.2t  3f{7  bInoi!£  plxjb  'isjhna  n£  7n  ’lo 


GbPi 


8231:; 


% 


j20D  5Li^^  lu^: 


3fb  msb  -13 b'!,.::  : ;^ 

34:.  ^nd  in 


.''i  •j.pamarjg.  airb  aamiitrrooaib  73v.nq;^£7  - 

. }f ears  prior  to 


-T 


.,  ac- 


mm. 

rr  T.,^Sii|S  .p;?^  b^jq7?13^E^t^tenifintps3io^i  &e;subm 

snbWin'g’  the'  aeveiOptnent  of  pfoHihitionr^nd  iQeal^pptidnJaws  within  the 
territory  of  the  taxpayer  during  the  fiVe  years  VrededingriVIarcH  ^ 
Sup^jStatepjipnt  shouM  sl^w  eac4::ProhiH  ptr  local  opriO:Q  Jaw  ..enacted 

of 

t^payet;  and'shotddal^b'^sfate  th%  unsifccessdui  ^e ff o r f s r at ‘ s'u cH  legis- 
^i5c4bP«^dd.^^^^(Eetirerrit)'Wr/L4^^^  Washington,  D- 

Gipsl^hedtbrC-oinniissidni^iIJa^^  antf  dated  tiihe  21;  iPlP.V 

yt  3:;b  ,23i7;7n332  s:;:!  bnc  &>do:2  ,2Dn:::i  ■ ..:  ::•  ^. , 

mm.ia  ^ considered: th§.  request: Gpntained  in  your  letter 

of  June  23  last  for  a modificati on  . tjf  the  rulmg"  relative  to  - obso- 
lescence^ of^  good-will,  trade-marks,  and  trade  brands  of  distillers  and 
dealers  .in  liquors,:  ;the  value^of  which  has  beep  rimpa^^^^^  destroyed  by 
prohibition  legislatidn,:  contained  in  Jhis:  departmeiLt’s  letter  to  you.  of  June 
P^rdonlar  modification  yQU'>desire  is  an  .extension  of  the  period  set 
fprdl  jq,  the  ruling- ^ajbq^^  referred  - to  againsri  the^  earnings  ; of  which;  the 
obsojescence  may  ! be.  taken  as  ^ deduction.  Jg-  : / 

foplyg>^ou  atO:adYised?  (IJ4haridi.std-lefs  and' dealers  in.  liquors 
are  entitled  to  make  a deduction  (hasedgupon;  actual  cost  or  fair  mar- 
ket value  as  of  March  1,  1913)  from  gross  income,  on  account  of  deprecia- 
^hsolescencc  ok,  their  intangibles,  such  as : good  will,  trade:-marl<:s, 
trade;  brands^,  etc.i  -such  deduction-  being  limited  to  a^ignable  assets,  the 
value  of  which  hasybeen- destroyed  by  prohibition  legislation,  and  (2)  that 
in  arriving  at  the  taxable  income  for  the,  first  taxable  year  ending  on  or 
after  January  31^  1918,  tfie  obsolescence  -fully  accrued  on  that  dateris  to  be 
allowed  as  a deduction  in  computing  the  income  subject  to.  taxation  under 
the  Jievenue  Act  of  1918,.,  plus  a further,  deduction  .o£  suchl  proportion  of 
the  remaining  value  of  the  intangible  assets  as  the  interval  between;  January 
31,-  lr918,-and  the  end  of  thcriaxable  year ‘bears  to  the  total  interval  between 
January  31,  1918,  and  January  lh,  ,1920,  (unless  at  anbearlier  date  the  tax- 
payer discontinues  his  business:,  in  which  case  such  earlier  date  shall  mark 
the  close  of  the  periodj;  and  (3).  that  for  any  taxable  year  following  the 
taxable  year -just  referred  to.  a deduction  in  respect,  of  the  v&ltie  of  such 
intangible  assets  on  January  31,  191<8,  based  upon^'a  ratable  distribution  will 
be  permissible.  ' i ' < ■ 

J,.342  the  opinion  of  the-department  that  the; ratification  of.  the  18th 

amendment  in  thernonth  of  January,  1918,  by  the  States  of  Massa- 
chusetts, Maryland,  and  Kentucky,  was  the  first  definite  indication  that  the 
prohihititMi  aAiendment  . would  he  ratifieckbyr^he  -requisite-  qumben.  of  State 
Legislatures,,  and  therefore  that  osi  January  31,  1918,  a computable  portion 
of  the  cost  of  good  will,  trade-marks,  trade  iH-ands,  or‘ the  value  thereof,  on 
March:  1,  1913  if  acquired  prior  thereto  (excluding  any  intangibles  acquired 
mnce  that  date,  the  expenditures  of  which  \Vere  deductible  and  had  been 
deducterl  in  computing  income  for  tax  purposes)  had  become  obsolescent. 


INC. 


227 


TAX 


DEDUCTIONS—DEPRECIATION. 


On  January  31,  1918,  the  intangible  assets  had  an  actual  value,  viz : the 
then  present  value  of  the  income  to  be  derived  therefrom  between  that  date 
and  January  16,  1920,  or  at  an  earlier  date  should  the  taxpayer  discontinue 
his  business  prior  thereto.  This  value  as  stated  above  should  be  distributed 
ratably  over  the  period  from  January  31,  1918,  to  January  16,  1920  (unless 
at  an  earlier  date  the  taxpayer  discontinues  his  business,  in  which  case 
such  earlier  date  shall  mark  the  close  of  the  period).  The  excess  of  the  cost 
of  the  intangibles  or  the  value  thereof,  on  March  1,  1913,  if  acquired  prior 
thereto  (subject  to  the  exclusions  mentioned  above),  over  the  value  thereof, 
as  of  January  31,  1918,  determined  as  outlined  above,  will  represent  the 
amount  of  obsolescence  that  was  fully  accrued  on  January  31,  1918.  (I^etter 
to  Mr.  Levi  Cooke,  Washington,  D C.,  signed  by  Acting  Commissioner  J.  H. 
Callan,  and  dated  August  19,  1919.) 

1343  Depreciation  in  the  Value  of  Stocks,  Bonds*  etc.  [Read  ]fl308 
and  jfl323.]  [For  inventories  of  securities  by  dealers  therein,  read 

at  ]fl095.] — The  depreciation  referred  to  in  the  income  tax  law  does  not 
relate  to  evidence  of  a right  or  interest  in  property  and  hence,  any  shrink- 
age in  the  value  of  bonds,  stocks,  and  like  securities,  due  to  fluctuations 
in  their  market  value,  is  not  deductible  in  a return  of  income  as  depreciation 
or  loss.  (T.  D.  2005,  July  8,  1914.) 

1344  sK  « jk  depreciation,  applies  only  to  such  tangible  property  as  is 
subject  to  wear  and  tear,  exhaustion  and  obsolescence,  and  is  not  to  be 

construed  as  recognizing  any  gain  or  loss  due  to  fluctuations  in  the  market 
value  or  arbitrary  changes  in  the  book  value  of  securities  and  like  assets, 
the  gain  or  loss  with  respect  to  which  will  be  determined  only  when  such 
assets  mature,  or  are  sold  or  disposed  of — that  is,  when  there  is  a completed, 
a closed  transaction.  (T.  D.  2077,  Nov.  21,  1914.) 

1345  Bonds  and  securities  are  not  subject  to  wear  and  tear  within  the 
meaning  of  the  Federal  income  tax  law,  and  therefore  depreciation 

does  not  apply  to  any  shrinkage  in  their  value.  Shrinkage  in  the  value  of 
securities,  as  such,  does  not  constitute  a loss  actually  sustained  within  the 
year,  the  amount  of  which  is  definitely  ascertained.  Therefore,  under  the 
rules  of  this  office  and  consistent  with  the  provisions  of  the  law,  a shrinkage 
in  the  value  of  bonds  or  like  securities  does  not  constitute  an  allowable  de- 
duction from  gross  income  either  as  loss  or  depreciation. 

1346  xhe  fact  that  bonds  and  similar  securities  were  written  off  at  the 
direction  of  the  Comptroller  of  the  Currency  or  the  State  banking 

department  is  not  material.  A mere  book  entry  does  not  constitute  either 
a loss  or  gain  for  the  purpose  of  the  income  tax.  The  fact  that  bonds  were 
written  off  does  not  necessarily  imply  that  they  are  a total  loss,  nor  is  this 
act  a conclusive  proof  that  any  loss  accurred  during  the  year  for  which 
the  return  is  made.  [See  P308.] 

-^347  Losses  of  this  character  are  only  ascertainable  when  the  securities 
mature,  are  disposed  of,  or  cancelled.  (T.  D.  2152,  Feb.,  12,  1915.) 

1348  Capital  Sum  Recoverable  Through  Depreciation  Allowances. — 
The  capital  sum  to  be  replaced  by  depreciation  allowances  is  the 
cost  of  the  property  in  respect  of  which  the  allowance  is  made,  except  that 
in  the  case  of  property  acquired  by  the  taxpayer  prior  to  March  1,  1913, 
the  capital  sum  to  be  replaced  is  the  fair  market  value  of  the  property  as  of 

228  TAX 


INC. 


8-28.20. 


DEDUCTIONS— DEPRECIATION. 


that  date.  In  the  absence  of  proof  to  the  contrary,  it  will  be  assumec^  that 
such  value  as  of  March  1,  1913,  is  the  cost  of  the  property  less  depreciation 
up  to  that  date.  To  this  sum  should  be  added  from  time  to  time  the  cost  of 
improvements,  additions  and  betterments,  the  cost  of  which  is  not  deducted 
as  an  expense  in  the  taxpayer’s  return,  and  from  it  should  be  deducted 
from  time  to  time  the  amount  of  any  definite  loss  or  damage  sustained  by 
the  property  through  casualty,  as  distinguished  from  the  gradual  exhaustion 
of  its  utility  which  is  the  basis  of  the  depreciation  allowance.  In  the  case  of 
the  acquisition  after  March  1,  1913,  of  a combination  of  depreciable  and 
nondepreciable  property  for  a lump  price,  as,  for  example,  land  and  build- 
ings the  capital  sum  to  be  replaced  is  limited  to  that  part  of  the  lump  price 
which  represents  the  value  of  the  depreciable  property  at  the  time  of  such 
acquisition.  (Art.  164,  Reg.  45,  Rev.,  April  17,  1919.) 

1349  Value  of  Purchased  Buildings  May  Have  to  be  Estimated. — In 
determining  the  cost  of  the  real  estate  upon  which  depreciable  prop- 
erty is  located  it  frequently  occurs  that  no  segregation  is  made  of  the  cost 
of  buildings  as  separate  and  distinct  from  the  cost  of  the  ground  upon  which 
such  buildings  stand.  In  such  cases  where  the  actual  cost  of  the  buildings 
or  improvements  at  the  time  they  were  taken  over  by  the  corporation  can  not 
be  definitely  determined,  it  will  be  sufficient  for  the  purpose  of  determining 
the  rate  of  depreciation  to  be  used  in  computing  the  amount  which  will  be 
deductible  from  gross  income  to  estimate  the  actual  value  at  the  time  ac- 
quired, of  buildings  or  improvements  if  acquired  after  March  1,  1913,  or 
the  fair  market  price  or  value  as  of  that  date  if  the  property  was  acquired 
prior  to  March  1,  1913,  the  value  in  either  case  to  be  reduced  by  the  amount 
of  depreciation  previously  sustained.  (Art.  163,  ^488,  Reg.  33,  Rev.,  Jan. 
2,  1918.) 

1350  Method  of  Computing  Depreciation  Allowance. — The  capital  sum 
to  be  replaced  should  be  charged  off  over  the  useful  life  of  the  prop- 
erty either  in  equal  annual  installments  or  in  accordance  with  any  othei 
recognized  trade  practice,  such  as  an  apportionment  of  the  capital  sum  over 
units  of  production.  Whatever  plan  or  method  of  apportionment  is  adopted 
must  be  reasonable  and  should  be  described  in  the  return.  (Art.  165,  Reg. 
45,  Rev.,  April  17,  1919.) 

1351  Unearned  Increment.— Unearned  increment  will  not  be  considered 
in  fixing  the  value  on  which  depreciation  shall  be  based.  (Art.  146, 

Reg.  33,  Jan.  3,  1914.) 

1352  Rate  for  Computing. — No  definite  rate  has  been  fixed  by  which  an 
allowable  deduction  on  account  of  depreciation  in  the  value  of  any 

class  of  property  subject  to  wear  and  tear  is  to  be  computed,  but  it  is 
contemplated  that  this  allowance  shall  be  computed  upon  the  basis  of  the 
cost  of  the  property  and  the  probable  number  of  years  constituting  its  life. 
(Art.  162,  1[485,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1353  At  what  rates  may  depreciation  be  claimed  and  under  what  condi- 
tions? (Answer.)  As  the  rate  at  which  depreciation  may  be  claimed 

is  dependent,  in  a greater  or  less  extent,  upon  local  conditions,  the  use  to 
which  the  property  is  put,  and  its  probable  lifetime  under  normal  business 
conditions,  no  specific  rates  at  which  it  may  be  claimed  have  ever  been  es- 

229  TAX 


INC. 


DEDUCTIONS—DEPRECIATION. 

tablished.  The  Law  states  that  a “reasonable  allowance’’  may  be  claimed 
taxpayer  to  determine  what  constitutes  a “reasonable  allow- 
ance.” To  compute  the  amount  which  may  be  claimed,  a taxpayer  should 
determine  the  probable  lifetime  of  the  property,  then  divide  its  cost  to  him 
by  the  number  of  years  it  will  be  usable  in  a business  in  which  employed, 
and  the  result  thus  obtained  will  represent  the  amount  which  may  be  claimed 
each  year  as  a deduction,  e.  g.,  a frame  building,  the  probable  lifetime  of 
which,  without  repair  or  replacement,  is  25  years,  cost  $5,000.  Divide  $5,000 
by  25,  and  claim  $200  each  year  as  depreciation. 

1854  While  each  taxpayer  must  determine  the  probable  lifetime  of  his 
property  without  regard  to  the  following  figures,  it  has  been  esti- 
mated that  the  average  usable  lifetime  of  a frame  building  is  25  years,  a 
brick  building  35  years ; a stone  building  or  steel  and  concrete  building, 
50  to  100  years.  The  estimated  lifetime  of  ordinary  machinery  is  ten 
years,  that  of  automobiles  used  for  business  or  farm  purposes  and  farm 
tractors,  four  to  five  years.  (Question  80,  1918  Income  Tax  Primer.) 

1355  Xhe  appended  chaige  of  the  court  to  the  jury  in  the  District  Court 
of  the  United  States  for  the  Southern  District  of  New  York,  in  the 
case  of  Hyman  Cohen  v.  John  Z.  Lowe,  collector,  is  published  for  the  in- 
formation of  internal-revenue  officers  and  others  concerned.  (T.  D.  2343, 
June  14,  1916.) 

Summary  of  Charge. 

1.  Depreciation  Depends  on  Life  of  Building. 

The  physical  loss  or  deterioration  a building  suffers  during  the  tax  year 
depends  on  the  life  of  the  building;  how  many  years  it  would  remain  so  as 
to  be  habitable  for  general  purposes  for  which  it  was  constructed. 

2.  Yearly  Deductions. 

The  average  amount  of  deduction  each  year  covers  the  annual  percentage. 

3.  Deductions  for  Improvements. 

When  allowance  is  made  for  depreciation  of  a building  no  deduction  shall 
be  allowed  for  expense  of  restoring  the  building  or  making  good  the  ex- 
haustion thereof. 

4.  Exhaustion,  Wear  and  Tear. 

The  word  “exhaustion,  wear  and  tear”  of  a building  contemplate  only 
depreciation  of  the  physical  property  itself,  irrespective  of  its  adaptability 
to  the  use  originally  intended  or  the  changing  environments. 

5.  Decrease  in  Rental  Value. 

No  allowance  can  be  made  for  depreciation  by  reason  of  decrease  in 
rental  value  nor  in  value  arising  from  lack  of  modern  improvements. 
Opinion  of  the  Court  in  the  Above  Case. 

[234  Fed.  474.] 

1857  The  plaintiff  was  allowed  3 per  cent  for  depreciation  on  an  apartment 
house  owned  by  him.  The  burden  is  on  him  to  show  that  the  depre- 
ciation so  allowed  was  too  small.  This  allowance  is  for  the  wear  and  tear 
suffered  by  the  building  during  the  tax  year,  which  means  the  physical  de- 
terioration that  the  building  suffered  during  that  period.  It  does  not  take 
into  account  depreciation  in  value  due  to  a loss  in  rental  value  because  of 
the  construction  of  more  modern  buildings  with  improved  facilities  or  due 
to  a change  in  the  neighborhood.  It  is  to  be  based  upon  the  life  of  the 
building  in  the  sense  of  the  number  of  years  the  building  would  remain 
in  a condition  to  be  habitable  for  the  use  for  which  it  was  constructed  and 
used;  and  which  was  in  the  instant  case  for  an  apartment  house,  and  not 

230  TAX 


INC. 


^^  •the  nuriibei-^5^  it  Uoum^^M  'BeH^^abitenit^d  anci 

mM  ^d6\\iji;  anritfat  W^^Vid  be^atf 'aJi^buntd-apra^^^^  by 

d^^cti^m/baving-biie  JoT-tbe^n^imyt^ap  %e'iitin3)er  of 

^arsV’reijm^n^bb^'r^^^r^itt^^  Hfe^bPlbebuildfrig Wtje^^ehbffiiri^^ 
Thi^assbines^Haft-thl^e  woukffe^aStJaV^fap^feteiiic^ti^'ltfffa^d^cli’yestf 
dunhgdHeS’Iifet'OraeybtitJdffig]  4i»^at W^lMitttiiFwotiia^a^liie^buiM^ 

mg  m good  repair  during  the  This rih^-law  eMtW  b™ 

tlies^  ^assumptions^  and, giving :ttfe^.u^niri^ 

¥€a-^najh^,:aljb>vancf th,^  g-:^Ba,us^c^>  ri^aai-oi^itbenproperty, 

prising  o^r<9-f;-  r-pse  rpV e^n)Bteyni^intYin,9thg  b;Ugine$:53,”3the£  ab^junt^oriihe 

dednot^n^aUp{^^^ed  rby  lfep':  <5^y^rpp|^nri.j:^^r,d^7piainrii0E:.  ongthia. account- 
d^n?.^d‘ tOi  •bg:;'.i^'^asonabj€.[)3^2^^x'^Odi  ^3:if?7  ('iis  orlT*  .oioisiii  7oiic| 

rloiiriV:  io  ei;  orrisv  i57f7JB.rfi  gji  lo  io  jdgrivqoD  lo  ^notsq  oAl  io  tdoo  ddi 
135^0.  .j^gj^j-ecMtibii^  Ohafa'ta.d^in 

.9d  veT.,^^6SK1fts26r^4bntiku^sl^,^^^eri$nd0'T^r‘mkdb^-h(^d^^8 
dMie-frshriMaWin-S^ditah^^  tW^sHiPmIding^0orb3fafidh’hn^d 

M»^%imM?iah:h»erfts  ^hai^^be6n50npfe  diMi^hldn^ay  to'  ^fHethef■ 
6r ' hbf  -dr?$n]3eba'r  Wih/  inbeoi^hricftiibfP^dth’'  the'’medhie^dhd  dxcOfe’s^' 
b^ofifs  alfeW^d^  ^ d"e^Richoh9d0bf0o?a'tfon^1^%ighdriffi^h  fatbs 

in  cas^s^'mefe^^o  sMffspa^re  b^hgCH^ri&(|dt^ji^  fhe^pfaiti  lhachiherf 'and 
equrph^nt  dtri^bpdraf(^d‘^xleen'ib¥  t^ni^-fah^^millrl^^  W|rdrP^l§^  6f'-*e 
usual;  b^glh  V^hme  'hbMgbf  ki^  ih^rhi^cf  ^hM^if  ii^mvibus 

#iat  ‘rh  i \^^fe‘^achth<et37-ahd0bidf^-’iibni^^^  •than''the 

V^’]fiuihfe  of ' 'Hbuf If^atbk^  iW W'dapferiktiOh ' k^ould^  \Sh 

d^irchbfb ^ih^’dd^r^Mihf  -a:  cbfiibFatibtj  dilb* to 

d^b.i^aiaf  ibh  '^'^buid ’ BB ' ^ha^^base^’ih  ;th6^e^ent ' th^ ^di'e’^thhchinery  riva's 
dfWdgpe^ted'bik^^^bFm^did*  t^b^hormM  fimev --jlThef^orb  yoti'afo 
-,^1^ eat0ri;ra»bf  jdebreriaribn  -aMowedritV^he  case  you' 

mentioned'' put  f/bT  defihife  kijhn^s  ■ felakve  the*f0tcP  ‘cahnia^giveif  exde^bt ' 
^d(^d' cdse^f  \vhfab  a:feq^i^0sehted  fodhi%-bfficb!  for  bbhsidOi^tioh^ih  cbhnection 
iy?th  a'  fill?  ^iafeiri'eht :6f'fa0t^‘ Shtl%hh^es^ relative  thehetbi  • '(.Better'  fb^’E.'  Gi- 
.%bVrdch  ‘S:\'Cpv''SettttlbriWashk  ri’ghed  ■ by^ -Deputy  Gomm'i^sionef^  Ed  F.' 
Speeri' ahd'datbd' [pLiIv'12^' IQiBv}'  ^'1  '■  u -ad  r ? si  m-  mc  . ,: 

7- - C' ;:3  >r‘;7.  ; '.:  = romr  >7  'v.-  , ;'d.:,  .7  'ffr  i-.'  ,.  . 

Mpdiiication  of  |det1ic^d,  of  CprnpuUn^  Deprgc^'ri^^  it  devel- 
,'1  d dsefvil  tifcr  b{^'(hed^rpj^  bas  been  underesfjmated,  the 

pfan  of  conTpiifirig  depfeciahon  s non  Id  be'  modified  and  me  balance  of,  fhe 
cost  of  the  ])roperty,  or  its  fair  market  value  as  of  March  1,  19Li/not 
already  prQf\dded,  ior  , through: -^t  depreciation  reserve  on.;  deduqted  from 
book  vahie,-' should :he  spread  over  the.  estii'nated  remaining  life  of-  due  prop- 
erty.- A taxpay-er;  who  in  Computing  .depreciation  ailovrances  in  retiinis  for 
yearS'  prior  to  191;8,=  has  not  taken  ordinary  ohsiolescencedinto  .consideration 
Diayrior  the  year  l91cS- a.ncl  subsconent  wears  rerdsefthe  estimate  of  the  use-^ 
ful  life  oEanv  property  so  as  to  aliow  for  si-ijch  future  obsolescence  as  may 
he  CKpected.  from  :expe.rienGe  to- result  from  thei  normal  progress  of  thei  art. 
No  mbdrficajt'ion  of  .the i method  shouid  be  made  on  account  of.  ,. changes 
in -the  iimrlcet -value  of 'the  .pa-f)]>er11y  from,  time  to  time,  such  as,;iOvn'  the  one 
hand-,  los.s  in  rentali  value  jof-huildings*due  .to  deterioration  of  dhe  neighborr 
hoody'or,  on  the  other,  appreciation;  due  to ‘increased  demanxl,;  The  condi-r 
tion 8 affecting; such  market  values  ; should  be, 'taken  .bito  cohridcration  only 
so- far  as  they  affect- the  estimatoof  the  useftiTlife  bf  ahelpropertv.  - (Art. 
166,  Kdg:  45, ■- It ev/,i  "April  17; 1 19101). d ^ v'  ; ,t ?.eo\  )■  ; - fid  ^ ^ 

Ti^'c.‘  T'if  rAk* 


DEDUCTIONS— DEPRECIATION. 


1360  Depreciation  in  Excess  of  Cost. — If  it  develops  that  by  reason  of 
underestimating  the  life  of  the  property  or  by  overestimating  the  rate 

of  deterioration  an  amount  in  excess  of  the  yearly  depreciation  has  been 
taken,  tlie  rate  applicable  to  future  years  should  at  once  be  reduced  and  Uie 
balance  of  the  cost  of  the  property  not  provided  for  through  a depreciation 
reserve  should  be  spread  over  the  estimated  remaining  life  of  the  property. 
(Art.  165,  11491,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1361  Depreciation  of  Patent  or  Copyright. — In  computing  a deprecia- 
tion allowance  in  the  case  of  a patent  or  copyright,  the  capital  sum 

to  be  replaced  is  the  cost  (not  already  deducted  as  current  expense)  of  the 
patent  or  copyright  or  its  fair  market  value  as  of  March  1,  1913,  if  acquired 
prior  thereto.  The  allowance  should  be  computed  by  an  apportionment  of 
the  cost  of  the  patent  or  copyright  or  of  its  fair  market  value  as  of  March 
1,  1913,  over  the  life  of  the  patent  or  copyright  since;  its  grant,  or  since  its 
acquisition  by  the  taxpayer,  or  since  March  1,  1913,  as  the  case  may  be. 
If  the  patent  or  copyright  was  acquired  from  the  Government,  its  cost 
consists  of  the  various  Government  fees,  cost  of  drawings,  experimental 
models,  attorney’s  fees,  etc.,  actually  paid.  If  a corporation  purchased  a 
patent  and  paid  for  it  in  stock  or  securities,  its  cost  is  the  fair  market  value 
of  the  stock  or  securities  at  the  time  of  the  purchase.  Depreciation  of  a 
patent  can  be  taken  on  the  basis  of  the  fair  market  value  as  of  March  1, 
1913,  only  when  affirmative  and  satisfactory  evidence  of  such  value^  is  of- 
fered. Such  evidence  should  whenever  practicable  be  submitted  with  the 
return.  If  the  patent  becomes  obsolete  prior  to  its  expiration  such  propor- 
tion of  the  amount  on  which  its  depreciation  may  be  based  as  the  number  of 
years  of  its  remaining  life  bears  to  the  whole  number  of  years  intervening 
between  the  date  when  it  was  acquired  and  the  date  when  it  legally  expires 
may  be  deducted,  if  permission  so  to  do  is  specifically  secured  from  the 
Commissioner.  Owing  to  the  difficulty  of  allocating  to  a particular  year  the 
obsolescence  of  a patent,  such  permission  Vv^ill  be  granted  only  if  affirmative 
and  satisfactory  evidence  that  the  obsolescence  occurred  in  the  year  for 
which  the  return  is  made  is  submitted  to  the  Commissioner.  The  fact  that 
depreciation  has  not  been  taken  in  prior  years  does  not  entitle  the  taxpayer 
to  deduct  in  any  taxable  vear  a greater  amount  for  depreciation  than  would 
otherwise  be  allowable. ' [See  1T1373.]  See  articles  40  [for  sale  of  patents 
and  copvrights,  1j912]  and  843  [for  valuing  patents  for  purposes  of  in- 
vested capital.— War  Tax  Service].  (Art.  167,  Reg.  45,  Rev.,  April  17, 
1919.) 

1362  Depreciation  of  Drawings  and  Models.— A taxpayer  who  has  in- 
curred expenses  in  his  business  for  designs,  drawings,  patterns, 
models,  or  work  of  an  experimental  nature  calculated  to  result  in  improve- 
ment of  his  facilities  or  his  product,  may  at  his  option  deduct  such  expenses 
from  gross  income  for  the  taxable  year  in  which  they  are  incurred  or  treat 
such  articles  as  a capital  asset  to  the  extent  of  the  amount  so  expended.  In 
the  latter  case,  if  the  period  of  usefulness  of  any  such  asset  may  be  esti- 
mated from  experience  with  reasonable  accuracy,  it  may  be  the  subject  of 
depreciation  allowances  spread  over  such  estimated  period  of  usefulness. 
The  facts  must  be  fully  shown  in  the  return  or  prior  thereto  to  the  satis- 
faction of  the  Commissioner.  Except  for  such  depreciation  allowances  no 
deduction  shall  be  made  by  the  taxpayer^  against  any  sum  so  set  up  as  an 
asset  except  on  the  sale  or  other  disposition  of  such  assets  at  a loss  or  on 
proof  of  a total  loss  thereof.  (Art.  168,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  232  TAX 


DEDUCTIONS— DEPRECIATION. 


1363  Charging  Off  Depreciation. — A depreciation  allowance,  in  order 
u allowable  deduction  from  gross  income,  must  be 

charged  off.  The  particular  manner  in  which  it  shall  be  charged  off  is  not 
material,  except  that  the  amount  measuring  a reasonable  allowance  for  de- 
preciation must  be  either  deducted  directly  from  the  book  value  of  the  as- 
sets  or  preferably  credited  to  a depreciation  reserve  account,  which  must  be 
reflected  in  the  annual  balance  sheet.  The  allowances  should  be  computed 
and  charged  off  with  express  reference  to  specific  items,  units  or  groups  of 
property,  each  item  or  unit  being  considered  separately  or  specifically  in- 
cluded m a group  with  others  to  which  the  same  factors  apply.  The  tax- 
payer should  keep  such  records  as  to  each  item  or  unit  of  depreciable 
property  as  will  permit  the  ready  verification  of  the  factors  used  in  comput- 

TsR  ^ a ^1919^)^  group.  (Art.  169,  Reg. 


1364  In  view  of  the  fact  that  it  has  been  the  practice  of  examining  offi- 
cers  to  disallow  a deduction  for  depreciation  or  depletion  if  not 

charged  off  on  the  books  of  the  corporation  at  the  time  of  the  investigation 
it  IS  deemed  necessary  to  clarify  the  interpretation  of  this  provision  of  the 

1365  A corporation  is  not  entitled  to  a deduction  from  the  amount  of  its 
^ gross  income  of  any  amount  for  depreciation,  depletion,  or  other  loss 

sustained  within  the  taxable  year  unless  the  amount  of  such  depreciation, 
j’  charged  off  on  the  books  of  the  corporation  before 

such  deduction  is  allowed.  The  purpose  of  this  requirement  that  depreci- 
ation depletion,  and  other  losses  be  charged  off  on  the  books  of  the  corpora- 
tion before  allowance  is  to  insure  that  the  returns  of  such  corporation  are 
m accord  with  its  books  of  account,  and  that  thereby  error  and  fraud  with 
respect  to  the  facts  are  prevented.  The  statute  is  not,  however,  to  be  con- 
strued  as  requiring  that  depreciation,  depletion,  and  other  losses  be  charged 
ott  within  the  taxable  year.  It  is  sufficient  that  they  are  charged  off  before 
they  are  allowed  as  deductions.  Consequently  at  the  time  of  an  examina- 
lon  of  a corporation  it  should  be  given  an  opportunity  to  reopen  its  books 
and  charge  off  depreciation,  depletion  and  other  losses  which  it  actually 
sustained  during  the  taxable  year. 

1366  The  depreciation,  depletion,  and  other  losses  must  be  charged  off  in 
^ the  manner  prescribed  by  the  regulations.  If  the  books  of  the  cor- 
poration are  reopened  for  the  purpose  of  charging  off  depreciation,  deple- 
tion or  other  losses,  corresponding  corrections  must  be  made  in  the  other 
book  entiles;  and  if  for  any  reason  the  facts  do  not  warrant  such  other 
changes,  depreciation,  depletion,  and  other  losses  can  not  be  charged  off 
and,  therefore,  can  not  be  allowed  as  deductions.  Thus,  for  example,  if  by 
reason  of  a distribution  of  earnings  there  is  nothing  from  which  to  credit 
a reserve  for  depreciation  no  allowance  for  depreciation  can  be  credited 
to  a depreciation  reserve  account.  [See  1f868.] 

1367  Whenper,  therefore,  a corporation  has  clearly  suffered  allowable 
_ depreciation,  depletion,  or  other  loss  which  has  not  been  charged  off 

on  Its  books,  and  on  reopening  its  books  at  the  time  of  an  examination 
charges  off  such  depreciation,  depletion,  or  other  loss  by  proper  entries,  it  is 
entitled  to  the  benefit  of  the  deduction  of  such  depreciation,  depletion  or 
other  loss  subject  to  the  general  provisions  of  law. 


INC.  233 


TAX 


1368 

'i  3hio 

li36&_iJ Y op^'^wrl'l  :pfe^s^'  aElPiid  wlMge^tlip  Xo 

5on  0!  ^Ifttemal  .R'e^enW' A^e&^/^signfediSv GpRooef, 

“”„::Sg;*1'g”f SjSSS 

>0  eqLiOTtg  'to  ^}':nn  DflioDqa  ol  aonaiaisi  823*rqx9  riliw  tio  bagiBfb  bnc 

l37liij:CT^Xii^  DepreciMtloh  !^(;c^unfi^l^ffi§^u|e 

* - - 

-,,,.  .;j, 

basis  upoil  Which  the 
a 


-:<£i  sf'titusm^&'is^p’eWhan^fflW  WMcontiriue^ 


4ist!l-l©'s^4  -m' the^^Scp^y^rb  Wetu'rri'  for  ihe  year  ihbA\ 
is  made  and  a full  statement  of  the  facts  and  the 
computation  is  calculated  must  be  attached  to  the  return.  Upon  a sale 
woodier  .dpspQsi^io^^;pi,,.the  , property; eqq§ide^at^p  }l=e'E^'^ednShalt)-t)e 
'cpmpare^t^^j|.]:T^^  t%  anxqup^-,q|5thp,;es]^aj:-€f:^^  otjse^sw  com- 
puting: ;t|T,e  pW  o3?94  rih^fc^lLc^ptnO flight. 

eppp  Jh^li^-'^pTji;i%ate^^  yte^t* 

lib  which'  'the  ^ale  of  other  disposition  was  made.  ' See  articles  141.-^X45 

[for  deductions,  for  losses,  beginningr  at • J113051. bArU^h^Q^.  Regc>i'45^ 
4i  |o  ^forUuo:^  b obbojirjns  -;od  zi  hb.o.t>iOp  =oo 

■ ” TO  ,uoit3iq9D  urodBbarqob  '^ol  tnuoffis  yrm  lo  arnooni  yaoip 

‘ ' ' 225[rtrj  Tr,3’'  sidcxBt  9/1+  nidtfv/ 

--if  of  ^ob^ole,^ 


Key; 

;,;ol  13ft  to 

13^^ ' ^ ^ 9^'  Rroli  h f e p'fp  iph  ti  Hgf  Ip  s sp|  ^pm4  c c ^un  f 


'aoU(l 


Wa 


Ud^as  a ' 


mmiwmikmrM,  tfilf fs  .2 


Dip.  the  Cpst;  pfothp^  pr^ppyty^ihe^^fata^^a^ 


hfe'  hdeh  ’ pf ?\bjjuSiv  rct^hieS'  ahcL  dedticted" Wn  ’ acdojuiih  Q^kthWieBrefiWfop 


'ihe?ufqpeff£;  p^u6'^res'ihphr9;vakte.,au  of .phs'dle^ph^  .fpr  •pluW  fee 

L5:,^ *.  ^i-u ' 2*.2'L3  > a bi a-  b Vb I? . - -^{ph 

bus 

1373  If  j-io  depreciation  has  been  chargefe dff^ig'afnsf  &ch^pfopS'ty ^aM 
;;:  'h'  'dexlncted(f rGmrgEOssdbcohie  dfipriorWeat^,  bhe'lambUiit^ahbWabie'as 
a deddctiom for  ^ the jyear  in . whrchythe'  pro:;^f’^-  bicorties  DObs'olete-'  shall  be 
asceftamedsby Adeductingafrombthe  cost;  of  j the  ‘ prdpebty-~d'tSD'fe§i^uaP4alue, 
plus'  an'ambuht  equal  to:  the  -depreciatron';  actually  sustained-' durhlg'  the  prim' 
period  and  which  niight  have  been J deductedowhenf  conipUted^  Ut  the  Vate 
applicable'  tosdieo samen  or.  siihilar ' propeityro : fi^he » amount'  of tdepfeci adbu 
thus  arriYed  cat-  aspappricable  to  former  years  mtay  be  made  'the  ba^id'  ttf 
amended  detums'.ahd  claim  Dfor.  the  refund?t)f  YaJtesf'd'berpaid  by  reason 
eif: ; the:'  fact  ridiatriiOi ’depgeciatidnsxledaGtlono was ' fctainted - iilA'-fhOSe  oyearg. 
(Art.  179,  T|557,  Reg.  33,  I^eV)gJan.22,  1:9.1:8,>3S  3x10231  noitsiDOiriab  £ ot 
'.;do-xof:r:  bo"o‘;^rr2  viiBslo  2B:i  noitBioqiOD  B ,01o}313rft  ,13V3n3riV/ 

1374^,  Sinking  Fund.Reserve.-^Whenf  a corpofatipil  sets  asideia-part  of 
io--:^£ftiW3i^4rpm^&  fee  rthf^fpunpo^e  .of  xsifeattug'P^shiking  fund' 'with  2^hich 
to- ‘uetW-e; riU-  boudeddor?. pthet;dnic|ehtedueqsi)  the ; ^annual ; additiohs*  toysueh 
fund^iat'e'nQtrcalloyfeble)  dfedjuchonQofoomoigrg^s  jnco'meiasobr  dn  flieiiitif 
dep^-iation  or  on  aayBPterFf^td^duutq  iShbeo^mfegsr  thuhisetaasidcoite 


234 

E8S 


TAX 

.OUl 


INC. 

XAT 


{S'^Rkhh 


I§j53d^{frie^bj9j03Bi5jP«V  70 


u P32oqmr  aaxsl  ^f^^  ^iD^TioDni  asw  bsv/oUjB  ^ilBni 


k’i  :.li  I iZ^,\^U 

deposits 
initbfi 
166, 

.' r V . - ^lOlDSl 

‘*;JISiS|f]  SbS  r:obD3a  lo  ^iiOidivu  A-4  ; iL*  ^-jiiBbiODDB  ni  •l^vBqx£^  srlJ  ot 
13<6  Law|fl34.  A Reasonable  Amount  for  the  Amortization  of  Certain 


amu^sH  b9bn3fn<j^a5:ejt$i  (Spe^at-^iife  toi  theitWsar[)omsDeductibl§^ 
feilbfe IC'as^\5>l:r  Ji^a5Mn^yy-.iequtpiTtet;i,4i'§Qlihec A/f^cilities, 

^^s^^Ol^s^iA^ed^rfnstall^^tibsiac^tiired^obn’  (:gnaft€ai>A.piii'S,  }917,  for 
Q^i-Qdui^i^nsLQ^f^wMclesj  Qont^butrngBtoqth®  )pii€^cjik^m tb  6: rthe^  icppesenit 
te<l  iS-^tbfir)ca^bi-gl^esi6^"E>:  c(l)hstru^tied  :T6goai(^£i8ied)MiKbn:diteri%i^ 
date  for  the  transportatioi]e*£sf'ia|b:£iesooErnten;rfcdhQ'ibhtm^tdltl^[jpcdseeui-i 
o^v-t^^^pi^djatjL’wac^'tl^  be  alk}wedc;a  j^asoTmbeleiA^eihieldonSi^^ 

to^',  tizhtion  iipi',s.uqh9p.arfco^!';:theI«50S^  roftsubhofacilit-iesridrij/e^sels  as 
bem-b(jifrie:b^  dae  taxpay-ei'qhut  3ibt  agaiii:  including]  an>i:am©i8iit?26th,erx 
wsjsfi  f aBo 0uneler.‘;tlu  s otitle  /bit;  pr'eyibius  Acts'  saf  rCongaiesB'O^;  iaridediidfiohi 
i^I^mputing^ijet-ins^dt^^  n*mt3-i  srh  ni  nadBt  ad  ton  ^sm  il  niaiarh 

sbx/oiq  llBfia  ,(?1Q1  ibsy  sldBxrd  sdt  lot  mirist  sdT 

“77  3tow.gi35.rAb  Redeterminatioja  dAoiA;  t&e;?AmoriizatiOft  nDbthictiotf 

-woH  ,r:f  arrqhBrMajf  Be 

^t:Pi3iihe!-iMmiiin^i0«i®:^the  ^rbs£ktBwan,f  die  IGoinihissioberaMa^r,  xdndsat^ 
(iiidhe  Aaxpa^egi:®ha^Ui?!reexauTihe-rfe  rekii^ip  mkl  rifi/heb  thefi'^ 
Wdfe:aftraige§:ultvMv^japprai>salror»Mnomo<b.tfaeri6iddenee:itiiat  fcheodedMtMj 
QEtgmftllyrdai;^i^do\ta^cihl::D6^btprthe:a^B^  iht^osed>ib>i'vthis'vYite;ah'd:^to 
bt»eslili^/[r\^^.ipccessSrMdfitSf^a:?4:£QrsiihenyeaT:oTl:yearsi^^^^^^ 

Etdeter^ifted!  ; MndVle  ,am;B[D  noitBsbiomB  ot  bsltitna  3'rB  aisqBqxBJ 
-dna  Yi  hns  glqBigBrBa  ^nrboooiq  3rb  ni  bebhoiq  2B  haniBj-r332£  -^-ruBb 
¥7^rn. towi  gi 36.  Adjustment  of  Under4 lor  Over-Payitient  of) Taxes  Due 
sbsfTi  30  bii/orf?  -.torRedeterminatioh  6f  AmoTtization  Deduction.^nthe; 
ameiintvof  Itaxbdiie.^upon  suckTedetenhination;  ifeacy,o^haM:ibe^'l)aid-  •lipbii 
netice  and  demand  bv:  the  :colfector,(^ar3the  amount  oMax  merpdidpif^any^; 
shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with  the  pro- 
yistk^i:^  qfrSecttqn-253  [g212L]:;l^rj£i.'i7omA  lol  noiaivoi^  lo  socob 

" T-  'ft'  ‘ ' ''  00;'3B-:t';  0 K yB  ISY-^OXL: 

- A-  , h'awgSQ?.  {CorporationSi]-frr'.‘(8-)- Indhe  case  of  jbuildings^  machin- 
.'  - ■ ■ ' • : r : ery,  equipmerLt>,©r  other  facilities  constructed, rbfectedo 

mBtalled,  on, acquired,  , pn  oio  after  April  ,4  191.7,  foxbthp^production  of 
articAes^Gox^lluting^ta  tl;ie-;prpB€cu,tion  of^.the  :p[re$ent  warq-aild  In  the 
case,  of:  vessels;,  constructed  or  acquired  .op  or  after  sucli>rdate  , for  the 
of,arti,c]es  or  men  contributing,  todhe.prosecution- of  the' 
present  war,,  there  qbaU  be  allovred  a reasonable  deduetiou:fpr  the  - a^^^^ 
Y^l^h.qi.sqcb  part  of  the  cpst  pi, such  facilities.- -or  ;vesse(s,, gtS  has  beeiv 
borne  by.; the,. taxpayer, . but  nob  again. ppelucling -any  amounfhqthcryeise- 
aJlowxd.utKler  thas.  titlc.qr  previousbVb^s  of  Congress  as. a d^^^^ction. in 
computing  net  income/"  - A . '.  b'^'  : ■ .v  ‘ = 


1^0  Law  g30^.,|;*At:any  fi^hc  .witjiin  three., yeai^rrai ter  bte/rtcriuip^tipn, 
^-:,/  / b'-’  %:Pl'^sent,war:'Ahe,.(2q^^  the 

request  of  the  taxpayer  shall,  reexamme/fh4^i^Uiq;^n^| 

^^JFr  Wi 


DEDUCTIONS— AMORTIZATION. 


as  a result  of  an  appraisal  or  from  other  evidence  that  the  deduction  orig- 
inally allowed  was  incorrect,  the  taxes  imposed  by  this  title  and  by  Title 
III  [war  excess-profits  tax]  for  the  year  or  years  affected  shall  be  re- 
determined and'' 

1381  Law  U309.  “The  amount  of  tax  due  upon  such  redetermination,  if 

any,  shall  be  paid  upon  notice  and  demand  by  the  col- 
lector, or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded 
to  the  taxpayer  in  accordance  with  the  provisions  of  section  252  [][2121] 

1382  Amortization  Claims  for  1918  and  for  1919:  Amended  Returns 
Involving  Amortization. — Reference  is  made  to  your  letter  of  May 
21,  1919,  requesting  information  relative  to  the  application  of  the 

provisions  of  Section  214  (a)  paragraph  9,  of  the  Revenue  Act  of  1918, 
and  Articles  181  to  188  [beginning  at  p385]  of  Regulations  45,  final  edi- 
tion, to  the  1918  and  1919  returns  of  taxpayers. 

1383  Your  questions  are  answered  in  the  order  submitted  as  follows:  (1) 
A claim  for  amortization  applicable  to  the  portion  of  the  calendar 

year  1918  covered  by  the  return  of  the  taxpayer  for  the  taxable  year  1918 
shall  be  included  in  such  return,  and  if  such  amortization  is  not  claimed 
therein  it  may  not  be  taken  in  the  return  covering  the  taxable  year  1919. 
The  return  for  the  taxable  3^ear  1919,  shall  provide  only  for  the  proper 
amortization  applicable  to  such  taxable  year  ascertained  in  accordance  with 
the  provisions  contained  in  Article  185  [^1393]  of  Regulations  45.  How- 
ever, in  cases  where  it  will  be  impracticable  to  accurately  determine  the 
amortization  during  the  calendar  year  1919,  any  returns  made  during  such 
period  should  include  amortization  allowances  tentatively  determined  in 
accordance  with  Articles  184  [][1388]  and  185  [^1393]  of  Regulations  45. 

1384  (2)  Returns  made  for  the  taxable  year  1918,  in  cases  where  the 
taxpayers  are  entitled  to  amortization  claims,  should  include  such 

claims  ascertained  as  provided  in  the  preceding  paragraph,  and  if  sub- 
sequently the  amortization  as  finally  determined  differs  essentially  from  the 
amount  claimed  in  the  returns  filed,  then  amended  returns  should  be  made 
[j[945].  (Letter  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  June  9,  1919.) 

1385  Scope  of  Provision  for  Amortization. — Any  allowance  made  to  a 
taxpayer  by  a contracting  Department  of  the  Government  or  by 

any  other  contractor  for  amortization  or  fall  in  the  value  of  prop- 
erty, either  as  a part  of  the  cost  of  production  or  as  a part  of  the  price 
of  the  product,  shall  be  included  in  gross  income  See  article  52 
[amended  returns  for  1918,  ^[945].  The  amount  to  be  allowed  as  a deduction 
from  gross  income  for  amortization  for  the  purpose  of  the  tax  is  to  be 
based  upon  the  provisions  of  articles  181  to  188  [this  paragraph  and  the 
paragraphs  following],  pursuant  to  which  the  deduction  should  be  made 
instead  of  upon  the  basis  of  any  amounts  contractually  or  otherwise  deter- 
mined. The  allowance  for  amortization  covers  the  decline  in  value  of  the 
property  subject  thereto  and  is  inclusive  of  the  depreciation  which  would 
ordinarily  be  allowed  separately.  Depreciation  for  any  taxable  period  after 
December  31,  1917,  should,  therefore  not  be  claimed  with  respect  to  prop- 
erty as  to  which  an  allowance  for  amortization  is  claimed.  See  also  sec- 
tion 204  of  the  statute  and  articles  1601-1603  [for  net  losses,  pi06].  (Art, 
181,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  236  TAX 


DEDUCTIONS—AMORTIZATION. 

Property  Cost  of  Which  May  Be  Amortized. — The  taxpayer  may 
make  a reasonable  deduction  from  gross  income  not  in  excess  of 
a surn  sufficient  to  extinguish  the  cost  of  buildings,  machinery,  equipment 
or  other  facilities  constructed,  erected,  installed  or  acquired  on  or  after 
April  6,  1917,  for  the  production  of  articles  contributing  to  the  prosecution 
of  the  present  war,  and  of  vessels  constructed  or  acquired  on  or  after 
such  date  for  the  transportation  of  articles  or  men  contributing  to  the 
prosecution  of  the  present  war.  In  the  case  of  property  the  construction 
or  installation  of  which  was  commenced  before  April  6,  1917,  and  com- 
pleted subsequently  to  that  date,  amortization  will  be  allowed  with  respect 
only  to  the  cost  incurred  on  or  after  April  6,  1917.  (Art  182  Reg-  45 
Rev.,  April  17,  1919.)  ^ ^ ' 

1387  Cost  Recoverable  Through  Amortization.— The  total  amount  to 
^ be  extinguished  by  amortization,  in  general,  is  the  excess  of  the  un- 

extinguished  or  unrecovered  cost  of  the  property  over  its  maximum  value 
(either  for  sale  or  for  use  as  part  of  the  plant  or  equipment  of  a going 
business)  under  stable  postwar  conditions.  Under  the  provisions  of  the 
statute  authorizing  reexamination  of  the  claim  at  any  time  within  three 
years  after  the  termination  of  the  present  war,  the  allowance  will  be  finally 
determined  upon  such  basis.  However,  in  many  cases  it  will  be  impractic- 
able during  the  calendar  year  1919  to  make  final  determination  either  of 
the  length  of  the  amortization  period  or  of  the  value  of  the'  property  under 
stable  postwar  conditions.  Consequently,  in  returns  made  during  the  cal- 
endar year  1919  the  amortization  allowance  will  tentatively  be  determined 
in  accordance  with  articles  184  [1[1388]  and  185  \n393].  (Art  183 
Reg.  45,  Rev.,  April  17,  1919.) 

1388  Cost  Which  May  Be  Amortized. — For  the  purpose  of  making  re- 
turns  in  1919  the  total  amount  to  be  extinguished  by  amortization  is 

the  difference  between  the  value  of  the  property  on  the  basis  indicated 
below  and  the  original  cost  of  the  property  less  any  amounts  otherwise  de- 
ducted for  depreciation,  losses,  etc.,  prior  to  January  1,  1918;  or  in  the  case 
of  property  acquired  or  completed  after  December  31,  1917,  it  is  the  differ- 
ence between  the  value  of  the  property  on  the  basis  indicated  below  and 
the  cost  of  such  property  at  the  date  of  acquisition  or  completion. 

(1)  In  the  case  of  property  useful  only  during  the  war  period  and 
permanently  discarded  at  the  date  of  the  return  the  basis  is  the  sal- 
vage value  as  of  the  date  when  the  property  was  discarded. 

1390  (2)  In  the  case  of  property  still  in  use  which  will  not  be  required 
for  the  future  use  of  the  business  and  which  is  certain  to  be  per- 
manently discarded  before  the  last  installment  payment  of  the  tax  covered 
by  the  return  the  basis  is  the  salvage  value  as  of  the  date  when  the  prop- 
erty will  be  permanently  discarded. 

1391  (3)  In  the  case  of  other  property  the  basis  for  amortization  calcu- 
lation shall  be  the  estimated  value  of  the  property  to  the  taxpayer 

in  terms  of  its  actual  use  or  employment  in  his  going  business,  such 
value  in  no  case  to  be  less  than  the  sale  or  salvage  value  of  the  property. 
Provided,  however,  that  in  no  case  shall  the  preliminary  estimate  (for 
purposes  of  returns  to  be  made  in  1919)  of  the  amount  of  such  amortiza- 
tion exceed  25  per  cent  of  the  cost  of  the  property.  In  the  final  deter- 
mination  the  amount  of  the  amoitization  allowance  Avill  be  ascertained 
upon  the  basis  of  stable  postwar  conditions  under  regulations  to  be 
promulgated  when  these  conditions  become  apparent. 

INC.  237 


TAX 


A<%p5.g?aP  %¥  a? mus'^ 


4a^SM-?a>'  -!f  '^.tiatit‘fare,aertV4's  te|69ed3i(!.  ifeg'-S'tli'f  tfil;  &t{air|>*y''if 


198®  'I 


noiiiu'f ^:noD  srit  ^8-t  nl  .iby/  inaas'iq  sdl  io  fiohuDsaoiq 

b£dAkiQyti^mlbh‘-^'I^T-^‘th^'^utf  itt> 

jD9qa9  q9fl  ^ tb^  be  ^ 

in^i'’bf>brtibn^  to^  tlib^  net'^i:TKbr]^*(^b0^  Wlthfbut'-t>^bfiV  bf<>dib^  abibrfi;^^ 

tion  allowance)  between  January  1,  1918,  and  the  fdllb’U^bg  xJatesqAjay^i^ 

sub- 


ancc: 


' -JWi  ^rV ?af98 rfi'f 
1918 ; "(b)  Axh  rany  eomp,i;iJatioq  Msed  upqn 
in  1918  ahd^ ending' in  l‘^19  shall' use  the 


ip^rt^ti^?.  based^upp^l  19,48  ratfs 
apportioned  to  the  catendar  year 

1919  rates  for  a year  beginning  ,,  _ 

aiWhhtdbf  ^ such^’  alibw'tin'ce'  apportto^^d4'^:to■‘^^edc4eMad^c^^  tL^I9;  %tid 


zatioh  ‘.must  ’ be  ^ 'uhn?is tak'ablj^ t^tiate^ .qri.  ^tbe^ yetmdi  '^1(1 

ptnei':  claims  'tqr‘‘\vear.;- feav,  bbsolepcence^^^mi  , 1^^^^  !^o^t^uc^”daim  yvillie 
a|ibwe3'  tf-fj^-cfed , in  ^an^,'  ^■cp.upS^‘sufe^^  fey  dpe  taxpayer  to 

stock1iblcfers’'and^in  .^ny.'ci-gfeitbsiate^  ta^p‘^pr  to  pank^,' and.  is, 


giyen  full^eft'eQt  on  tiiS;':!^^^  booSfS.pf,  apj:bpmt.'-,|](^.  df  o^bep 

contractdtaixen'fey  the  taxpayer  Vontdined  recogm^  p^^pibrti^atipp  as  an 
derpent  in^^tie.  yost  oi  producijou;,  gopies.  Q^^spc^  bqntr^^cts  . sbah  jfee,^^^^^ 
with  the  taxpayer’s  return,'  together  with;  a s^^tefeieht^  and,  d^scriptio^^^  qf 
any  sums  received  od  account  of  amorti.za.tIpp|,and  ,tj^e  , basis,  upop^.whiqh 
they^y^erp;48^eripined. ; In  :^py , ease ^ iq^^yfliidy  ap, 

lof  anaorpzatipp  bf^.cps.t  thpdafXLp^  be  plf.p\ved;tQjje:ptOr^  to  his 

ipy^s.tedp^^itaj  fpf;  the  purp,o^se;  ot  the  ,y(ay;  prqfet^ 

^rtipppf  the  apiqvipt  yqY-ered  by.fuchsailOjWpnce.ypi^Aft. 

Aphi  i;^A:^lA)7'TSfrta‘r iloTo  c i i o.^-so  orr  ai  tBill  ,';0  ; / . '.I  ..^ubr^o'P  L 

ia95i  RedetbTmm^tiori  of  Arhattizatibn  Aiildwanbe.^^  redeterminatmn; 

of. qhe- dbdtohtion' alldwed^'oh  kcbhm  antmtization  niay,  ^or/at  dhe 
i^bdhesf ‘ t>'f ' - the ' t&payef ' shall, ' ' bepMade- the>  iXmiYniiissioner  oab  any i -time.- 
vvithhi  a^ftbb  the  -thiW^^  if  as-a' 

result  of  an  appraisalWker6m  mehdvi<fehce4  Ipttkl  thiitqhbJdeductioni 

B§  rW 


^.Sil%l<T^Se  .(fpr'^e^ij  tax^abte 
additional  assess- 
4§,  9-nBv70f 

iBYOiaq^  ?dt  ritiv/  i9noi2eimmo3  ad?  vd  bsdi’iDcr  la  od 
1396  Information  to  be  F'urmshed  by  Taxpayer.— To  obtain  the  benefit 

A rLT_i  ilia  VC.  _t\1^0-l7;i  Cl /^n  -C  . . . . 1 1 • 1 . . 


fall  also  siito^^^ipg}pi^:^^ryri§ta|ejM«<^ 

tormation : (a)  a description  of  the  property  in  reasonable  detail;  (b)  the 

on  which  such 

MsJaMisPK^tas-Kbpguji:  a^aiCoaipletf^d  JidC®)/.^*- 

](iei3e§oe.ys{ihsfei?4gjtb§  fte;ta?4p§‘yQri  q!3!'.aii|t®ijerja^P5il,6s„!.ei;?, 

01  on  and^  after  the  date^  of  acquisltieirbMjithie  da^*<^fijbegiwir)gjrgqpSitiTih- 
itp^'i^^c^tpn  ^qbi|^f$.ilajibia,ot<5i:^lpMa)t^i  sjijKhrpitopprtyi  ' v,es^'>SvstqThei’'pird- 
sdittcticOrboifeiirtklQ^  (:05hiii  $he  9a$^Io^lvq^s€^Tthp  tfamportation  of  articles 
mr;m^0:])  hi^ithgiproM^tttibrypix.the:  ptt§ent-i^ara^!(d>ThphpQs$ 

construction,  erection,  installation  or  acquisitiPh5-.j{5p)ii^e  mh§  9t£di^pir0p- 
l^ty  l^t9f‘otd5miliatiQii5:x)§ithQiaiJMxt'fe^ibhi'ipq^li‘^Ji'.((f“)^^*  of  il-lie 

/piro^^-tjy:fpermanently(X%Qarddd,vdrlof-^^  which  win  be  perman- 

entJlyK discarde^^ before-^thp^lasl:  insIlllmenti^aym^Bt iDp>Y;^red,b3^'ithe3'iati|irit ; 
“()g^^.ailv dedlIctj<Ims^ if rdni^qgoD^aiiijidajinejktherMliseritake'n  oPr  .dairned-  with 
t^^pQCttX)\sisaiL\pv6p^tJ^^,  ^hi)jsthefcGiTQp4tatmd  by!  which  th'^ j total.  amotiM:tp 
ibeiextmguf$ti£d)bdlamdttl0atibh^  was  ideterniiped];  lahdii^idnthe  computatioh 
by  which  the  proportion  of  the  amortization  charghdaimeidrhsf.a  dedpGti(bh 
dh  jth^ta$tablb';y^if  lfprii^Tkhathellf€trkh^dg8beiiiglc.m^^^^  ^dearm^lid(3. 
yfWftdd'8%"Kd^^.  GiiS;  ^^fe^.y:^jprilnlT^9li919^^  obcm  sd 

arit  lo  Ir.vo-jqqfi  orb  djiv/  isnoiaaimraoD  sib 


eirlj  yd  bsy/olh  anoitoubid)  -odj  -ei)&.f!;',\i  i 


'fit  fiT'  ‘toi  ir 


, ' . u ..  .rioir  wjavj.  -'v't  « 

|l^Q-4‘^V't9d  honotUfOKCTj;  vidrTr;o^3  ,od  Her'  -'  ;!oe''-<^R' urn 

Lawpsy.  A Reasonable  Allowance  for  Depletion  of^Mines,  Qil 
, , ^ Wells,  Other  Natural  Deposiisf  and  fimber, 

and  for  Depreciation  of  Improvements  is  Deductible.— “(10)  In  the  case 
'df-  telriesL'  d,I  4i3id-^s<  i('e!fe<'8th'er  ift'rtife'l ’aii)osi«’,%ti('a  thTltfeba'l?4sonabfe 
'!llloWanlee''fof^d«plfetibii'atid,  fdr^deiilJffiiktlbii  6f  iitfptot^bmehti;  according  to 
ihe  'ppe!nHir;'<‘hHfliti'6hs’  iH^^icK'baW'  ibSsed  uWbn^doSt  iHdhiclihyOloSt 'ofdb- 
'6thh'iVi%4’  .Slfl  ,di  vusiruisd  ^stie  bsiinp 

tsd'Tfim  i’ef  orij  iioqu  fo)  lo  ,oj:-isrlt  lohq  bs'iiupoe  li  ,flCf  J rljiBlvi  to 

ii^SoLa^KfeB.-'^BaslB  iH  tteoCa'se'  'of  Properties  A'(!quired'*Pribt''t6 

JiM  -,i:y,iw  ,,,,Pf  ,'<MaftK'l?igr3.tii-‘’PtWMM;j!THaMrh'‘'fhe“ckse“df^^ 
ptttpePtieil 'acqiiived  -'jiHof  »13[^he'’fai'r  -mSfltfet  vdftq'Pf'the 

Trdf^eftyd  dr  th(el'ta^'t)ayhr’s'  iilte¥e^t  therein)'  Pii bhat ' date  ^^hiiir be'  itahdi ' ih 
q{eu^5f^dM?'hh/ffcibha^tbla'teb'’'’ipT  ne  ibrno^rrM  si  - 'S  Kerl.  .blor-' i 'lo  J ^ b 
rriid  vd  \)D]-o-r-<  (r  iqr';  Unrofor  orb  1 


jj  iroi;onl)sb 


itt  tRe'Cdse  'of  Mihfes  8r  Wkfe  Piscqvef'ea  by'tMe 

Th^ii  Thhfbri.4h^lfe5^e  of  'ifihYp'i'  'bh'nhd  o^'-Livi  • -Cm'..,!  ,.,; 


M..  . xaj^payer  on  pr  r^rter  ivian 

W'a'pT’6l.en,;ffa'df'far!;Ied‘^^  hrtaVffaVaiii?“of 'tlVc''prob<ii-tV'is 

i-iafW'aiibfo'bHHIrinAt'ii  to- W6'  eftsft  ffib''c1(!Til^t5’ori'  dirdw.-i'nJ-.i-'c'h'-i'fl  Ch- Ki=jJ.i-i 


lol  r'-!!<i./  Y/rf-rjI  -'H  ((jU  IlffI  ViPriOir.  x;- ■ , , r r*.  ,n  f 


;ou’  lufl 


239 


Tifn- 

TAX 


DEDUCTIONS—DEPLETION. 


1400  Law1[140.  Depletion  and  Depreciation  Allowance  to  be  Made  in 

Accordance  With  Regulations. — “such  reasonable  al- 
lowance in  all  the  above  cases  to  be  made  under  rules  and  regulations  to 
be  prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary.”' 

1401  Lawp41.  Depletion  and  Depreciation  of  Improvements  Allow- 

ance to  be  Apportioned  Between  the  Lessor  and  the 
Lessee. — “In  the  case  of  leases  the  deductions  allowed  by  this  paragraph 
shall  be  equitably  apportioned  between  the  lessor  and  lessee 

1402  Law][310.  [Corporations.] — *‘(9)  Tn  the  case  of  mines,  oil  and 

gas  wells,  other  natural  deposits,  and  timber,  a reasonable 
allowance  for  depletion  and  for  depreciation  of  improvements,  according 
to  the  peculiar  conditions  in  each  case,  based  upon  cost  including  cost  of 
development  not  otherwise  deducted 

1403  Law  pll.  “Provided,  That  in  the  case  of  such  properties  acquired 

prior  to  March  1,  1913,  the  fair  market  value  of  the 
property  (or  the  taxpayer’s  interest  therein)  on  that  date  shall  be  taken  in 
lieu  of  cost  up  to  that  date 

1404  Lawpi2.  “Provided  further.  That  in  the  case  of  mines,  oil  and 

gas  wells,  discovered  by  the  taxpayer,  on  or  after  March 
1,  1913,  and  not  acquired  as  the  result  of  purchase  of  a proven  tract  or 
lease,  where  the  fair  market  value  of  the  property  is  materially  dispro- 
portionate to  the  cost,  the  depletion  allowance  shall  be  based  upon  the 
fair  market  value  of  the  property  at  the  date  of  the  discovery,  or  within 
thirty  days  thereafter;” 

1405  Law  pis.  “such  reasonable  allowance  in  all  the  above  cases  to 

be  made  under  rules  and  regulations  to  be  prescribed  by 
the  Commissioner  with  the  approval  of  the  Secretary.” 

1406  Law  pl4.  “In  the  case  of  leases  the  deductions  allowed  by  this 

paragraph  shall  be  equitably  apportioned  between  the 

lessor  and  lessee ;” 

1407  Depletion  of  Mines,  Oil  and  Gas  Wells. — A reasonable  deduction 
from  gross  income  for  the  depletion  of  natural  deposits  and  for  the 

depreciation  of  improvements  is  permitted,  based  (a)  upon  cost,  if  ac- 
quired after  February  28,  1913,  or  (b)  upon  the  fair  market  value  as 
of  March  1,  1913,  if  acquired  prior  thereto,  or  (c)  upon  the  fair  market 
value  within  30  days  after  the  date  of  discovery  in  the  case  of  mines,  oil  and 
gas  wells  discovered  by  the  taxpayer  after  February  28,  1913',  wherej  the 
fair  market  value  is  materially  disproportionate  to  the  cost.  The  essence 
of  this  provision  is  that  the  owner  of  such  property,,  whether  it  be  a lease- 
hold or  freehold,  shall  secure  through  an  aggregate  of  annual  depletion  and 
depreciation  deductions  a return  of  the  amount  of  capital  invested  by  him 
in  the  property,  or  in  lieu  thereof  an  amount  equal  to  the  fair  market  value 
as  of  March  1,  1913,  of  the  properties  owned  prior  to  that  date,  or  an  amount 
equal  to  the  fair  market  value  within  30  days  after  the  date  of  discovery  of 
mines,  oil  or  gas  wells  discovered  by  the  taxpayer  on  or  after  March  1,  1913, 
and  not  acquired  as  the  result  of  purchase  of  a proven  tract  or  lease,  where 
the  fair  market  value  of  the  property  is  materially  disproportionate  to  the 
cost;  plus  in  any  case  the  subsequent  cost  of  plant  and  equipment  (less 
salvage  value)  and  underground  and  overground  development,  which  is  not 
chargeable  to  current  operating  expense,  but  not  including  land  values  for 

240  TAX 


INC. 


DEDUCTIONS— DEPLETION. 

purposes  other  than  the  extraction  of  minerals.  Operating  owners,  lessors 
and  lessees  are  entitled  to  deduct  an  allowance  for  depletion,  but  a stock- 

corporation  is  not.  See  further  articles 
45  Rev  A 1919^)^*^  capital.— War  Tax  Service].  (Art.  201,  Reg. 

1408  Captal  Recoverable  Through  Depletion  Allowance  in  the  Case 
of  Owner.— In  the  case  of  an  operating  owner  in  fee  or  a lessor 

the  capital  remaining  m any  year  recoverable  through  depletion  allowances 

property,  or  its  fair  market  value  as  of 
Alarch  1,  1913,  or  its  fair  market  value  within  30  days  after  discovery,  as 
the  case  may  be,  plus  (b)  the  cost  of  subsequent  improvements  and  develop- 
ment not  charged  to  current  operating  expenses,  but  minus  (c)  deductions 
lor  depletion  which  has  or  should  have  been  taken  to  date  and  (d)  the 
portion  of  the  capital  account,  if  any,  as  to  which  depreciation  has  been 
and  IS  being  deducted  instead  of  depletion.  The  value  of  the  surface 
of  the  land  should  be  taken  into  consideration.  In  no  case,  however,  may 
a lessor  include  in  his  capital  recoverable  through  such  an  allowance  any 
part  of  development  costs  not  borne  by  the  lessor  nor  any  part  of  the  dis- 
covery value.  (Art.-  202,  Reg.  45,  April  17,  1919.) 

1409  Capital  Recoverable  Through  Depletion  Allowance  in  the  Case  of 
Lepee.  In  the  case  of  a lessee  the  capital  remaining  in  any  year 

recoverable  through  depletion  allowances  is  the  sum  of  (a)  thq  cost  of  the 
leasehold  or  its  fair  market  value  as  of!  March  1,  1913,  or  its/  fair  market 
value  within  30  days  after  discovery,  as  the  case  may  be,  plus  (b)  the  cost 
of  subsequent  improvements  and  development  not  charged  to  current  oper- 
minus  (c)  deductions  for  depletion  which  has  or 
should  have  been  taken  to  date  and  (d)  the  portion  of  the  capital  account,  if 
any,  as  to  which  depreciation  has  been  and  is  being  deducted  instead  of  de- 
pletion. Any  annual  or  periodical  rents  or  royalties  supplementing  the  bonus 
or  other  amount  paid  for  the  lease  may  be  charged  to  current  operating 
expenses  or,^  until  the  property  reaches  the  operating  stage,  to  capital  ac- 
count,  and  in  the  latter  event  will  form  part  of  the  capital  returnable 
through  deductions  for  depletion  (Art.  203,  Reg.  45,  Rev.,  April  17,  1919.) 

1410  Apportionment  of  Deductions  Between  Lessor  and  Lessee—As 

lessee  nn  lom®  comprehends  the  interests  of  both  lessor  and 

value  of  ther^”.  ?’  depletion  allowances,  of  the 

the  value  of  sepaiately  as  of  any  date  which  combined  exceeds 

Ipnii«  to  be  permitted.  The  same  principle 

is^deemed  evrel!'  ^ fractional  interests.  If  the  aggregate  deduction  claimed 
show  Xal  7 V*®  Commissioner  may  request  the  owner  or  lessee  to 

the  nronert^J  -7  value  of 

article  206  determined  m the  manner  explained  in 

ro7m!7c-  aid  lessee  shall,  with  the  approval  of  the 

?onTlhio7s  i^n^T^  iPP°''‘7n  the  allowance  in  the  light  of  the  peculiar 
To  thp  01  fhe  basis  of  their  respective  interests  therein, 

snert  of  claiming  an  allowance  for  depletion  in  re- 

L property  in  which  he  owns  a fractional  interest  only  or  (b)  a 
®“bject  to  a lease,  there  shall  be  attached  a state- 
ment  setting  forth  the  name  and  address  and  the  precise  nature  of  the  hold- 

Ap  I 17^79197^°"  interested  in  the  property.  (Art.  204,  Reg.  45,  Rev., 


INC.  241 


TAX 


^r>y.fQfi:se  ix^  \^mch  ^ c 

“5130 J2  ^let'fen-^bP  tt&i8ft  cpmS^teS  , rtfip 

M^ited;  the. less^b ' mlf 

Commissioner  to  show  that  the  cost  or  price  al'wmch^the  \Vas 

iy).ngh^ ^wa^f  j^teS'a 

fyliiM  ,ff?oP59P^ltyiPa^§M9iat\5P}®nef5  i|\>  f^cloagriyelhias-.M-j^iMidifferent 
.tip  «y???&^qelN  Q-^9|4ipmj(ax  Jixfeted  rQO-st  oi^  prlcf:  be-ipfermittediio 

^91*^  thi^ba^sf-^^fTiaHj^kM^rdati^pitiPLf oaqd^^  ;pr,  depr^d^tfen . idedtic 

pMiPl^t^IpfiefzMiCost^al  whitii  ^&i^’|)i4ic]p[aseMr 
.^]khj.y^s|,p)afey9Mfi^A^AitkGp^el^^liQaaT^^  Q£li|h^(^Qpe^i:-6ol<i, 

4^1 (Hillg^  igwe^itQi:ti#j^#att<MsM|tj  pricpmectiipiii^^kitogc^ 
pgXsq^jgeUjgg  t]^o  kw^fe  th^repl.  f{£^#. 

^ fbifiw  oi  8B  ,xnB  li  ^tnuooaB  iBilqsD  sdt  lo  noinoo 


ejR 


yrlt  io.  ouIkv  oiiT  moitsiqab  lo  h^Mcni  pataubsb  -^ftbci 


81 


XBrn  FaA  M^l^e^oyalpe  of  Dep9,$ijtS4^ 


.*nr>  1^-  sp.^dfed  .4at9,4n.4kUoOioA^ 

Co^t  ^fgerepf , flie.  basis,  ;|o,ni  d^pHAPiiapxJ  jdepi’ecMipp);  dpdMCtipn^-^  fttA 

value'  must  be  'd^termined^^pbj^ctji^  ;app]royk.''?i'^3i^yi-^W)by.Afe'P9*?^^^^" 
sioner,  by  the  owner  01  the  prbperty^in  the  IT^ht  of  the  conditions  ahd^cir- 
'icumst^ieest  knovm-atutMt  -dafey  MteP'^Mb^^fes' W^'^ev^ldA 

ments  in  diet  propoi^  drdpismeAods'cpfbliimng;' w €idr^btrok?28q^^  value 
isoiight;  -should  be  i that  restablbhed-^ssd'nhi'hg  a kails febd^tiyeeh  -a  '^Hhiig 
seller;  andia  -mlhng-'HuyerlaS  ob  thai  pattkular  dateh  Nb  M 5r  method  of 
deteraiiniri^  the  dak'  rnar-kelt'^afeet  Oi-  nlineral  property  q^ ‘'prescribed,  btit  dhe 
domniissionerotvill  iendodhei  keight ' and-^bohsideratiod'to  any  aiid  dil  f a'ctdf S 
and:  '.evi  deride,  havihgqa  hbeaiinguori  atlie^' bnrirlcet  va^ue,  'Stteh. ' as  ^ atrial 
‘isalesLand-transfers  bf  similkr'probertiesS  Market  valiie^  Pf^stdck  A-  febaids, 
royalties; rand'  tentaiky  value  hxed  h^  dhe lowrier  for  pu^f^sdskf  thesea^tal 
Stock  lax,,,  ivairrati-onq  ford  Ibcal  r>or ' cStaid  thxMonf •'  parMershipy  accouiitirigs, 
;records^f  hligatiom  iri^^^^W  the  yalueoof  khe  property  "yrasi  the 

-amourit)  at  which-' Ae.prdp'^iriy  Mky  'haVeebeeMinyentofiediMupfobate-iebtirt, 
•disinterested;! apprais-alslcbv'iapproved  Imethuds^^eandlidthei!  fiactbf^. 
2069R^  d5v;-Eev.?34VA^bd^t^9.)riA)  noMqab  lol  anohonbob  dgnoirl) 

^i4i^  ■ ^e^rilu'Afori  J cf  9^^  dil  (A^oiPf  oP'S^  A 

• qts^''faipMaffi^|jV^lri  .A9i9^%(-,may  be;,^plus 


Fdf  VAdh^^eai;''4uiipk'''tbe  ^ co^firiuMeeJ^olkb^^^^  .‘pwriersliM  ptipiier  r wni cJpiMe 
Farr  Ma peel  value  61  posf  yras_  fixed,  and  during  ^u^cb  Qw^ejt^ip,-  P^ 

;rio^r^3lukfij6n ‘|o4  of'  AisAedhdto  '^i^^puiA’^iU  pot  fpibid 

Ae;'redistributiBn^bf  tfie/yalit^T'accbAnriPoverrtlTfe^e^^ 

3^  yldcliiros  ^ 

* ' ^ - i . =;0i1ib 


9yi< 


breftdved-  A ‘HkW'&Sed  iri  fhe  ’gloMAbn^MaM  1 . 

’atqliisftfombT  thep)ldperty,*''ym49MrP'6D  'da9s  afterAhe^  dat% |^i  '^i^oyery, 
as  the  case  may  be.  In  estimating  the  total  units  of  ores  arid  iriiilerals  tor 

ikd.  ^42 


DEDUCTIONS— DEPLETION. 


purposes  of  depletion  the  property  must  be  considered  in  the  condition 
in  which  it  was  on  March  1,  1913,  or  the  date  of  acquisition,  or  within  30 
days  after  the  date  of  discovery,  but  if  subsequently  during  the  ownership 
of  the  taxpayer  making  the  return  additional  recoverable  mineral  deposits 
have  been  discovered  or  developed  which  were  not  taken  into  account  in 
estimating  the  number  of  units  for  purposes  of  depletion,  or  if  it  shall 
be  discovered  by  working,  development  or  exploration  that  ground  previously 
estimated  to  contain  commercially  recoverable  mineral  is  barren  or  con- 
tains only  commercially  unworkable  mineral,  a new  estimate  of  the  recov- 
erable units  of  ores  or  minerals  (but  not  of  the  cost  or  fair  market  value 
at  a specified  date)  shall  be  made  and  when  made  shall  thereafter  constitute 
a basis  for  depletion.  In  the  selection  of  the  unit  of  estimate  the  custom 
or  practice  applicable  to  the  type  of  mineral  deposit  and  the  ^^haracter  of 
the  operations  thereon  should  be  considered.  The  estimate  of  the  recover- 
able units  of  ores  or  minerals  for  the  purpose  of  depletion  shall  include  (a) 
the  ores  and  minerals  “in  sight,”  “blocked  out,”  “developed,”  or  “assured,” 
in  the  usual  or  conventional  meaning  of  these  terms  in  respect  to  the  type  of 
deposit,  and  may  also  include  (b)  “prospective”  or  “probable”  ores  and  min- 
erals (in  the  same  sense),  that  is,  ores  and  minerals  that  are  believed  to 
exist  on  the  basis  of  good  evidence,  although  not  actually  known  to  occur 
on  the  basis  of  existing  development;  but  “probable”  or  “prospective” 
ores  and  minerals  may  be  computed  for  purposes  of  depletion  only  as  exten- 
sions of  known  deposits  into  undeveloped  ground.  (Art.  208,  Reg.  45  Rev 
April  17,  1919.)  ^ 

1415  Determination  of  Quantity  of  Oil  in  Ground.— In  the  case  of  either 
an  owner  or  lessee  it  will  be  required  that  an  estimate,  subject  to  the 

approval  of  the  Commissioner,  shall  be  made  of  the  probable  recoverable  oil 
contained  in  the  territory  with  respect  to  which  the  investment  is  made  as 
of  the  time  of  purchase,  or  as  of  March  1,  1913,  if  acquired  prior  to  that 
date,  or  within  30  days  after  the  date  of  discovery,  as  the  case  may  be.  The 
oil  reserves  must  be  estimated  for  all  undeveloped  proven  land  as  well  as 
producing  land.  If  information  subsequently  obtained  clearly  shows  the 
estimate  to  have  been  materially  erroneous,,  it  may  be  revised  with  the  ap- 
proval of  the  Commissioner.  (Art.  209,  Reg.  45,  Rev.,  April  17,  1919.) 

1416  Computation  of  Allowance  for  Depletion  of  Mines  and  Oil  Wells 

r.  “ ]he  cost  or  value  as  of  March  1,  1913,  or  within  30  days 
atter  the  date  of  discovery  of  the  property  shall  have  been  determined,  and 
the  number  of  mineral  units  in  the  property  as  of  the  date  of  acquisition  or 
valuation  shall  have  been  estimated,  the  division  of  the  former  amount  by 
the  latter  figure  will  give  the  unit  value  for  purposes  of  depletion,  and  the 
depletion  allowance  for  the  taxable  year  may  be  computed  by  multiplying 
such  unit  value  by  the  number  of  units  of  mineral  extracted  during  the 
however,  proper  additions  are  made  to  the  capital  account  repre- 
sented by  the  original  cost  or  value  of  the  property,  or  unforeseen  circum- 
stances necessitate  a revised  estimate  of  the  number  of  mineral  units  in  the 
ground,  a new  unit  value  for  purposes  of  depletion  may  be  found  by  divid- 
ing the  capital  account  at  the  end  of  the  year,  less  deductions  for  depletion 
to  the  beginning  of  the  taxable  year  which  have  or  should  have  been  taken, 
by  the  number  of  units  in  the  ground  at  the  beginning  of  the  taxable  year. 
This  number,  unless  a revision  of  the  original  estimate  has  been  necessary 
will  equal  the  number  of  units  in  the  ground  at  the  date  of  original  ac- 

INC.  243 


TAX 


DEDUCTIONS— DEPLETION. 


quisition  or  valuation  less  the  number  extracted  prior  to  the  taxable  year. 
If,  however,  a recalculation  is  needed,  the  number  of  units  at  the  beginning 
of  the  year  will  be  the  sum  of  the  gross  production  of  the  year  and  the 
estimated  mineral  reserves  in  the  property  at  the  end  of  the  year.  (Art. 
210,  Reg.  45,  Rev.,  April  17,  1919.) 

1417  Computation  of  Allowance  for  Depletion  of  Gas  Wells. — On 

account  of  the  peculiar  conditions  surrounding  the  production  of 
natural  gas  it  will  be  necessary  to  compute  the  depletion  allowances  for  gas 
properties  by  methods  suitable  to  the  particular  cases  in  question  and  ac- 
ceptable to  the  Commissioner.  Usually,  the  depletion  of  natural  gas  prop- 
erties should  be  computed  on  the  basis  of  decline  in  closed  or  rock  pressure, 
taking  into  account  the  effects  of  water  encroachment  and  any  other  modi- 
fying factors.  The  gas  producer  will  be  expected  to  compute  the  depletion 
as  accurately  as  possible  and  submit  with  his  return  a description  of  the 
method  by  which  the  computation  was  made.  The  following  formula,  in 
which  the  units  of  gas  are  pounds  per  square,  inch  of  closed  pressure  may 
be  used  and  is  recommended:  the  quotient  of  the  capital  account  recover- 
able through  depletion  allowances  to  the  end  of  the  taxable  year,  divided 
by  the  sum.  of  the  pressures  at  the  beginning  of  the  year  less  the  sum  of  the 
pressures  at  the  time  of  expected  adandonment  (which  quotient  is  the  unit 
cost),  multiplied  by  the  sum  of  the  pressures  at 'the  beginning  of  the  taxable 
year  plus  the  sum  of  the  pressures  of  new  wells  less  the  sum  of  the  pressures 
at  the  end  of  the  tax  year,  equals  the  depletion  allowance.  (Art.  211,  Reg. 
45,  Rev.,  April  17,  1919.) 


1418  Gas  Well  Pressure  Records  to  be  Kept.— Beginning  with  1919 
closed  pressure  readings  of  representative  wells,  if  not  of  all  wells, 
must  be  carefully  made  and  kept.  In  order  to  standardize  pressure  read- 
ings the  well  should  remain  closed  until  the  pressure  does  not  build  up  more 
than  1 per  cent  of  the  total  pressure  in  10  minutes.  Ordinarily  24  hours  will 
suffice  for  this  purpose,  but  some  wells  will  need  to  remain  closed  for  a 
longer  period.  If  there  is  any  water  in  the  well  it  should  be  blown  or 
pumped  off  before  the  well  is  closed.  A closed  pressure  reading  of  a gas 
well  which  has  been  producing,  or  is  near  gas  wells  that  have  beeri  produc- 
ing, is  lower  than  the  actual  pressure  of  the  gas  in  the  reservoir  by  an 
amount  depending  on  the  well’s  location  with  reference  to  other  producing 
wells  and  the  length  of  time  it  has  been  closed  in.  It  is  necessaiy  to  record 
the  length  of  time  the  well  has  been  closed  and  to  show  how  the  pressure 
built  up  during  this  period.  Successive  readings  will  indicate  the  pomt  at 
which  the  pressure  becomes  approximately  stationary,  that  is,  the  point  at 
which  the  closed  pressure  approaches  as  nearly  as  possible  the  maximurn 
pressure  which  would  be  shown  if  all  wells  in  the^  pool  were  closed  loi 
several  months.  The  length  of  time  required  varies  with  the  character  of  the 
sand,  position  of  the  packer,  the  location  of  the  well  with  reference  to  other 
wells,  the  limits  of  the  pool,  and  other  factors.  The  depth  the  well,  di- 
ameter of  tubing,  and  line  pressure  when  the  well  was  shut  off,  should  be 
noted.  Since  readings  at  the  exact  end  of  the  taxable  year  will  ordinarily 
not  be  available,  the  pressure  of  that  date  may  be  obtained  by  interpolation 
or  extrapolation.  In  certain  cases  readings  taken  regularly  m September  or 
some  other  month  may  be  applicable  to  the  end  of  the  taxable  year  As  a 
general  rule  September  closed  pressure  readings  furnish  the  best  indication 
of  depletion  and  it  is  recommended  that  such  readings  be  made  with  regu- 


244 


TAX 


INC 


DEDUCTIONS— DEPLETION. 

larity  and  care.  Where  interpolated  or  extrapolated  readings  are  used  the 
data  from  which  they  are  obtained  should  be  given.  Gauges  should  be  of 
appropriate  capacity  and  should  be  frequently  tested.  A record  should  be 
kept  of  the  number  of  gauges,  ’date  each  was  tested,  names  of  men  testing, 
and  other  significant  details.  (Art.  212,  Reg.  45,  Rev.,  April  17,  1919.) 

1419  Computation  of  Allowance  Where  Quantity  of  Oil  or  Gas  Un- 
certain.— If  by  reason  of  the  youth  of  the  field,  the  restricted  pro- 
duction, or  for  any  other  cause,  it  is  not  possible  to  determine  with  any 
degree  of  certainty  the  quantity  of  oil  or  gas  in  a property,  it  will  be  neces- 
ary  to  make  a tentative  estimate  which  will  apply  until  production  figures  are 
available  from  which  an  accurate  determination  may  be  made.  (Art.  213 
Reg.  45,  Rev.,  April  17,  1919.) 

1420  Computation  of  Depletion  Allowance  for  Combined  Holdings  of 
Oil  and  Gas  Wells. — (1)  The  recoverable  oil  belonging  to  the 

taxpayer  shall  be  estimated  separately  on  the  smallest  unit  on  which  data 
are  available,  such  as  individual  wells  or  tracts,  and  these  added  together 
into  a grand  total  to  be  applied  to  the  total  capital  account  returnable  through 
depletion.  The  capital  account  shall  include  the  cost  or  value,  as ! the  case 
may  be,  of  all  oil  or  gas  leases  or  rights  within  the  United  States  and  its 
possessions,  plus  all  incidental  cost  of  development  not  charged  as  expense 
nor  returnable  through  depreciation.  The  unit  value  of  the  total  recover- 
able oil  or  gas  is  the  quotient  obtained  by  dividing  the  total  capital  account 
recoverable  through  depletion  by  the  total  estimated  recoverable  oil  or  gas. 
This  unit  multiplied  by  the  total  number  of  units  of  oil  or  gas  produced  by 
the  taxpayer  during  the  taxable  year  from  all  of  the  oil  and  gas  properties 
will  determine  the  amount  which  may  be  allowably  deducted  from  the 
gross  income  of  that  year. 

1421  (2)  In  the  case  of  the  gas  properties  of  a taxpayer  the  depletion  al- 
lowance for  each  pool  may  be  computed  by  using  the  combined  capital 

account  returnable  through  depletion  of  all  the  tracts  of  gas  land  owned  by 
the  taxpayer  in  the  pool  and  the  average  decline  in  rock  pressures  of  all  the 
taxpayer’s  wells  in  such  pool  in  the  formula  given  in  article  211  [][1417]. 
The  total  allowance  for  depletion  of  the  gas  properties  of  the  taxpayer  will 
he  the  sum  of  the  amounts  computed  for  each  pool.  (Art.  214,  Res’.  45 
Rev.,  April  17,  1919.) 

1422  Depletion  of  Mine  Based  on  Advance  Royalties. Where  the 

owner  has  leased  a mining  property  for  a term  of  years  with 

a requirernent  m the  lease  that  the  lessee  shall  mine  and  pay  for  annually 
a specified  number  of  tons  or  other  agreed  units  of  measurement  of  such 
mmeral,^  or  shall  pay  annually  a specified  sum  of  money  which  shall  be 
applied  in  payment  of  the  purchase  price  or  agreed  royalty  per  unit  of  such 
mineral  whenever  the  same  shall  thereafter  be  mined  and  removed  from  the 
leased  premises,  the  value  in  the  ground  to  the  lessor  for  purposes  of  de- 
pletion of  the  number  of  units  so  paid  for  in  advance  of  mining  will  con- 
stitute an  allowable  deduction  from  the  gross  income  of  the  year  in  which 
such  payment  or  payments  shall  be  made;  but  no  deduction  for  depletion  by 
the  lessor  shall  be  claimed  or  allowed  in  any  subsequent  year  on  account  of 
the  mining  or  removal  in  such  year  of  any  ore  or  mineral  so  paid  for  in 
advance  and  for  which  deduction  has  been  once  made.  If  for  any  reason 

245 


INC. 


TAX 


DEDUCTIONS— DEPLETION. 


any  such  mining  lease  shall  be  terminated  before  the  ore  or  mineral  therein 
which  has  been  paid  for  in  advance  has  been  mined  and  removed,  and  the 
lessor  repossesses  the  leased  property,  an  amount  equal  to  the  aggregate 
deductions  for  depletion  allowed  in  respect  of  ore  or  mineral  not  mined  and 
removed  by  the  lessee,  but  still  in  the  ground,  will  be  deemed  income  to  the 
lessor  and  will  be  returned  as  such  for  the  year  in  which  the  property  is  re- 
possessed. (Art.  215,  Reg.  45,  Rev.,  April  17,  1919.) 


1423  Depletion  and  Depreciation  Accounts  on  Books. — Every  taxpayer 
claiming  and  making  a deduction  for  depletion  and  depreciation  of 

mineral  property  shall  keep  accurate  ledger  accounts  in  which  shall  be 
charged  the  fair  market  value  as  of  March  1,  1913, 'or  within  30  days  after 
the  date  of  discovery,  or  the  cost,  as  the  case  may  be,  (a)  of  the  property, 
and  (b)  of  the  plant  and  equipment,  together  with  such  amounts  expended 
for  development  of  the  property  or  additions  to  plant  and  equipment  since 
that  date  as  have  not  been  deducted  as  expense  in  his  returns.  These  ac- 
counts shall  be  credited  with  the  amount  of  the  depreciation  and  depletion 
deductions  claimed  and  allowed  each  year,  or  the  amount  of  the  depreciation 
and  depletion  shall  be  credited  to  depletion  and  depreciation  reserve  accounts, 
to  the  end  that  when  the  sum  of  the  credits  for  depletion  and  depreciation 
equals  the  value  or  cost  of  the  property,  plus  the  amount  added  thereto  for 
development  or  additional  plant  and  equipment,  less  salvage  value  of  the 
physical  property,  no  further  deduction  for  depletion  and  depreciation  with 
respect  to  the  property  will  be  allowed.  If  dividends  are  paid  out  of  a 
depletion  or  depreciation  reserve,  the  stockholders  must  be  expressly  noti- 
fied that  the  dividend  is  a return  of  capital  and  not  an  ordinary  dividend 
out  of  profits.  See  article  1549  [for  discussion  of  such  dividends,  ^868]. 
(Art.  216,  Reg.  45,  Rev.,  April  17,  1919.) 

1424  Statement  to  be  Attached  to  Return  Where  Depletion  of  Mine 
Claimed. — To  the  return  of  the  taxpayer  claiming  a deduction 

for  depletion  or  depreciation  or  both  there  should  be  attached  a statement 
setting  out:  (a)  whether  the  owner  is  a free  owner  or  lessee  or  both;  (b) 
a description  of  the  property  owned  iu  fee,  if  any,  and  a description  of  the 
leasehold  property,  if  any,  including  the  date  of  acquisition  and  the  date 
of  expiration  of  the  lease;  (c)  the  fair  market  value  as  of  March  1,  1913, 
or  within  30  days  of  the  date  of  discovery,  or  the  cost,  as  the  case  may 
be,  of  the  property  owned  in  fee  and  the  leasehold  property,  together  with 
a statement  of  the  precise  method  by  which  the  value  or  the  cost  of  freehold 
and  leasehold  property  was  determined;  (d)  the  estimated  number  of  units 
of  mineral  or  ore  at  the  date  of  acquisition  or  of  valuation  in  the  property 
owned  in  fee  and  in  the  leasehold  property  separately,  .'together  with  an  ex- 
planation of  the  method  used  in  estimating  in  each  case  the  number  of  units 
of  mineral  or  ore  for  purposes  of  depletion;  (e)  the  amount  of  capital 
applicable  to  each  unit;  (f)  the  number  of  units  removed  and  sold  during 
the  year  for  which  the  return  was  made;  (g)  the  total  amount  deducted  on 
account  of  depletion  and  on  account  of  depreciation,  stated  separately,  up  to 
the  taxable  year  during  the  ownership  of  the  taxpayer;  andi(h)  any  other 
data  which  would  be  helpful  in  determining  the  reasonableness  of  the  deple- 
tion and  depreciation  deductions  claimed  in  the  return.  (Art.  217,  Reg.  45, 
Rev.,  April  17,  1919.) 


INC. 


246  TAX 


DEDUCTIONS— DEPLETION. 

1425  Statement  to  be  Attached  to  Return  Where  Depletion  of  Oil  or 
Gas  Claimed. — To  each  return  made  by  a person  owning  or  op- 
erating oil  or  gas  properties,  there  should  be  attached  a statement  showing 
for  each  property  the  following  information,  which  may  be  given  in  the 
form  of  a table,  if  desired  by  taxpayers  owning  more  than  one  property: 
(a)  the  fair  market  value  of  the  property  (exclusive  of  machinery,  equip- 
ment, etc.,  and  the  value  of  the  surface  rights)  as  of  March  1,  1913,  if  ac- 
quired prior  to  that  date ; or  the  fair  market  value  of  the  property  within 
30  days  after  the  date  of  discovery ; or  the  actual  cost  of  the  property,  if 
acquired  subsequently  to  February  28,  1913,  and  not  covered  by  the  fore- 
going clause;  (b)  how  the  fair  market  value  was  ascertained,  if  the  property 
came  under  the  first  or  second  head  under  (a)  ; (c)  the  estimated  quantity 
of  oil  or  gas  in  the  property  at  the  time  that  the  value  or  cost  was  deter- 
mined; (d)  the  name  and  address  of  the  person  making  the  estimate  and 
the  manner  in  which  this  estimate  was  made,  including  a summary  of  the 
calculations  ; (e)  the  amount  of  capital  applicable  to  each  unit  (this  being 
found  by  dividing  the  value  or  cost,  as  the  case  may  be,  by  the  estimated 
number  of  units  of  oil  or  gas  in  the  property  at  the  time  the  value  or  cost 
was  determined)  ; (f)  the  quantity  of  oil  or  gas  produced  during  the  year 
for  which  the  return  is  made  (in  the  case;  of  new  properties  'it  is  desirable 
that  this  information  be  furnished  by  months)  ; (g)  the  number  of  acres  of 
producing  and  proven  oil  or  gas  land;  (h)  the  number  of  wells  producing 
at  the  beginning  and  end  of  the  taxable  year;  (i)  the  date  of  completion  of 
wells  finished  during  the  taxable  year;  (j)  the  date  of  abandonment  of  all 
wells  abandoned  during  the  taxable  year;  (k)  a property  map  showing  the 
location  of  the  property  and  of  the  producing  and  abandoned  wells,  dry  holes, 
and  proven  oil  and  gas  land;  (1)  the  average  gravity  of  the  oil  produced,'  on 
the  tract;  (m)  the  number  of  pay  sands  and  average  thickness  of  each  pay 
sand  or  zone  on  the  property ; (n)  the  average  depth  to  the  top  of  each  of  the 
different  pay  sands;  (o)  any  data  regarding  change  in  operating  conditions, 
such  as  flooding,  use  of  compressed  air,  vacuum,  shooting,  etc.,  which  have 
a direct  effect  on  the  production  of  the  property;  (p)  the  monthly  or 
annual  production  of  individual  wells  and  the  initial  daily  production  of  new 
wells  (this  is  highly  desirable  information  and  should  be  furnished  wher- 
ever possible)  ; (q)  (for  the  first  year  in  which  the  above  information  is 
filed  for  a property  which  was  producing  prior  to  the  taxable  year  covered 
by  the  above  statement  the  following  information  must  be  furnished) 
annual  production  of  the  tract  or  of  the  individual  wells,  if  the  latter  in- 
formation is  available,  from  the  beginning  of  its  productivity  to  the  begin- 
ning of  the  taxable  year  for  which  the  return  was  filed ; the  average  number 
of  wells  producing  during  each  year;  and  the  initial  daily  production  of 
each  well;  and  (r)  any  other  data  which  will  be  helpful  in  determining 
the  reasonableness  of  the  depletion  deduction.  When  a taxpayer  has  filed 
adequate  maps  with  the  Commissioner  he  may  be  relieved  of  filing  further 
maps  of  the  same  properties,  provided  all  additional  information  necessary 
for  keeping  the  maps  up  to  date  is  filed  each  year.  This  includes  records  of 
dry  holes,  as  well  as  producing  wells,  together  with  logs,  depth  and  thick- 
ness of  sands,  location  of  new  wells,  etc.  By  “production”  is  meant  the  net 
production  of  oil  or  gas  belonging  to  the  taxpayer.  In  those  leases  where 
no  account  is  kept  of  the  oil  or  gas  used  for  fuel,  the  production  will  nec- 
essarily be  that  remaining  after  the  fuel  used  in  the  property  has  been  taken 
out.  In  cases  of  this  kind  an  estimate  of  the  fuel  used  from  each  tract 
should  be  given  for  each  year.  (Art.  218,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  247 


TAX 


DEDUCTIONS— DEPLETION. 

1426  Discovery  of  Mine. — The  discovery  of  a mine  or  a natural  deposit 
of  mineral,  whether  it  be  made  by  an  owner  of  the  land  or  by  a 

lessee,  shall  be  deemed  to  mean  (a)  the  bona  fide  discovery  of  a com- 
mercially valuable  deposit  of  ore  or  mineral  of  a value  materially  in 
excess  of  the  cost  of  discovery  in  natural  exposure  or  by  drilling  or  other 
exploration  conducted  above  or  below  ground,  or  (b)  the  development  and 
proving  of  a mineral  or  ore  deposit  which  has  been  abandoned  or  appar- 
ently worked  out,  or  sold,  leased  or  otherwise  disposed  of,  by  an  owner  or 
lessee  prior  to  the  development  of  a body  of  ore  or  mineral  of  sufficient  size, 
quality  and  character  to  determine  it,  in  connection  with  the  physical  and 
geological  conditions  of  its  occurrence,  to  be  a mineable  deposit  of  ore^  or 
mineral  having  a value  materially  in  excess  of  the  cost  of  the  proving 
and  development.  In  determining  whether  a discovery  has  been  made  the 
Commissioner  will  take  into  account  the  peculiar  conditions  of  the  case,  and 
every  taxpayer  claiming  the  value  of  a mineral  deposit  on  the  date  of  dis- 
covery or  within  30  days  thereafter  for  purposes  of  depletion  will  be  re- 
quired to  attach  to  his  return  a statement  setting  forth  the  conditions  and 
circumstances  of  the  discovery  and  the  size,  character  and  location  of 
the  deposit,  together  with  the  cost  of  discovery,  its  value  and  the  precise 
method  used  in  determining  the  value.  (Art.  219,  Reg.  45,  Rev.,  April  17, 
1919.) 

1427  Oil  and  Gas  Wells.  Section  214  (a)  (10)  and  Section  234  (a) 
(9)  provide  that  taxpayers  who  discover  oil  and  gas  wells  on  or 

after  March  1,  1913,  may,  under  the  circumstances  therein  prescribed,  de- 
termine the  fair  market  value  of  such  property  at  the  date  of  discovery  or 
within  30  days  thereafter  for  the  purpose  of  ascertaining  allowable  de- 
ductions for  depletion.  Before  such  valuation  may  be  made  the  statute 
requires  that  two  conditions  precedent  be  satisfied,  (1)  that  the  fair  market 
value  of  such  property  (oil  and  gas  wells)  on  the  date  of  discovery  or 
within  30  days  thereafter  became  materially  disproportionate  to  the  cost, 
by  virtue  of  the  discovery,  and  (2)  that  such  oil  and  gas  wells  were  not 
acquired  as  the  result  of  purchase  of  a proven  tract  or  lease.  (Art.  220, 
Reg.  45,  Rev.,  as  amended  by  T.  D.  2956,  Dec.  2,  1919.) 

1428  Discovery— Proven  Tract  or  Lease— Property  Disproportionate 
Value.— (1)  For  the  purpose  of  these  sections  of  the  Revenue  Act 

of  1918,  an  oil  or  gas  well  may  be  said  to  be  discovered  when  therd  is 
either  a natural  exposure  of  oil  or  gas,  or  a drilling  that  discloses  the  actual 
and  physical  presence  of  oil  or  gas  in  quantities  sufficient  to  justify  com- 
mercial exploitation.  Quantities  sufficient  to  justify  commercial  exploita- 
tion are  deemed  to  exist  when  the  quantity  and  quality  of  the  oil  or  gas  so 
recovered  from  the  well  are  such  as  to  afford  a reasonable  expectation  of 
at  least  returning  the  capital  invested  in  such  well  through  the  sale  of 
the  oil  or  gas,  or  both,  to  be  derived  therefrom. 

(2)  A proven  tract  or  lease  may  be  a part  or  the  whole  of  a proven 
area.  A proven  area  for  the  purposes  of  this  statute  shall  be^  pre- 
sumed to  be  that  portion  of  the  productive  sand  or  zone  or  reservoir  in- 
cluded in  a square  surface  area  of  160  acres  having  as  its  center  the  mouth 
of  a well  producing  oil  or  gas  in  commercial  quantities.  In  other  words, 
a producing  well  shall  be  presumed  to  prove  that  portion  of  a given  sand, 
zone  or  reservoir  which  is  included  in  an  area  of  160  acres  of  land,  regard^ 
less  of  private  boundaries.  The  center  of  such  square  area  shall  be  the 

248  TAX 


INC. 


DEDUCTIONS— DEPLETION. 


tT“’  to  the  section  lines  estab- 

li^ed  by  the  United  States  system  of  public  land  surveys  in  the  district  in 
which  It  IS  located.  Where  a district  is  not  covered  by  the  United  States 
Land  surveys,  the  sides  of  said  area  shall  run  north  and  south,  east  and  west. 
So  much  of  a taxpayer  s tract  or  lease  which  lies  within  an  area  proven  either 
y iimself  or  by  another  is  “a  proven  tract  or  lease”  as  contemplated  by 
the  statute,  and  the  discovery  of  a well  thereon  will  not  entitle  such  tax- 
payer  to  revalue  such  well  for  the  purpose  of  depletion  allowances,  unless 
the  tract  or  lea,se  had  been  acquired  before  it  became  proven.  And  even 
though  a well  IS  brought  in  on  a tract  or  lease  not  included  in  a proven 
area  as  heretofore  defined,  nevertheless  it  may  not  entitle  the  owner  of  the 
tract  or  lease  m which  such  well  is  located  to  revaluation  for  depletion 
purposes,  if  such  tract  or  lease  lies  within  a compact  area  which  is  immedi- 
ately surrounded  by  proven  land,  and  the  geologic  structural  conditions  on 
or  under  the  land  so  inclosed  may  reasonably  warrant  the  belief  that  the 
oil  or  gas  of  the  proven  areas  extends  thereunder.  Under  such  circum- 
stances the  entire  area  is  to  be  regarded  as  proven  land. 

(3)  "^e  property”  which  may  be  valued  after  discovery  is  the  “well” 
purposes  of  these  sections  the  “well”  is  the  drill  hole,  the  surface 
necessary  for  the  driHing  and  operation  of  the  well,  the  oil  or  gas  content 
of  the  par  icular  sand,  zone  or  reservoir  (limestone,  breccia,  crevice  etc  f 
m which  the  discovery  was  made  by  the  drilling  and  from  which  the  pro- 
duction  IS  drawn  to  the  limit  of  the  taxpayer’s  private  bounding  lines 
but  not  beyond  the  limits  of  the  proven  area  as  heretofore  providfd!  ' 
be  entitled  to  revalue  his  property  after  March  1, 
the  purpose  of  depletion  allowances  must  make  a discovery  after 
said  date  and  such  discovery  must  result  in  the  fair  market  value  of  the 
property  becoming  disproportionate  to  the  cost.  The  fair  market  value  of 
if  deemed  to  have  become  disproportionate  to  the  cost 

Tf  returnbJ'to  tf  "^-“ble  expectation 

if  ihi  f * 1*  an  amount  materially  in  excess  of  the  cost 

of  the  land  or  lease  if  acquired  since  March  1,  1913,  or  its  fair  market 

value  on  March  1,  1913,  if  acquired  prior  thereti,  plus  the  cost  of  ^xpS 

2?n  r the  time  the  well  was  brought  in.  (Art 

220  (a),  Reg.  45,  Rev.,  added  by  T.  D.  2956,  Dec.  2,  1919.)  ^ 

1429  Proof  of  Discovery  of  Oil  and  Gas  Wells.— In  order  to  meet  the 
the  requirements  of  the  preceding  article  to  the  satisfaction  of  the 
thi  the  taxpayer  will  be  required,  among  other  things,  to  submit 

Z SZiZfZr'TJ-  ^ “"P  convenient  sctk,  showing 
the  location  of  the  tract  and  discovery  well  in  question  and  of  the  nearest 

producing  well,  and  the  development  for  a radius  of  at  least  three  miles 
from  the  tract  in  question,  both  on  the  date  of  discovery  and  on  the  date 
when  the  fair  market  value  was  set;  (b)  a certified  cop/ of  Ae"og  oflhe 
discovery  \vell,  showing  the  location,  the  date  drilling  began,  the  date  of  com- 

production,  the  formations  penetrated,  the  oil 
® f penetrated,  the  casing  record,  including  the  record  of 

perforations,  and  any  other  information  tending  to  show  the  conditi/n 
of  the  well  and  the  location  of  the  sand  or  zone  from  which  the  oil  or  gas 
n .the  discovery  was  claimed;  (c)  a sworn  recordPf 

production,  clearly  proving  the  commercial  productivity  of  the  discovery 
well;  (d)  a sworn  copy  of  the  records,  showing  the  cost  of  the  proZZ 
and  (e)  a full  explanation  of  the  method  of  determining  the  value  on  the 

INC.  249 


TAX 


DEDUCTIONS— DEPLETION. 


date  of  discovery  or  within  30  days  thereafter,  supported  by  satisfactory 
evidence  of  the  fairness  of  this  value.  (Art.  221,  Reg.  45,  Rev.,  as 
amended  by  T.  D.  2956,  Dec.  2,  1919.) 

1430  Charges  to  Capital  and  to  Expense  in  the  Case  of  Mine. — In  the 
case  of  mining  operations  all  expenditures  for  plant,  equipment,  de- 
velopment, rent  and  royalty  prior  to  production,  and  thereafter  all  major 
items  of  plant  and  equipment,  shall  be  charged  to  capital  account  for  pur- 
poses of  depletion  and  depreciation.  After  a mine  has  been  developed  and 
equipped  to  its  normal  and  regular  output  capacity,  however,  the  cost  of 
additional  minor  items  of  equipment  and  plant,  including  mules,  motors, 
mine  cars,  trackage,  cables,  trolley  wire,  fans,  small  tools,  etc.,  necessary  to 
maintain  the  normal  output  because  of  increased  length  of  haul  or  depth  of 
working  consequent  on  the  extraction  of  mineral,  and  the  cost  of  replace- 
ments of  these  and  similar  minor  items  of  worn-out  and  discarded  plant 
and  equipment,  may  be  charged  to  current  expense  of  operations,  unless  the 
taxpayer  elects  to  write  off  such  expenditures  through  charges  for  deprecia- 
tion. (Art.  222,  Reg.  45,  Rev.,  April  17,  1919.) 

1431  Charges  to  Capital  and  to  Expense  in  the  Case  of  Oil  and  Gas 
Wells. — Such  incidental  expenses  as  are  paid  for  wages,  fuel, 

repairs,  hauling,  etc.,  in  connection  with  the  exploration  of  the  property, 
drilling  of  wells,  building  of  pipe  lines,  and  development  of  the  property  may 
at  the  option  of  the  taxpayer  be  deducted  as  an  operating  expense  or  charged 
to  the  capital  account  returnable  through  depletion.  If  in  exercising  this 
option  the  taxpayer  charges  these  incidental  expenses  to  capital  account,  in 
so  far  as  such  expense  is  represented  by  physical  property  it  rnay  be  taken 
into  account  in  determining  a reasonable  allowance  for  depreciation.  The 
cost  of  drilling  nonproductive  wells  may  at  the  option  of  the  operator  be 
deducted  from  gross  income  as  an  operating  expense  or  charged  to  capital 
account  returnable  through  depletion  and  depreciation  as  in  the  case  of 
productive  wells.  An  election  once  made  under  this  option  will  control  the 
taxpayer’s  returns  for  all  subsequent  years.  Casinghead-gas  contracts  have 
been  construed  to  be  tangible  assets  and  their  cost  may  be  added  to  the 
capital  account  returnable  through  depletion,  following  the  rate  set  by  the 
oil  wells  from  which  the  gas  is  derived,  or,  if  the  life  of  the  contract  is 
shorter  than  the  reasonable  expectation  of  the  life  of  the  wells  furnishing  the 
gas,  the  capital  invested  in  the  contract  may  be  written  off  through  yearly 
allowances  equitably  distributed  over  the  life  of  the  contract.  All  oil  pro- 
duced during  the  taxable  year,  whether  sold  or  unsold,  must  be  considered 
in  the  computation  of  the  depletion  allowance  for  that  year.  In  com- 
puting net  income  all  oil  in  storage  at  the  beginning  and  at  the  end  ^ of 
the  taxable  year  must  be  inventoried  at  cost,  that  is,  unit  cost  plus  lifting 
cost.  Where  deductions  for  depreciation  or  depletion  have  either  on  the 
books  of  the  taxpayer  or  in  his  returns  of  net  income  been  included  in  the 
past  in  expense  or  other  accounts,  rather  than  specifically  as  depreciation  or 
depletion,  or  where  capital  expenditures  have  been  charged  to  expense  in  lieu 
of  depreciation  or  depletion,  a statement  indicating  the  extent  to  which  this 
practice  has  been  carried  should  accompany  the  return.  (Art.  223,  Reg.  45, 
Rev.,  April  17,  1919.) 

1432  Depreciation  of  Improvements  in  the  Case  of  Mine. — It  shall  be 
optional  with  the  taxpayer,  subject  to  the  approval  of  the  Commis- 
sioner, (a)  whether  the  cost  or  value  of  the  mining  property,  including  ores 

250  TAX 


INC. 


DEDUCTIONS— DEPLETION. 


equipment,  and  charges  and  additions  to  capital 

of  thp  f 1°  deducted  as  expense  on  the  returns 

of  the  taxpayer,  shall  be  recovered  at  a rate  established  by  current  exhaus- 
tion of  rnineral,  or  (b)  whether  the  cost  or  value  of  the  mineral  and  charges 
to  capital  account  of  expenditures  other  than  for  physical  property  shall  be 
recovered  by  appropriate  charges , based  on  depletion  and  the  cost  or  value 
of  plant  and  equipment  shall  be  recovered  by  reasonable  charges  for  depre- 
ciation calculated  by  the  usual  rules  for  depreciation  or  according  to  the 
peculiar  conditions  of  the  taxpayer’s  case  by  a method  satisfactory  to  the 
Commissioner.  Nothing  m these  regulations  shall  be  interpreted  to  mean 
that  the  value  of  a mining  plant  and  equiqment  may  be  reduced  by  depre- 
ciation or  dep  etion  deductions  to  a sum  below  the  value  of  the'  salvag-e  when 
the  property  shall  have  become  obsolete  or  shall  have  been  abandoned  for  the 
purpose  of  mining  or  that  any  part  of  the  value  of  land  for  purposes  other 

22X  RTi,“.v.^prin7;*s 

1433  Depreciation  of  Improvement  in  the  Case  of  Oil  and  Gas  Wells. 

—Both  owners  and  lessees  operating  oil  or  gas  properties  will,  iii 
addition  to  and  apart  from  the  deduction  allowable  for  the  depletion  or 
return  of  capital  as  hereinbefore  provided,  be  permitted  to  deduct  a reason- 
able allowance  for_  depreciation  of  physical  property,  such  as  machinery 
tools,  equipment,  pipes,  etc.,  so  far  as  not  in  conflict  with  the  option  exer- 
cised by  the  taxpayer  under  article  223.  The  amount  deductible  on  this  ac- 
count  shall  be  such  an  amount  based  upon  its  cost  or  fair  market  value  as  of 
March  1,  1913,  equitably  distributed  over  its  useful  life  as  will  bring  such 
property  to  its  true  salvage  value  when  no  longer  useful  for  the  purpose  for 
which  such  property  was  acquired.  Accordingly,  where  it  can  be  shown 
to  the  satisfaction  of  the  Commissioner  that  the  reasonable  expectation  of 
the  economic  life  of  the  oil  or  gas  deposit  with  which  the  property  is  con- 
nected is  shorter  than  the  normal  useful  life  of  the  physical  property,  the 
amount  annually  deductible  for  depreciation  may  for  such  property  be  based 
upon  the  length  of  life  of  the  deposit.  See  articles  161-170  Ifor.the  subject 

![1330].  (Art.  225,  Reg.  45,  Rev., 

Depreciation  of  Oil  and  Gas  Wells  in  Years  Before 
.•  i ur  “ examination  it  is  found  that  in  respect  of  the 

‘'Tr*  s '"eluding  physical  property  and  incidental  ex- 

penses,  between  March  1,  1913,  and  December  31,  1915,  a taxpayer  has  been 
allowed  a reasonable  deduction  suflScient  to  provide  for  the  elements  of  ex- 
haustion, wear  and  tear,  and  depletion,  it  will  not  be  necessary  to  reopen  the 
returns  for  years  prior  to  1916  in  order  to  show  separately  in  these  years  the 
portions  of  such  deduction  representing  depletion  and  depreciation,  respec- 
tively. _ .Such  separation  will  be  required  to  be  made  of  the  reserves  for 
depreciation  at  January  1,  1916,  and  proper  allocation  between  depreciation 
and  depletion  must  be  maintained  after  that  date.  In  any  case  in  which  it 
IS  found  that  the  deductions  taken  between  March  1,  1913,  and  Dcember  31 
1913,  are  not  reasonable,  amended  returns  may  be  required  for  these  years’ 
See  article  §39  (for  invested  capital.— War  Tax  Service],  (Art.  226,  Reg. 
45,  Rev.,  April  17,  1919.)  » s 

1435  Form  A Revised  (Mining)  and  Form  N (Oil  and  Gas).— ICor- 
• 2^  Schedule  A,  page  2 of  Form  1120.]  Form  A 

revised  (Mining)  and  Form  N (Oil  and  Gas)  have  been  prepared  for  the 

INC.  251  TAX 


DEDUCTIONS— DEPLETION. 


use  of  taxpayers  engaged  in  mining  or  in  the  production  of  oil  and  gas. 
A sufficient  supply  will  be  sent  to  Collectors  of  Internal  Revenue  for  dis* 
tribution. 

1436  These  forms  are  prescribed  to  facilitate  the  compilation  and  presen- 
tation of  certain  information  required  for  the  audit  and  examination 
of  the  returns  of  these  classes  of  taxpayers.  If,  however,  it  is  more  con- 
venient to  use  other  methods  of  tabulation,  the  information  so  furnished, 
if  complete,  will  be  accepted  in  lieu  of  those  forms. 

1487  The  information  called  for  by  these  forms  should  be  filed  \vith  th« 
returns  in  complete  detail,  either  on  the  forms  prescribed  or  in  other 
suitable  manner.  This  requirement  is  necessary  for  the  reason  that  deple- 
tion sustained  must  be  taken  into  consideration  in  the  computation  of  in- 
vested capital,  regardless  of  whether  or  not  a deduction  for  it  is  claimed  or 
has  been  claimed  for  it  in  the  past  by  the  taxpayer.  This  requirement  applies 
to  individual  as  well  as  corporate  taxpayers.  (T.  D.  2849,  May  27,  1919.) 

1438  Depletion  of  Timber.— A reasonable  deduction  from  gross  income 
for  the  depletion  of  timber  and  for  the  depreciation  of  improvements 

is  permitted,  based  (a)  upon  cost  if  acquired  after  Febrpry  28,  1913,  or 
(b)  upon  the  fair  market  value  as  of  March  1,  1913,  if  acquired  prior 
thereto.  The  essence  of  this  provision  is  that  the  owner  of  timber  property, 
whether  it  be  a leasehold  or  a freehold,  shall  secure  through  an  aggregate  of 
annual  depletion  and  depreciation  deductions  a return  of  the  amount  of 
capital  invested  by  him  in  the  property,  or  in  lieu  thereof  an  amount  equal 
to  its  fair  market  value  as  of  March  1,  1913,  plus  in  any  case  the  subsequent 
cost  of  plant,  equipment  and  development  which  is  not  chargeable  to  cuirent 
operating  expenses,  but  not  including  cut-over  land  values.  (Art.  227,  Reg. 
45,  Rev.,  April  17,  1919.) 

1439  Capital  Recoverable  Through  Depletion  Allowance  In  the  Case  of 
Timber.— In  general,  the  capital  remaining  in  any  year  recover- 
able through  depletion  allowances  may  be  determined  as  indicated  in  articles 
202  [t[1408]  and  203  [1fl409].  In  the  case  of  leases  the  apportionment  of 
deductions  between  the  lessor  and  lessee  should  be  made  as  specified  m 
article  204  [^410].  Where  it  becomes  necessary  to  determine  the  cost  or 
fair  market  value  as  of  March  1,  1913,  of  the  property,  the  rules  laid  down 
in  articles  205  [P411]  and  206  [P412]  should  be  followed  so  far  as  pos- 
sible. (Art.  228,  Reg.  45,  Rev.,  April  17,  1919.) 

1440  Computation  of  Allowance  for  Depletion  of  Timber.  An  allow- 
ance for  the  depletion  of  timber  in  any  taxable  year  shall  be  based 

upon  the  number  of  feet  of  stumpage  cut  during  the  year  and  the  unit  cost 
of  the  stumpage  at  the  date  of  acquisition  or  the  unit  market  value  on 
March  1,  1913,  if  acquired  prior  thereto.  The  unit  market  value  as  of 
March  1,  1913,  shall  be  the  unit  price  at  which  the  standing  timber  in  its 
then  condition  and  in  view  of  its  then  environment  could  have  been  sold 
for  cash  or  its  equivalent.  The  amount  of  the  deduction  for  depletion  in 
any  taxable  year  shall  be  the  product  of  the  number  of  feet  of  stumpage  cut 
during  the  year  multiplied  by  such  unit  cost  or  market  value  of  the  stump- 
age. (Art.  229,  Reg.  45,  Rev.,  April  17,  1919.) 

1441  Revaluation  of  Stumpage  Not  Allowed. — The  fair  market  value 
of,  stumpage  when  determined  as  of  March  1,  1913,^  for  the  purpose 

of  depletion  allowances  in  the  case  of  timber  acquired  prior  thereto,  shall 

INC.  252  TAX 


DEDUCTIONS— DEPLETION. 


be  the  basis  for  determining  the  depletion  deduction  for  each  year  during 
the  continuance  of  the  ownership  under  which  the  fair  market  4lue  of  the 
stumpage  was  fixed  and  during  such  ownership  there  can  be  no  redetermin- 
tion  of  the  fair  market  value  of  the  stumpage  for  such  purpose.  However 
the  «nit  market  value  of  stumpage  adopted  by  the  taxpayer  may  subse- 
quently be  chan^ged  If  from  any  cause  such  value,  if  continued  as  a basis 
of  depletion,  should  upon  evidence  satisfactorv  to  the  Commissioner  be 
found  inadequate  or  excessive  for  the  extinguishment  of  the  fair  market 

ST919.)  “ 45.  Rev.,  April 

1442  Charges  to  Capital  and  to  Expense  in  the  Case  of  Timber  —In 
the  case  of  tirnber  operations  all  expenditures  for  plant,  equipment 

development,  rent  and  royalty  prior  to  production,  and  thereafter  all  maTor 
Items  of  plant  and  equipinent,  shall  be  charged  to  capital  account  for  pur- 
poses of  depreciation.  After  a timber  operation  and  plant  has  been  deveh 
oped  and  equipped  to  its  normal  and  regular  output  capacity,  the  cost  of 
additional  minor  items  of  equipment  and  the  cost  of  replacement  of  mLor 
Items  of  worn-out  and  discarded  plant  and  equipment  may  be  charged  to 
current  expenses  of  operations.  (Art.  231,  Reg.  45,  Rev.,  April  17,  f919  ) 

1443  Depreciation  of  Improvements  in  the  Case  of  Timber.— The  cost 

or  value  as  of  March  1,  1913,  as  the  case  may  be,  of  development 
no  represented  by  physical  property  having  an  inventory  value  and  Tuch 
cost  or  value  of  all  physical  property  which  has  not  been  deducted  and 
allowed  as  expense  in  the  returns  of  the  taxoaver  ^ m 

through  depreciation.  It  shall  be  optional  with  the  taxoaver^uhw/r^n^ 
approval  of  the  Commissioner,  (aWhether  the  cosro'rTalu:  aftL  c2^^ 
property  subject  to  depreciation  shall  be  recovered  at  a rate 
established  by  current  exhaustion  of  stumpage  or  Ibl  whet-hor  T * 

value  shall  be  recovered  by  appropriate  ch^rfe^  To/ deprecl£„  calculate°d 
by  the  usual  rules  for  depreciation  or  accordincr  tn  r j*  • 

of  the  taxpayer’s  case  by  a method  satisfactory  T the^Commisslo/TTnTo 
case  may  charps  for  depreciation  be  based  on  a rate  which  TTT  inguish 

*1"  the  terminatioTofTts  useful 

I\othing  in  these  regulations  shall  be  interpreted  to  mean  tknf  i i 

a timber  plant  and  equipment,  so  far  as  itT  represeTed  f 

erty  having  an  inventory  value,  may  be  reduced  hv  denr^  Pyop- 

Claim'^dTT  Attached  to  Return  Where  Depletion  of  Timber 

hold  property;  (d)  the  number  of  feet  of  timbe^  Removed  an^lldV^^*^^’ 
the  year  for  which  the  return  was  made-  (e)  the  ^ ^ during 

account  of  depletion  and  on  account  of' iepTciatlT!  s^terseSStery';  up 

INC.  253  TAX 


DEDUCTIONS— DEPLETION. 

to  the  taxable  year  during  the  ownership  of  the  5/L^the 

other  data  which  would  be  helpful  in  determining  Ae  ’'f 
depletion  and  depreciation  deductions  claimed  m the  return.  ‘^^P^ral 

shall  keep  accurate  ledger  accounts  as  outlined  in  article  216,  and  in  graeral 
should  comply  with  the  requirements  of  the  f oregoing  artic  es  relating  o 
the  depletion  of  mines  and  oil  and  gas  wells  so  far  as  applicable.  (Art.  233, 
Reg.  45,  Rev.,  April  17,  1919.) 

1445  Determination  of  Fair  Market  Value  of  Timber.  Where  the  fair 
market  value  of  the  property  at  a specified  date  in  lieu  of  ^ost 
thereof  is  the  basis  for  depletion  and  depreciation  deductions,  such  value 
must  be  determined,  subject  to  approval  or  revision  by  the  Commissioner 
Tthe  owner  of  the  property  in  the  light  of  the  most  reliable  and  accurate 
information  with  reference  to  the  condition  of  the  property  as  it  existed  at 
that  date,  regardless  of  all  subsequent  changes  such  as  changes  m surround- 
ing circumstances,  in  methods  of  exploitation,  m degree  of  utilization,  «c. 
tL  value  sought  should  be  that  established,  assuming  a transfer  between 
a wiltorseller  and  a willing  buyer  as  of  that  particular  date.  No  rule  or 
meAofof  dlrmining  the  fair"^  market  value  of  timber  Property  is  pre- 
scribed but  the  Commissioner  will  give  due  weight  and  consideration  to  a y 
and  all’  facts  and  evidence  having  a bearing  on  the  market  value,  such  as 
cost  actual  sales,  and  transfers  of  similar  properties,  market  value  of  stock 
or  shares  royalties  and  rentals,  value  fixed  by  the  owner  for  purposes  of  t 
capital-stock^tax  valuation  for  local  or  State  taxation,  partnership  account- 
records^  litigation  in  which  the  value  of  the  property  was  m ques- 
tiot  the  amount  at  which  the  property  may  have  been  m pro- 
bate court,  disinterested  appraisals  by  to ^ rket 

tors  For  depletion  purposes  the  cost  of  the  timber  or  its  fair  market 

value  at  a specified  date  shall  not  include  any  Part  of  the 

of  the  land.  (Art.  234,  Reg.  45,  Rev.,  added  by  T.  D.  2916,  September  b, 

1919.)  [In  connection  with  the  foregoing  read  at 

1446  Determination  of  Quantity  of  Timber.--Each  f 

a deduction  for  depletion  is  required  to  estimate  with  r®spect  to  each 

separate  timber  account  the  total  units  (feet  board  ^ d to  htve 

units)  of  timber  reasonably  known  or  on  good  evidence  believed  to  have 
Sd  on  the  ground  on  March  1,  1913,  or  on  the  date  of  acquisition 
of  the  property,  as  the  case  may  be.  The  taxpayer,  according  o i 
kLuldge  Ld  belief  and  in  the  light  of  the  most  accurate  and  reliable 

information,  will  estimate  the  number  of  units  of  P®'^®^^/®‘f'‘2ts^whidl 
noon  the  specified  date;  this  , estimate  will  state  the  number  of  units  which 
would  have  been  found  present  by  a careful  estimate  made  on  the  specified 
date  with  the  object  of  determining  100  per  cent  of  the  quantity  o 

which  the  area  would  have  produced  on  that  date  } ^ ^ standards  oTutili- 
timber  had  been  cut  and  utilized  in  accordance  with  the  standards  ot  uti 

zato  prevamng  in  that  region  at  that  time.  If  subsequently  d™  *e 
ownersWp  of  the  taxpayer  making  the  return  ^'dditional  units  o^  fimbe 
are  found  to  be  available  for  utilization  as  the  result  of  the  growth  ot  me 
timber  of  closer  utilization  of  the  timber,  of  the  utilization  of  species  of 
rTes  not  foimerly  utilized,  of  underestimates  of  the  quantity  of  timber 
available  on  the  specified  date,  etc.,  which 
estimating  the  number  of  units  for  P«.■•P“®^°^/®Pl® 
found  in  the  course  of  operation  that  timber  included  in  the  estimate 

254  TAX 


INC. 


DEDUCTIONS— CONTRIBUTIONS. 


merchantable  as  the  result  of  deterioration  through  rot  or  otherwise,  or 
that  the  original  estimate  was  too  great,  a new  estimate  of  the  recoverable 
units  of  timber  (but  not  of  the  cost  or  the  fair  market  value  at  a specified 
date)  shall  be  made  and  when  made  shall  thereafter  constitute  a basis  for 
depletion.  In  the  selection  of  the  unit  or  units  of  estimate  the  custom 
applicable  to  the  given  type  of  timber  in  the  given  region  should  be  con- 
sidered. (Art.  235,  Reg.  45,  Rev.,  added  by  T.  D.  2916,  September  5, 
1919.) 


1447  Law  jf  142.  Certain  Contributions  or  Gifts  Made  by  Individuals 

are  Deductible  to  a Limited  Amount. — ‘'(11)  Contri- 
butions or  gifts  made  within  the  taxable  year  to  corporations  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or  educational  pur- 
poses, or  for  the  prevention  of  cruelty  to  children  or  animals,  no  part  of 
the  net  earnings  of  which  inures  to  the  benefit  of  any  private  stockholder 
or  individual,  or  to  the  special  fund  for  vocational  rehabilitation  authorized 
by  section  7 of  the  Vocational  Rehabilitation  Act,  to  an  amount  not  in 
excess  of  15  per  centum  of  the  taxpayer’s’  net  income  as  computed  without 
the  benefit  of  this  paragraph.  Such  contributions  or  gifts  shall  be  allow- 
able as  deductions  only  if  verified  under  rules  and  regulations  prescribed  by 
the  Commissioner,  with  the  approval  of  the  Secretary.” 

1448  Charitable  Contributions. — Contributions  or  gifts  within  the  tax- 
able year  are  deductible  to  an  aggregate  amount  not  in  excess 

of  fifteen  per  cent  of  the  taxpayer’s  net  income  including  such  pay- 
ments, if  made  (a)  to  corporations  or  associations  of  the  kind  exempted 
from  tax  by  subdivision  (6)  of  section  231  of  the  statute  or  (b) 
to  the  special  fund  for  vocational  rehabilitation  under  the  Vocational 
Rehabiliation  Act  of  June  27,  1918.  For  a discussion  of  what  corpor- 
ations and  associations  are  included  within  (a)  see  article  517  [1f760]. 
A gift  to  a common  agency  (as  a war  chest)  for  several  such  cor- 
porations or  associations  is  treated  like  a gift  directly  to  them.  In 
connection  with  claims  for  this  deduction  there  shall  be  stated  on  re- 
turns of  income  the  name  and  address  of  each  organization  to  which  a 
gift  was  made  and  the  approximate  date  and  the  amount  of  the  gift  in 
each  case.  Where  the  gift  is  other  than  money,  the  basis  for  calculation 
of  the  amount  of  the  gift  shall  be  the  fair  market  value  of  the  property 
at  the  time  given.  A gift  of  real  estate  to  a city  to  be  maintained  per- 
petually as  a public  park  is  not  an  allowable  deduction.  This  article 
does  not  apply  to  gifts  by  partnerships,  estates  and  trusts,  or  corpora- 
tions. See  sections  218  [for  partnerships,  t552]  and  219  [for  estates 
and  trusts,  1[652]  of  the  statute  and  articles  561  and  562  [for  corporations, 
111  181  and  111227].  (Art.  251,  Reg.  45,  Rev.,  April  17,  1919.) 

1449  Receipt  is  acknowledged  of  your  letter  dated  December  5.  1917, 
referring  to  contributions  or  gifts  made  by  citizen  and  resident 

individuals  of  the  United  States  to  corporations  or  associations  organ- 
ized and  operated  exclusively  for  religious,  charitable  or  scientific  pur- 
poses which  may  be  considered  as  a deduction  for  tax  purposes,  in  ac- 
cordance with  the  provisions  of  the  ninth  paragraph  added  to  Section 
5 (a).  Act  of  September  8,  1916,  by  Section  1201,  Act  of  October  3,  1917. 

1450  You  present  several  inquiries  which  are  repeated  and  answered 
in  the  order  stated  by  you. 

INC.  255 


TAX 


DEDUCTIONS— CONTRIBUTIONS. 


1451  “Are  gifts  to  foreign  organizations  of  a character  specified  in  the 
Law  to  be  also  deducted?”  Such  contributions  or  gifts  may  be 

considered  in  computing  the  amount  allowable  as  a deduction  under 
the  provisions  of  paragraph  nine. 

1452  “Is  the  Red  Cross  to  be  included  as  a charitable  organization  . 

It  is  held  that  the  American  National  Red  Cross  falls  within 

the  class  of  associations  enumerated  in  paragraph  nine. 

1453  “Is  a church  to  be  considered  a religious  organpation?  Of  course, 
we  know  that  ‘the  Church’  is  a religious  institution,  but  is  any 

particular  church  so  considered?”  It  is  held  that  every  church  con- 
stitutes a religious  corporation  or  association  for  the  purposes  of  the 
deduction  provided  by  the  ninth  paragraph.  _ r i . 

1454  “In  this  connection,  are  donations  made  to  missionary  funds,  to 
the  church  building  funds  and  for  the  benefit  of  other  activities 

of  the  church  to  be  deductible?”  It  is  held  that  all  such  donations,  being 
for  the  benefit  or  furtherance  of  religious  activities,  constitute  items  which 
may  be  considered  in  computing  the  deductions  provided  by  the  niihh  para- 
graph. (Letter  to  The  Corporation  Trust  Company,  signed  by  Commis- 
sioner Daniel  C.  Roper,  and  dated  December  24,  1917.) 

1455  With  referenc  to  the  ninth  paragraph  of  Section  5 of  the  Act 
of  September  8,  1916,  as  amended,  how  am^  I to  determine  to 

what  extent  contributions  or  gifts  made  to  corporations  or  associations, 
organized  exclusively  for  religious,  charitable,  scientific  or  educationa 
purposes,  societies  for  the  Prevention  of  Cruelty  to  Children  or  Animals, 

may  be  claimed  as  a deduction?  , 

1456  You  should  first  ascertain  what  your  taxable  net  income  would 
be  were  you  not  entitled  to  a deduction  on  account  of  contri- 
butions or  gifts  made  to  such  corporations,  associations  or  so- 
cieties, and  then  if  the  aggregate  of  your  contributions  and  gifts  made 
during  the  year  to  such  organizations  does  not  exceed  15  per  cent  ot 
your  taxable  net  income  so  computed,  their  aggregate  aniount  may  be 
entered  in  the  space  provided  therefor  under  General  Deductions  on  a 
personal  return  form.  If  such  aggregate  amount  exceeds  15  per  cent  of 
your  taxable  net  income  so  computed,  the  excess  cannot  be  claimed. 

1457  For  example:  Your  total  taxable  net  income  amounts  to  $2U,- 
OOO.  During  the  year  you  have  contributed  to  the  National  Red 

Cross  $1,000,  to  the  Young  Men’s  Christian  Association  $1,000,  toward 
the  construction  of  a new  church  $1,000,  and  to  the  Associated  Char- 
ities of  your  home  city  $500,  a total  of  $3,500.  Fifteen  per  cent  of  your 
total  net  income  amounts  to  $3,000,  therefore,  this  latter  amount  may 
be  claimed  as  a deduction,  and  the  balance  of  your  contributions  and 

gifts  may  not  be  claimed.  . 

1458  During  1917  I contributed  $100  toward  the  support  of  a needy 
family.  May  this  contribution  be  claimed  as  a deduction?  (An- 
swer ) Contributions  or  gifts  made  to  individuals  do  not  constitute  allow- 
able deductions.  (Questions  86  and  87,  1918  Income  Tax  Primer.) 

1459  No  Taxable  Profit  Accrues  to  the  Donor  in  Connection  with  the 
Making  of  a Deductible  Charitable  Contribution  in  the  Form  of 

Securities  Which  Have  Increased  in  Value  in  His  Hands.— In 
compliance  with  your  request  of  July  31,  1919,  this  office  hereby  confirms 
the  following  telegram  addressed  to  you  under  date  of  July  19,  IViy. 
“Your  telegram  July  17.  Where  donor  is  entitled  to  claim  deduction 

256  TAX 


INC. 


DEDUCTIONS— CONTRIBUTIONS. 

for  value  of  gift  as  provided  in  Article  251  [1[1448]  regulations  he  is  not 
required  to  report  as  a profit  the  excess  in  value  of  the  property  donated 
over  its  cost  or  fair  market  value  on  March  1,  1913.’'  The  above  was  in 
reply  to  your  telegraphic  inquiry  of  July  17,  which  reads  as  follows : 

“Article  251  says  where  charitable  gift  is  other  than  money  basis 
for  calculation  of  amount  to  be  deducted  shall  be  fair  market  value  of 
thing  given:  Does  this  mean  donor  can  deduct  market  value  of  gift 
of  securities  without  being  treated  as  having  realized  as  taxable  income 
the  difference  between  such  market  value  and  cost  of  securities  to  him? 
Please  wire  reply  our  expense.”  (Letter  to  Ropes,  Gray,  Boyden  and 
Perkins,  Boston,  Mass.,  signed  by  J.  H.  Callan,  Assistant  to  the  Com- 
missioner, by  N.  T.  Johnson,  Chief  of  Section,  and  dated  Aug.  14,  1919.) 

1460  Corporations  are  not  Entitled  to  Deduct  from  Gross  Income  the 
Amount  of  Contributions  to  Religious,  Charitable,  Scientific  or 

Educational  Corporations  or  Associations,  Even  Though  Such  Con- 
tributions Are  Made  to  Red  Cross  or  Other  War  Activities.— The 

Revenue  Act  of  1918  contains  two  sections  relating  to  deductions  which 
may  be  made  in  ascertaining  net  income  subject  to  tax.  Section  214 
relates  to  individuals  and  allows  as  deductions : 

(1)  All  ordinary  and  necessary  expenses  paid  or  incurred  during  the 
taxable  year  in  carrying  on  any  trade  or  business,  etc. 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  indebted- 
ness, etc.  (with  certain  exceptions). 

(3)  Taxes  paid  or  accrued  within  the  taxable  year,  etc.  (with  cer- 
tain exceptions). 

(4-10)  Certain  allowance  for  losses,  bad  debts,  exhaustion,  wear 
and  tear  of  property  of  various  sorts. 

(11)  Contributions  or  gifts  made  within  the  taxable  year  to  corpora- 
tions organized  and  operated  exclusively  for  religious,  charitable,  scien- 
tific, or  educational  purposes,  or  for  the  prevention  of  cruelty  to  chil- 
dren or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual,  etc. 

1461  Section  234  relates  to  corporations,  and  allows  as  deductions : 

(1)  All  ordinary  and  necessary  expenses  paid  or  incurred  during 
the  taxable  year  in  carrying  on  any  trade  or  business,  including  a rea- 
sonable allowance  for  salaries  or  other  compensation  for  personal  serv- 
ices actually  rendered,  and  including  rentals  or  other  payments  required 
to  be  made  as  a condition  to  the  continued  use  or  possession  of  property 
to  which  the  corporation  has  not  taken  or  is  not  taking  title,  or  in  which 
it  has  no  equity. 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  in- 
debtedness (with  certain  exceptions). 

(3)  Taxes  paid  or  accrued  within  the  taxable  year,  etc.  (with  cer- 
tain exceptions). 

(4  et  seq.)  Losses  sustained  of  a certain  character,  bad  debts,  allow- 
ances for  exhaustion,  wear  and  tear,  etc. 

1462  The  question  is  presented  whether  corporations  are  entitled  to 
deduct  from  their  gross  income  for  the  purpose  of  the  income 

tax,  the  amount  of  contributions  to  religious,  charitable,  scientific  or 
educational  corporations  or  associations,  this  question  arising  most  fre- 
quently with  reference  to  contributions  made  to  the  Red  Cross  and 
other  war  activities. 


INC.  257 


TAX 


DEDUCTIONS— INVENTORY  LOSSES. 

1463  It  will  be  observed  that  there  is  no  express  deduction  permitted 
corporations  of  such  contributions,  as  in  the  case  of  individuals, 

and  unless,  therefore,  they  fall  \vithin  the  definition  of  some  items  of 
deduction  allowed  to  corporations,  they  cannot  be  allowed.  The  only 
head  within  which  it  might  be  suggested  that  such  contributions  could 
be  included  is  that  of  ordinary  and  necessary  expenses  paid  or  incurred 
in  carrying  on  any  trade  or  business,  including  reasonable  salaries  or 
other  compensation,  rentals,  and  payments  for  use  of  property,  pro- 
vided for  in  paragraph  11.  [Sic.  Should  be  ‘T.’’]  Practically  these 
same  deductions  are  permitted  in  section  214  in  the  case  of  individuals, 
and  had  such  words  included  the  contributions  or  gifts  mentioned  in  para- 
graph 11  of  Section  214,  it  would  have  been  unnecessary  to  put  in  such 
paragraph,  as  they  would  have  been  covered  by  paragraph  1 of  such 
section. 

1464  The  Attorney  General,  in  an  Opinion  dated  May  19,  1919,  states 
the  view  that  ordinary  and  necessary  expenses  contemplated  by 

paragraph  1 of  sections  214  and  234  were  not  intended  to  include  all 
necessary  expenses  because  the  two  immediately  succeeding  paragraphs 
provide  for  deducting  interest  and  taxes,  both  of  which  are  necessary 
expenses ; also  the  provision  in  regard  to  allowance  for  salaries,  com- 
pensation, rentals,  etc.,  indicates  that  all  of  the  expenses,  which  are 
contemplated  under  the  terms  used  in  paragraph  1 of  these  sections,  are 
expenses  incurred  directly  in  the  maintenance  and  operation  of  the  busi- 
ness, and  not  all  those  which  may  be  beneficial  and  even  necessary  in 
the  broader  sense. 

1465  In  addition  to  the  above  considerations  and  to  the  fact  that  there 
is  express  provision  for  deducting  contributions  or  gifts  in  the 

case  of  individuals,  which  is  wanting  in  the  section  providing  for  deduc- 
tions to  be  made  b}^  corporations,  reference  to  the  legislative  history  of 
the  Revenue  Act  of  1918  (Congressional  Record  for  September  17,  1918), 
shows  that  an  amendment  providing  that  corporations^  might  make  de- 
ductions of  contributions  or  gifts,  as  in  the  case  of  individuals,  came  to 
a vote  and  was  defeated,  the  principal  reason  assigned  in  the  debate 
being  that  it  would  be  dangerous  to  authorize  directors  to  be  generous 
with  the  money  of  their  stockholders  even  for  such  laudable  purposes. 

1466  It  is  concluded,  therefore,  that  corporations  are  not  entitled  to 
deduct  from  their  gross  income  for  the  purpose  of  the  income  tax 

the  amount  of  contributions  made  to  religious,  charitable,  scientific  or 
educational  corporations  or  associations,  even  though  such  contribu- 
tions are  made  to  the  Red  Cross  or  other  war  activities.  (T.  D.  2847,  as 
amended.  May  24,  1919.) 


1467  Law  11144.  Adjustment  for  Substantial  Losses  Sustained  in  the 

Taxable  Year  1919  Because  of  Material  Reduction  of 
Inventory  Values  for  1918,  or  Because  of  Certain  Rebate  Payments. — 
'‘(12)  (a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a tax- 
paver  may  file  a claim  in  abatement  based  on  the  fact  that  he  has  sus- 
tained a substantial  loss  (whether  or  not  actually  realized  by  sale  or 
other  disposition)  resulting  from  any  material  reduction  (not  due  to 
temporary  fluctuation)  of  the  value  of  the  inventory  for  such  taxable 
year,” 

1468  Law1fl45.  “or  from  the  actual  payment  after  the  close  of  such 

taxable  year  of  rebates  in  pursuance  of  contracts  en- 
tered into  during  such  year  upon  sales  made  during  such  year.” 

258  TAX 


INC. 


DEDUCTIONS— INVENTORY  LOSSES. 


1469  Lawp46.  “In  such  case  payment  of  the  amount  of  the  tax  cov- 

ered by  such  claim  shall  not  be  required  until  the 
claim  is  decided,  but  the  taxpayer  shall  accompany  his  claim  with  a 
bond  in  double  the  amount  of  the  tax  covered  by  the  claim,  with  sureties 
satisfactory  to  the  Commissioner,  conditioned  for  the  payment  of  any 
part  of  such  tax  found  to  be  due,  with  interest.  If  any  part  of  such 
claim  is  disallowed  then  the  remainder  of  the  tax  due  shall  on  notice 
and  demand  by  the  collector  be  paid  by  the  taxpayer  with  interest  at 
the  rate  of  1 per  centum  per  month  from  the  time  the  tax  would  have 
been  due  had  no  such  claim  been  filed.” 

1470  LawT[147.  “If  it  is  shown  to  the  satisfaction  of  the  Commissioner 

that  such  substantial  loss  has  been  sustained,  then  in 
computing  the  tax  imposed  by  this  title  the  amount  of  such  loss  shall 
be  deducted  from  the  net  income.” 

1471  Law|[148.  ‘‘(b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the 

satisfaction  of  the  Commissioner  that  during  the  tax- 
able year  1919  the  taxpayer  has  sustained  a substantial  loss  of  the 
character  above  described  then  the  amount  of  such  loss  shall  be  de- 
ducted from  the  net  income  for  the  taxable  year  1918  and  the  tax  im- 
posed by  this  title  for  such  year  shall  be  redetermined  accordingly. 
Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis  of  such 
redetermination  shall  be  credited  or  refunded  to  the  taxpayer  in  ac- 
cordance with  the  provisions  of  section  252  [^2121].” 

1472  LawplQ.  [Corporations.] — “(14)  (a)  At  the  time  of  filing 

return  for  the  taxable  year  1918  a taxpayer  may  file  a 
claim  in  abatement  based  on  the  fact  that  he  has  sustained  a substantial 
loss  (whether  or  not  actually  realized  by  sale  or  other  disposition)  re- 
sulting from  any  material  reduction  (not  due  to  temporary  fluctuation) 
of  the  value  of  the  inventory  for  such  taxable  year,” 

1473  Law  ]f320.  “or  from  the  actual  payment  after  the  close  of  such 

taxable  year  of  rebates  in  pursuance  of  contracts  en- 
tered into  during  such  year  upon  sales  made  during  such  year.” 

1474  Law][321.  “In  such  case  payment  of  the  amount  of  the  tax  cov- 

ered by  such  claim  shall  not  be  required  until  the  claim 
is  decided,  but  the  taxpayer  shall  accompany  his  claim  with  a bond  in 
double  the  amount  of  the  tax  covered  by  the  claim,  with  sureties  satis- 
factory to  the  Commissioner,  conditioned  for  the  payment  of  any  part  of 
such  tax  found  to  be  due,  with  interest.  If  any  part  of  such  claim  is 
disallowed  then  the  remainder  of  the  tax  due  shall  on  notice  and  de- 
mand by  the  collector  be  paid  by  the  taxpayer  with  interest  at  the  rate 
of  1 per  centum  per  month  from  the  time  the  tax  would  have  been  due 
had  no  such  claim  been  filed.” 

1475  Law  jf322.  “If  it  is  shown  to  the  satisfaction  of  the  Commissioner 

that  such  substantial  loss  has  been  sustained,  then  in 
computing  the  taxes  imposed  by  this  title  and  Title  III  the  amount  of 
such  loss  shall  be  deducted  from  the  net  income.” 

1476  Law1|323.  “(b)  If  no  such  claim  is  filed,  but  it  is  shown  to  the 

satisfaction  of  the  Commissioner  that  during  the  tax- 
able year  1919  the  tax])ayer  has  sustained  a substantial  loss  of  the  char- 

iNC.  259 


TAX 


DEDUCTIONS— INVENTORY  LOSSES. 


acter  above  described  then  the  amount  of  such  loss  shall  be  deducted 
from  the  net  income  for  the  taxable  year  1918  and  the  taxes  imposed 
by  this  title  and  by  Title  III  for  such  year  shall  be  redetermined  ac- 
cordingly. Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis 
of  such  redetermination  shall  be  credited  or  refunded  to  the  taxpayer 
in  accordance  with  the  provisions  of  section  252  [1|2121].” 

1477  Losses  in  Inventory  and  From  Rebates. — Taxpayers  are  allowed 
deductions  from  net  income  for  the  taxable  year  1918  for  losses 

resulting  (a)  from  material  reductions  after  the  close  of  the  taxable 
year  1918  of  the  values  of  inventories  for  such  taxable  3^ear,  and  (b) 
from  actual  payments  after  the  close  of  the  taxable  year  1918  of  re- 
bates in  pursuance  of  contracts  entered  into  during  such  year  upon 
sales  made  during  such  year.  The  taxable  year  of  the  taxpayer,  whether 
calendar  or  fiscal,  is  meant  in  every  case.  Such  deductions  may  be  se- 
cured by  two  methods,  either  by  a claim  in  abatement  or  by  a claim  for 
refund,  and  must  not  be  entered  upon  the  regular  return.  (Art.  261, 
Reg.  45,  Rev.,  April  17,  1919.) 

1478  Loss  from  Rebates. — Where  after  the  close  of  the  taxable  year 
1918  rebates  have  been  bona  fide  paid  in  pursuance  of  contracts 

entered  into  during  such  year  upon  sales  made  during  such  year,  the 
net  income  for  that  year  may  be  reduced  by  the  deduction  of  the  amount 
of  such  rebates  actually  paid.  No  such  deduction  will  be  allowed  unless 
the  profits  from  such  sales  have  been  included  in  the  income  for  the 
taxable  year  1918.  (Art.  262,  Reg.  45,  Rev.,  April  17,  1919.) 

1479  Loss  in  Inventory. — Inventory  losses  are  allowable  either  (a) 
where  goods  included  in  an  inventory  at  the  end  of  the  taxable 

year  1918  have  been  sold  at  a loss  during  the  succeeding  taxable  year, 
or  (b)  where  such  goods  remain  unsold  throughout  the  taxable  year 
1919  and  at  its  close  have  a then  market  value  (not  resulting  from  a 
temporary"  fluctuation)  materially  below  the  value  at  which  they  were 
inventoried  at  the  end  of  the  taxable  year  1918.  No  deduction  is  allow- 
able for  losses  of  anticipated  profits  or  for  losses  not  substantial  in 
amount,  nor  for  physical  damage  or  obsolescence  occurring  in  the  tax- 
able year  1919.  In  determining  whether  goods  included  in  an  inventory 
at  the  end  of  the  taxable  year  1918  have  been  sold  during  the  succeed- 
ing taxable  year,  and  whether  loss  has  resulted  therefrom,  sales  of  goods 
made  in  the  taxable  year  1919  will  be  deemed  to  have  been  made  from 
the  inventoried  stock  of  1918  until  such  inventoried  stock  is  exhausted. 
(Art.  263,  Reg.  45,  Rev.,  April  17,  1919.) 

1480  Loss  Where  Goods  Have  Been  Sold. — Where  goods  included  in 
the  inventory  at  the  end  of  the  taxable  year  1918  have  been 

sold  during  the  succeeding  taxable  year,  the  loss  which  may  be  deducted 
from  net  income  for  the  taxable  year  1918  is  the  amount  by  which  the 
value  at  which  the  goods  sold  were  included  in  the  inventory  exceeds 
the  actual  selling  price  minus  a reasonable  allowance  for  selling  expenses 
and  for  manufacturing  expenses,  if  any,  incurred  in  the  taxable  year 
1919  and  attributable  to  such  goods.  (Art.  264,  Reg.  45,  Rev.,  April 
17,  1919.) 


INC. 


260  TAX 


DEDUCTIONS— INVENTORY  LOSSES. 


1481  Loss  Where  Goods  Have  Not  Been  Sold. — Where  goods  in- 
cluded in  the  inventory  at  the  end  of  the  taxable  year  1918  have 

not  been  sold  during  the  succeeding  taxable  year,  the  loss  Avhich  may 
be  deducted  from  net  income  for  the  taxable  year  1918  is  the  amount  by 
which  the  net  income  for  such  year  would  be  reduced  if  the  inventory 
were  redetermined  and  such  goods  taken  at  their  market  value  (ignor- 
ing mere  temporary  fluctuations  of  value)  at  the  end  of  the  taxable  year 
1919.  (Art.  265,  Reg.  45,  Rev.,  April  17,  1919.) 

1482  Claims. — Claims  in  abatement  should  be  filed  with  the  collector 
on  Form  47  when  the  return  for  the  taxable  year  1918  is  made. 

Claims  for  refund  should  be  filed  on  Form  46  not  later  than  30  days 
after  the  close  of  the  taxable  year  1919.  Each  claim  shall  contain  a 
concise  statement  of  the  amount  of  the  loss  sustained  and  the  basis 
upon  which  it  has  been  computed,  together  with  all  pertinent  facts 
necessary  to  enable  the  Commissioner  to  determine  the  allowability  of 
the  claim.  The  amount  allow^ed  by  the  Commissioner  in  respect  of  any 
such  claim  shall  be  deducted  from  the  net  income  for  the  taxable  year 
1918  and  the  taxes  shall  be  recomputed  accordingly.  Any  excess  paid 
over  the  tax  due  shall  be  credited  or  refunded  to  the  taxpayer.  See 
section  252  of  the  statute  and  articles  1031-1038  [for  credits  and  refunds, 
[^2115].  In  computing  income  for  the  taxable  year  1919  the  opening 
inventory  must  be  properly  adjusted  by  the  taxpayer  in  respect  of  any 
claim  allowed  for  the  year  1918  under  this  article.  (Art.  266,  Reg.  45, 
Rev.,  April  17,  1919.) 

1483  Time  for  Filing  Claim  in  Abatement. — Acknowledgment  is  made 
of  the  receipt  of  your  telegram  of  July  25,  1919,  asking  to  be 

advised  if  an  abatement  claim  covering  loss  in  inventory  value  can  be 
filed  by  a taxpayer  after  his  return  is  filed  but  before  the  total  amount 
of  tax  is  collected.  In  reply,  you  are  advised  that  as  the  section  of 
the  law  covering  the  matter  referred  to  by  you  reads  that  at  the  time 
of  filing  a return  for  the  taxable  year  1918,  a taxpayer  may  file  a claim 
for  abatement,  it  is  held  by  this  Bureau  that  the  law  does  not  man- 
datorily  provide  that  the  claim  shall  be  filed  at  the  time  of  rendering 
the  return.  Therefore,  such  an  abatement  claim  will  be  considered  by 
this  Bureau  if  filed  before,  or  within  30  days  after,  the  mailing  of  the 
Collector’s  notice  and  demand  on  Form  17.  (Letter  to  the  Guaranty 
Trust  Company  of  New  York,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  August  6,  1919.) 

1484  Disposition  of  Claims.^ — ^A  claim  for  loss  resulting  from  rebates 
paid  or  from  actual  sales  will  be  decided  as  soon  as  practicable 

after  it  has  been  filed.  A claim  for  loss  in  inventory  not  realized  by 
sale  will  be  decided  only  after  the  close  of  the  taxable  year  1919  upon 
the  basis  of  any  permanent  reduction  in  the  level  of  market  values 
which  may  occur  during  such  year  from  the  inventory  values  taken  at  the 
close  of  the  taxable  year  1918.  Not  later  than  thirty  days  after  the 
close  of  the  taxable  year  1919  a taxpayer  who  has  filed  either  a claim 
in  abatement  or  a claim  for  refund,  or  both,  shall  submit  to  the  Com- 
missioner a descriptive  statement  showing  the  quantity  and  kind  of 
all  goods  included  in  the  1918  inventory  which  have  been  (a)  sold  at  a 
loss  in  the  taxable  year  1919,  (b)  sold  at  a profit  during  the  taxable 
year  1919,  or  (c)  not  sold  or  otherwise  disposed  of  during  the  taxable 

261  TAX 


INC. 


DEDUCTIONS— INVENTORY  LOSSES. 

year  1919,  together  with  such  other  information  in  respect  of  such  goods 
as  the  Commissioner  may  require.  A claim  filed  with  the  return  for  a 
loss  not  then  realized  by  sale  will  be  passed  upon  in  the  light  of  any 
sales  thereafter  made  during  the  taxable  year  1919.  A claim  filed  with 
the  return  is  authorized  for  the  purpose  of  allowing  the  taxpayer  to 
utilize,  where  justified,  a preliminary  allowance  for  inventory  losses  and 
not  to  provide  a deduction  essentially  different  from  that  taken  by  way 
of  a claim  filed  at  the  end  of  the  taxable  year  1919.  (Art.  267,  Reg. 
45,  Rev.,  April  17,  1919.) 

1485  Effect  of  Claim  in  Abatement. — In  the  case  of  a claim  in  abate- 
ment filed  with  a return  payment  of  the  amount  of  the  tax 

covered  thereby  shall  not  be  required  until  the  claim  is  decided,  pro- 
vided the  taxpayer  files  therewith  a bond  on  Form  1124  in  double  the 
amount  of  the  tax  covered  by  the  claim,  conditioned  for  the  payment  of 
any  part  of  such  tax  found  to  be  due  with  interest  at  the  rate  of  12 
per  cent  per  annum.  The  bond  shall  be  executed  by  a surety  company 
holding  a certificate  of  authority  from  the  Secretary  of  the  Treasury  as 
an  acceptable  surety  on  federal  bonds  and  shall  be  subject  to  the 
approval  of  the  Commissioner.  See  also  section  1320  of  the  statute 
[for  United  States  bonds  in  lieu  of  sureties,  111500].  If  abatement  of 
any  part  of  the  tax  covered  by  such  a claim  is  denied,  then  such  part 
shall  be  paid  by  the  taxpayer  with  interest  at  the  rate  of  12  per  cent 
per  annum  from  the  original  due  date  of  the  tax.  (Art.  268,  Reg.  45, 
Rev.,  April  17,  1919.) 

1486  Questions  and  Answers  About  Inventory  Losses.  Compiled  and 
Arranged  by  Tax  Committee  of  the  Southern  Wholesale  Dry 

Goods  Association. — These  questions  were  asked  at  the  Conven- 
tion of  the  Southern  Wholesale  Dry  Goods  ^ Association,  held  at 
Louisville,  Kentucky,  April  17th.  At  the  suggestion  of  the  Hon.  Daniel 
C.  Roper,  Commissioner  of  Internal  Revenue,  these  questions  were  sub- 
mitted to  the  Advisory  Tax  Board  at  Washington  and  explained  by  a 
committee  from  the  Association  composed  of  Messrs.  W.  J.  D.  Bell, 
Lynchburg ; Harry  Dumesnil,  Louisville ; C.  C.  Henking,  Huntington, 
and  Norman  H.  Johnson,  Richmond.  Each  of  the  answers  is  made  by 
the  Advisory  Board,  and,  therefore,  is  authoritative. 

1487  Comment:  [The  Tax  Committee  of  the  Southern  Wholesale 
Dry  Goods  Association,  consisting  of  W.  J.  D.  Bell,  Chairman, 

W.  R.  King,  Vice-Chairman,  Harry  Dumesnil,  C.  C.  Henking,  C.  L. 
Sanger,  James  J.  Ragan  and  Norman  H.  Johnson,  Secretary,  recently 
issued  a pamphlet  entitled  “Questions  and  Answers  on  Inventories  and 
the  Abatement  Clause  of  the  Internal  Revenue  Act  of  1918,”  containing 
fifty-eight  questions  and  the  answers  thereto.  By  the  courtesy  of  the 
Committee,  through  its  Secretary,  we  are  permitted  to  reproduce  below 
^1488  to  1[1499.  Those  questions  and  answers  which  we  have  not  repro- 
duced were  rather  more  specific  in  their  character  than  those  we  have 
given;  hence  their  exclusion  here.  The  foreword  at  |[1486,  above,  is 
the  foreword  of  the  pamphlet  as  issued  by  the  Tax  Committee.— The 
Corporation  Trust  Company.] 

1488  Q.  1.  Are  copies  of  inventory  required  by  the  Department  to  be  filed  with 

return?  . . , 

Ans.  No.  But  it  should  be  understood  by  all  taxpayers  that  all  original 
inventory  sheets  and  all  papers  which  would  have  any  bearing  on  a claim  for 
los-S  in  inventories  (including  sales  slips)  should  be  retained  for  a period  of  not 
less  than  five  years. 


INC. 


262  TAX 


DEDUCTIONS— INVENTORY  LOSSES. 


It  is  recommended  that  the  taxpayer  attach  to  his  return  for  the  taxable  year 
subsequent  years,  a summarized  analysis  of  his  inventories. 
1489  Q.  2.  Are  these  copies  of  inventory  necessary  whether  a claim  in  abate- 
ment is  filed  or  not? 

Ans.  See  answer  to  Question  1.  However,  it  is  recommended  to  the  tax- 
payer that  all  such  records  be  maintained  in  order  to  facilitate  a proper  verifica- 
tion of  the  return  at  any  time  deemed  advisable  by  the  Commissioner. 

Loose-leaf  ledgers  are  recommended,  whereby  control  can  be  secured  of  each 
classification  or  lot  of  goods  upon  which  claim  is  to  be  made. 

Therein  should  be  recorded  quantities  and  values  as  returned  on  the  inven- 
tory at  the  close  of  the  taxable  year  1918;  and  there  should  be  recorded  in 
summary  form  each  day  or  week,  the  quantities  sold  and  the  values  thereof 
and  all  items  of  sales  should  be  carried  forward,  according  to  established  classi- 
fication adopted  by  the  taxpayer,  to  the  time  when  the  quantities  as  reported  in 
the  inventory  shall  have  been  accounted  for. 

At  the  time  of  filing  the  return,  on  or  about  June  15,  1919,  the  taxpayer  should 
compute  his  loss  from  sales  to  that  date,  by  deducting  from  the  total  sales  a 
i^asonable  and  proportionate  allowance  for  operating  and/or  selling  expense 
The  net  result  ascertained  should  be  deducted  from  the  inventory  value  of  the 
goods  included  in  the  1918  inventory  sold  to  that  date,  and  the  resultant  loss 
brought  down. 

The  taxpayer  should  then  reduce  the  balances  remaining  unsold  to  the  then 
market  value,  and  add  the  loss  thus  ascertained  to  the  losses  ascertained  from 
sales. 


The  sum  total  of  these  computations  would  represent  the  total  loss  upon 
which  the  amount  of  tax  to  be  claimed  in  abatement  is  to  be  computed  and  this 
amount  may  be  deducted  from  the  second  installment  of  the  tax*  Provided 
proper  bond  is  furnished  on  Form  1124  in  accordance  with  Article  268  of 
Regulations  45.  [111485.] 

Should  any  goods  unsold,  upon  which  claim  in  abatement  has  been  filed  at 
the  time  of  filing  the  return,  be  disposed  of  by  sale  at  some  future  period  within 
the  taxable  year  1919  the  taxpayer  will  continue  to  record  the  sales  effected 
deducting  therefrom  the  proportionate  cost  of  operating  and/or  selling  expense 

Ihe  gam  or  loss  would  then  be  ascertained  by  computing  the  difference  be- 
tween the  adjusted  sales  values  and  the  inventory  value  established  at  the  time 
of  filing  the  claim  m abatement. 

If  at  the  close  of  the  taxable  year  1919  there  remains  any  commodity  unsold, 
the  taxpayer  shall  adjust  the  inventory  value  to  the  market  price  (ignoring 
mere  temporary  fluctuations  in  price  or  value),  at  the  close  of  the  taxable  year 
and  compute  the  amount  of  gain  or  loss. 

Such  gain  or  loss  shall  be  combined  with  the  gain  or  loss  on  sales  between 
the  time  of  filing  the  return  and  the  close  of  the  taxable  year  1919 
^ If  It  IS  shown  that  the  taxpayer  has  sustained  a loss  additional  to  that  shown 
in  the  claim  in  abatement  a claim  for  refund  should  be  made  on  Form  46  for 
the  amount  of  tax  overpaid. 

Should  it  be  shown  that  the  amount  deducted  in  the  claim  in  abatement  at 
the  time  of  filing  the  return  for  the  taxable  year  1918  is  in  excess  of  the  tax 
based  upon  actual  losses  sustained  throughout  the  taxable  year  1919  the  tax- 
payer must  remit  to  the  Collector  the  additional  amount  of  tax  involved  with 
interest  at  the  rate  of  1%  per  month  from  the  time  of  filing  the  return  until  the 
date  of  filing  the  final  adjustment  of  taxes  for  the  taxable  year  1918  on  account 
losses.  An  example  is  given  for  the  information  of  your  associa- 


Assunie  an  inventory  at  December  31,  1918,  200,000  yds.  at  15c, 


$30,000  00 


Assume  sales,  between  January  1,  1919.  and  lune  1 1919 

100  000  yds.  at  12/.c.  $12,500  00 

Cost  of  manufacturing  and/or  selling  based  upon  data  as- 
certained from  1918  operations,  say  in  this  case  15% 
of  sales  values 1 875  00 

Net  proceeds  from  sales $10  625  00 

The  inventory  cost  at  15c.  per  yd.  amounted  to |l5’000  00 

Net  loss  upon  which  tax  can  be  claimed  in  abatement  ’’  ’ 

Assume  that  the  market  price  at  June  1,  1919  (on  the  as- 
sumption that  the  taxpayer  will  prepare  his  claim  on 
June  1,  rather  than  delay  until  June  15,  1919),  on  this 
class  of  goods  was  12c.  There  would  remain  unsold 


$4,375  00 


INC.  263 


TAX 


DEDUCTIONS— INVENTORY  LOSSES. 


at  that  time  100,000  yds.  originally  inventoried  at  15c. 
to  be  reduced  to  12c.  or  at  a loss  of  3c.  per  yd. 

aggregating  3,000  00 

1 Otal  amount  upon  which  tax  could  be  claimed  in  abate- 
ment at  the  time  of  filing  the  return  on  or  before 

June  1,  1919,  would  be $/,3/5  00 

Now,  between  June  1,  1919,  and  December  31,  1919,  assume 
that  the  taxpayer  sells  50,000  yds.  at  a price  of  15c. 

per  yard,  amount  of  sale  would  be $7,500  00 

Deducting  therefrom  operating  and/or  selling  expense  at 
the  same  rate  of  15%  (or,  if  ascertainable,  the  ad- 
justed percentage  for  1919)  1,125  00 

Net  proceeds  from  sale $6,375  00 

Cost  of  this  material  as  adjusted  at  June  1,  1919,  on  the 

bassi  of  12c.  per  yd 6,000  00 

Gain  on  these  transactions $375  00 

Further,  assume  that  the  remaining  50,000  yards  were  un- 
sold at  the  close  of  the  taxable  year  1919,  and  that  the 
market  price  had  risen  to  17c.  per  yard,  the  taxpayer 
would,  in  this  case,  have  to  readjust  his  inventory 
value  to  the  17c.  basis,  and  account  for  the  element 
of  appreciation,  in  this  case  (5c.  per  yard  over  ad- 
justed figure  as  of  June  1) 2,500  00 

Total  gains  2,875  00 

Adjusted  loss  upon  which  tax  is  to  be  abated  or  refunded, 

as  the  case  may  be $4,500  00 

See  also  answer  to  Question  No.  27. 

1490  Q.  5.  Does  the  claim  in  abatement  apply  to  all  goods  charged  in  1918, 
though  not  received  until  after  inventory? 

Ans.  All  goods  where  title  has  actually  passed  to  the  taxpayer,  must  be  in- 
cluded in  the  inventory,  and  as  a result  thereof  are  eligible  for  consideration  in 
any  claim  in  abatement.  . , 

It  is  necessary  that  title  shall  have  passed  to  the  taxpayer  m 1918,  and  the 
goods  merely  ordered  for  future  delivery  and  for  which  no  transfer  of  title  has 
been  effected,  should  be  excluded.  See  Article  1581  of  Regulations  45.  [1[1091]. 

1491  Q.  6.  Where  inventory  is  taken  on  December  1 or  15,  can  a claim  be 
made  for  all  goods  invoiced  up  to  December  31,  1918? 

Ans.  It  is  presumed  that  your  question  refers  either  to  a fiscal  year  ending 
November  30,  1918,  or,  in  the  second  instance,  to  a calendar  year  ending 
December  31,  since  no  fiscal  year  can  be  considered  except  at  the  close  of  some 

month  in  the  year.  

In  the  first  instance,  no  goods  to  v/hich  title  has  not  passed  to  the  vendee 
at  and  including  November  30,  1918,  can  be  considered  as  inventory  items. 

In  the  second  instance,  all  goods  to  which  title  has  passed  to  the  vendee 
up  to  December  31,  1918,  must  be  included  in  the  inventory. 

Where  the  fiscal  year  ended  on  November  30,  1918,  the  claim  in  abatement 
can  only  apply  to  goods  which  are  the  property  of  the  taxpayer  up  to  that 
date  but  no  claim  can  be  made  on  any  materials  which  have  become  the 
property  of  the  taxpayer  between  December  1 and  31,  inclusive,  of  that  year. 

1492  Q.  15.  Can  more  than  one  claim  be  filed? 

Ans.  Two  claims  may  be  filed,  one  at  time  of  filing  the  return,  and  one 
adjusting  the  entire  claim  for  losses  at  the  close  of  the  taxable  year  1919. 

The  first  would  represent  a claim  in  abatement;  the  second,  a claim  for 
refund.  It  is  possible  that  an  additional  amount  of  tax  may  become  due  from 
the  taxpayer  with  interest  at  the  rate  of  1%  per  month  from  the  time  of  making 
the  deduction  until  the  time  of  filing  the  final  statement,  which  would  be 
brought  about  by  the  fact  that,  in  the  disposition  of  unsold  goods  as  to  the 
1918  inventory  after  the  filing  of  the  original  return,  and  the  claim  in  abate- 
ment, gains  may  result  from  subsequent  sales.  It  will  therefore  be  necessary 
for  the  taxpayer  to  prepare  a statement  which  will  fully  reflect  the  corrected 
amount  of  any  claim  to  which  he  may  be  entitled  for  losses  in  inventory  of 
1918,  and  this  statement  must  definitely  embrace  the  total  amount  of  inventory 

INC.  264  TAX 


DEDUCTIONS— INVENTORY  LOSSES. 


value  as  recorded  on  the  books  of  the  taxpayer  at  the  end  of  the  taxable  year 
1918,  and  be  capable  of  proper  audit. 

The  following  is  suggested  as  a possible  outline  to  be  used  in  making  final 
statement  of  adjustment  at  the  close  of  the  taxable  year  1919.  This  is  based 
upon  the  illustration  given  in  answer  to  Question  2 which  applies  to  one  item 
of  inventory  only,  but  it  must  be  understood  that  the  final  statement  referred 
to  herein,  must  cover  the  entire  inventory  value  as  at  the  end  of  the  taxable 
year  191& 


1.  Inventory  close  of  taxable  year  1918 

2.  Sales  from  1918  inventory  during  taxable  year  1919.... 

3.  Less  deductions  from  sales  for  selling  expense 

4.  Net  sales  proceeds  (Item  2 value  less  Item  3) 

5.  Balance  of  1918  inventory  on  hand  at  close  of  taxable 

year  

(Quantity  Item  1 less  Item  2.) 

(Value  priced  at  market  close  of  taxable  year  1919.) 

6.  Net  sales  proceeds  and  balance  of  inventory 

(Item  4 plus  Item  5,  values.) 

7.  Loss  (Item  1 value  less  Item  6) 

8.  Gain  

9.  Amount  of  claim  in  abatement  or  for  refund  filed 

(date  ) 

(In  this  illustration  an  excessive  claim  in  abatement  of  tax  based  upon  a 
loss  of  inventory  values,  amounting  to  $2,875  is  assumed.  Tax  upon  this  amount 
with  interest  at  one  per  cent,  per  month  between  the  date  of  making  the  deduc- 
tion and  final  statement  will  be  assessed  in  this  case.) 

Should  the  taxpayer  elect  not  to  file  a claim  in  abatement  at  the  time  of  filing 
his  return,  but  rather  to  wait  until  the  end  of  the  taxable  year  1919  then  in 
that  case,  but  one  claim  would  be  filed.  * ’ 


Quantity 

200,000 

150,000 

Value 
$30,000  00 
20,000  00 
3,000  00 
17,000  00 

50,000 

8,500  00 

25,500  00 

4,500  00 

7,375  00 

1493  Q.  20.  Suppose  we  are  unable  to  sell  them  (Discontinued  off  colors  in 
broken  lots?). 

Ans.  If  the  salable  colors  had  been  disposed  of  and  the  stock  broken  before 
the  close  of  the  taxable  year  1918,  the  element  of  obsolescence  if  definitely 
determined  should  be  taken  into  account  in  both  the  inventory  made  at  the  close 
of  the  taxable  year  1918  and  that  made  at  the  close  of  the  taxable  year  1919. 
If  “it  is  impossible  to  get  the  market  value  for  such  colors  in  broken  stocks’*’ 
the  taxpayer  will  be  required  to  await  the  sale  of  such  broken  stocks  in  order 
to  determine  the  loss  involved;  but  it  is  believed  that  in  practically  all  instances 
a reasonable  and  fair  estimate  of  the  market  value  can  be  made. 

salable  colors  were  disposed  of  after  the  close  of  the ’taxable  year 
1918,  the  accompanying  obsolescence  of  the  remaining  stock  takes  place  in  the 
ypr  1919,  and  the  deduction  must  be  taken  not  as  a loss  in  inventory  but  as 
obsolescence  occurring  in  the  taxable  year  1919. 


securing 
the  sales 


1494  Q.  25.  Ue  take  stock  on  January  1.  During  December  we  shipped  out 
quite  a lot  of  ginghams  at  the  high  price,  and  in  January  were  forced 

to  rebate  our  customers  on  sales  made  in  December.  Are  we  allowed  to 
charge  this  rebate  in  our  claim? 

Ans.  In  cases  where  rebates  have  been  made  on  sales  reported  in  the  1918 
Income  Tax  Return,  a separate  schedule  should  be  submitted  and  the  total 
thereof  may  be  included  in  the  taxpayer’s  claim  in  abatement. 

This  schedule  should  be  prepared  in  such  manner  as  to  reflect* 

(a)  The  date  of  each  rebate;  (b)  the  name  and  address  of  each  party 
the  benefit  thereof;  (c)  a description  of  the  goods;  (d)  quantities*  (e) 
value  of  each  item;  and  (f)  the  amount  rebated.  ’ 

1495  Q.  26.  Suppose  I ship  some  ginghams  at  the  high  price  in  January  and 

A customers;  am  I entitled  to  put  that  on  the  claim? 

Ans.  Rebates  made  during  the  taxable  year  1919  on  sales  made  during  such 

year  (provided  the  goods  to  which  the  rebate  applies  were  included  in  the 
inventory  at  the  close  of  the  taxable  year  1918)  Avill  be  considered  as  an  adiust- 
inent  of  sales  values  in  arriving  at  the  loss  on  inventories  for  the  taxable  year 
1918,  and  will  be  treated  as  outlined  in  Question  No.  2.  This  cannot  go  in  the 
rebate  claim,  but  the  rebate  may  be  considered  in  detciniining  the  sale  orice 
for  the  purpose  of  determining  an  inventory  loss.  ^ 

It  must  be  understood  that  rebates  made  on  goods  acguired  and  sold  subse- 

‘I’®  taxable  year  1918  cannot  be  considered  in  any  manner 
as  a 1918  inventory  loss. 


INC.  265 


TAX 


UNITED  STATES  BONDS  AS  SECURITY. 


1496  Q.  27.  Do  we  have  to  file  a complete  inventory  of  all  our  stock,  or  just 
the  stock  on  which  we  ask  an  abatement? 

Ans.  See  Question  No.  1.  You  are  required  to  file  with  your  original  claim 
and  at  the  close  of  the  taxable  year  1919  summarized  statements  covering  all 
adjustments  involved. 

To  conform  to  good  accounting  practices,  the  taxpayer  should  consider  these 
summaries  in  the  light  of  controlling  accounts  and  the  sum  totals  thereof  should 
equal  the  total  inventories  maintained  in  detail  by  the  taxpayer. 

It  must  be  understood  that  claim  for  losses  in  inventories  of  the  taxable  year 
1918  are  to  embrace  all  items  of  the  taxpayer’s  inventory  so  that  gains  made  in 
any  sales  of  certain  items  or  classes  will  be  used  to  offset  losses  in  others  and 
the  net  result  as  to  the  entire  inventory  determined. 

Thus  if  the  final  computation  shows  a net  gain  over  all  inventory  items 
sold,  no  claim  for  loss  in  any  particular  item  or  items  can  be  sustained. 

1497  Q.  34.  When  can  this  claim  for  abatement  be  filed? 

Ans.  Claim  for  net  loss  cannot  be  made  before  November  1,  1919. 
Claim  in  abatement  for  loss  in  inventory  must  be  filed  at  the  time  of  filing 
the  return  for  the  taxable  year  1918.  [But  see  111483.] 

1498  Q.  37.  Where  the  claim  in  abatement  is  allowed,  what  effect  has  that 
on  1919  profits? 

Ans.  Where  a claim  for  inventory  loss  is  finally  allowed,  this  means  that 
the  net  income  for  1919 — as  established  by  usual  accounting  methods — will  be 
correspondingly  higher  as  reported  in  the  return  for  the  taxable  year  1919. 
In  other  words,  an  item  of  loss  which  would  normally  find  its  way  into  1919 
operating  accounts  is  thrown  back  against  1918  income.  This  Department 
recommends  that  the  accounting  records  of  the  taxpayer  be  not  changed, 
but  that  any  adjustment  of  inventories  be  recorded  in  distinct  accounts,  sup- 
ported by  adequate  detailed  schedules. 

In  arriving  at  the  net  operating  profits  for  any  year,  the  income,  excess 
and  war  profits  taxes  to  be  paid  on  such  profits  are  not  taken  into  consideration. 
Such  taxes,  therefore,  are  theoretically  paid  out  of  surplus  for  the  year.  If  at 
a subsequent  date  any  of  such  taxes  are  refunded,  they  should  not  be  recorded 
in  the  operating  accounts,  but  should  be  credited  directly  to  surplus. 

1499  Q.  47.  Individual  income  of  partnerships.  How  do  you  file  plea  of 
abatement  when  partnership  files  no  blank  or  form  like  a corporation 

does? 

Ans.  See  Article  321  of  Regulation  45  [1[551  and  1[553]. 

A claim  in  abatement  arising  from  a loss  in  1918  partnership  inventory  must 
be  made  by  each  individual  partner  as  to  his  distributive  share  of  recomputed 
net  income.  To  this  claim  should  be  attached  the  statement  of  the  partnership 
showing  the  loss  in  inventory  supported  in  the  same  manner  as  such  claims  are 
supported  by  corporations  and  individuals.  The  statement  filed  as  to  the  part- 
nership as  a whole  will  be  used  by  the  Department  for  the  purposes  of  record 
and  verification  and  any  adjustments  which  may  be  found  necessary  will  be 
spread  pro-rata  over  the  claims  of  the  individuals.  At  the  close  of  the  taxable 
year  1919  a properly  authorized  member  of  the  partnership  shall  compile  the 
final  statement  of  adjustment  in  accordance  with  the  methods  outlined  in 
Question  2 and  elsewhere,  attaching  thereto  the  proportionate  amounts  of  adjust- 
ment affecting  each  individual  member  of  the  partnership.  On  the  determina- 
tion of  the  net  result,  each  individual  partner  shall  file  a claim  for  refund  (if 
any  refund  is  due),  or  in  the  event  that  the  claim  in  abatement  was  in  excess 
of  the  actual  losses  sustained,  each  individual  will  remit  to  the  Collector  of 
his  District,  his  share  of  the  additional  amount  of  tax  ascertained  from  the 
adjusted  statement,  with  interest  at  the  rate  of  1 % per  month  from  the  time 
of  deduction  from  the  second  installment  to  the  time  when  such  remittance  is 
made.  (For  source  and  authority  see  1[1486  and  111487.) 


1500  Law  j[456.  Liberty  and  Other  United  States  Bonds  as  Security  in 
Connection  with  “Penal  Bonds.” — “Sec.  1320.  That 
wherever  by  the  laws  of  the  United  States  or  regulations  made  pursuant 
thereto,  any  person  is  required  to  furnish  any  recognizance,  stipulation,  bond, 
guaranty,  or  undertaking,  hereinafter  called  “penal  bond,”  with  surety  or 
sureties,  such  person  may,  in  lieu  of  such  surety  or  sureties,  deposit  as  se- 
curity with  the  official  having  authority  to  approve  such  penal  bond.  United 
States  Liberty  bonds  or  other  bonds  of  the  United  States  in  a sum  equal  at 

INC.  266  TAX 


UNITED  STATES  BONDS  AS  SECURITY. 

their  par  value  to  the  amount  of  such  penal  bond  required  to  be  furnished 
together  with  an  agreement  authorizing  such  official  to  collect  or  sell  such 
bonds  so  deposited  in  case  of  any  default  in  the  performance  of  any  of  the 
conditions  or  stipulations  of  such  penal  bond.  The  acceptance  of  such 
United  States  bonds  in  lieu  of  surety  or  sureties  required  by  law  shall  have 
the  same  force  and  effect  as  individual  or  corporate  sureties,  or  certified 
checks,  bank  drafts,  post-office  money  orders,  or  cash,  for  the  penalty  or 
amount  of  such  penal  bond.  The  bonds  deposited  hereunder,  and  such 
other  United  States  bonds  as  may  be  substituted  therefor  from  time  to 
time  as  such  security,  may  be  deposited  with  the  Treasurer,  or  an  Assistant 
Treasurer  of  the  United  States,  a Government  depository.  Federal  Reserve 
bank,  or  member  bank,  which  shall  issue  receipt  therefor,  describing  such 
bonds  so  deposited.  As  soon  as  security  for  the  performance  of  such 
penal  bond  is  no  longer  necessary  such  bonds  so  deposited  shall  be 
returned  to  the  depositor:  Provided,  * ^ 

1501  Lawl[457.  “Provided  further-  That  nothing  herein  contained  shall 

affect  or  impair  the  priority  of  the  claim  of  the  United 
States  against  the  bonds  deposited  or  any  right  or  remedy  granted  by  said 
Acts  or  by  this  section  to  the  United  States  for  default  upon  any  obligation 
of  said  penal  bond:” 

1^02  Law  11458.  “Provided  further.  That  all  laws  inconsistent  with  this 
. . section  are  hereby  so  modified  as  to  conform  to  the 

provisions  hereof 

1503  Law  1[459.  And  provided  further.  That  nothing  contained  herein 
shall  affect  the  authority  of  courts  over  the  security, 
where  such  bonds  are  taken  as  security  in  judicial  proceedings,  or  the 
authority  of  any  administrative  officer  of  the  United  States  to  receive 
1^)4  security  in  cases  authorized  by  existing  laws.”  ' 

Law  11460.  “The  Secretary  may  prescribe  rules  and  regulations 
effect”  necessary  and  proper  for  carrying  this  section  into 

1503  Bonds  Under  Sections  214  (a)  (12),  234  (a)  (14),  and  1320  of 
the  Revenue  Act  of  1918.-Sections  214  (a)  (12)  and  234  (a)  (14) 
of  the  Revenue  Act  of  1918  provide  in  part  as  follows  [P467  and  1114721  • 
At  the  time  of  filing  return  for  the  taxable  year  1918  a taxpayer 
may  file  a c aim  in  abatement  based  on  the  fact  that  he  has  sustained  a 
substantial  loss  (whether  or  not  actually  realized  by  sale  or  other  dis- 
position) resulting  from  any  material  reduction  (not  due  to  temporai-y 
tiuctuation)  of  the  value  of  the  inventory  for  such  taxable  year  or  from 
the  actual  payments  after  the  close  of  such  taxable  year  of  rebates  in 
pursuance  of  contracts  entered  into  during  such  year  upon  sales  made 
during  such  year.  In  such  case  payment  of  the  amount  of  the  tax 
covered  by  such  claim  shall  not  be  required  until  the  claim  is  decided, 
but  the  taxpayer  shall  accompany  his  claim  with  a bond  in  double  the 
amount  of  the  tax  covered  by  the  claim,  with  sureties  satisfactory  to  the 
Commissioner,  conditioned  for  the  payment  of  any  part  of  such  tax 
^found  to  be  due,  with  interest.” 

1500  Section  1320  of  the  same  Act  provides,  in  part  [IflSOO]  : 

“That  wherever  by  the  laws  of  the  United  States  or  regulations 
made  pursuant  thereto,  any  person  is  required  to  furnish  any  recogniz- 
ance, stiT)ulation,  bond,  guaranty,  or  undertaking,  hereinafter  called 
penal  bond,’  with  surety  or  sureties,  siidi  person  may,  in  lieu  of  such 
surety  or  suieties,  deposit  as  security  with  the  official  having  authority 

INC.  267 


TAX 


UNITED  STATES  BONDS  AS  SECURITY. 

to  approve  such  penal  bond,  United  States  Uiberty  bonds  or  other  bonds 
of  the  United  States  in  a sum  equal  at  their  par  value  to  the  amount  of 
such  penal  bond  required  to  be  furnished,  together  with  an  agreement 
authorizing  such  official  to  collect  or  sell  such  bonds  so  deposited  in 
case  of  any  default  in  the  performance  of  any  of  the  conditions  or  stipu- 
lations of  such  penal  bond.  The  acceptance  of  such  United  States  bonds 
in  lieu  of  surety  or  sureties  required  by  law  shall  have  the  same  force 
and  effect  as  individual  or  corporate  sureties,  or  certified  checks,  bank 
drafts,  post-office  money  orders,  or  cash,  for  the  penalty  or  amount  of 
such  penal  bond.  The  bonds  deposited  hereunder  and  such  other 
United  States  bonds  as  may  be  substituted  therefor  from  time  to  time 
as  such  security  may  be  deposited  with  the  Treasurer,  * * * of  the 
United  States,  * * * which  shall  issue  receipt  therefor,  describing 

such  bonds  so  deposited.  As  soon  as  security  for  the  performance  of 
such  penal  bond  is  no  longer  necessary,  such  bonds  so  deposited,  shall 
be  returned  to  the  depositor.” 

1507  Article  268  of  Regulations  No.  45  [P485]  provides  m part  as 
follows,  relative  to  claims  for  losses  in  inventory  and  from  rebates : 

“In  the  case  of  a claim  in  abatement  filed  with  a return  payment  of 
the  amount  of  the  tax  covered  thereby  shall  not  be  required  until  the 
claim  is  decided,  provided  the  taxpayer  files  therewith  a bond  on  Form 
1124  in  double  the  amount  of  the  tax  covered  by  the  claim,  conditioned 
for  the  payment  of  any  part  of  such  tax  found  to  be  due  with  interest  at 
the  rate  of  12  per  cent  per  annum.  The  bond  shall  be  executed  by  a 
surety  company  holding  a certificate  of  authority  from  the  Secretary 
of  the  Treasury  as  an  acceptable  surety  on  Federal  bonds  and  shall  be 
subject  to  the  approval  of  the  Commissioner.” 

1508  The  bond  executed  on  Form  1124,  pursuant  to  Article  268  of  Regu- 
lations No.  45,  together  with  abatement  claim,  should  be  forwarded 

by  the  collector  to  the  Commissioner  of  Internal  Revenue.  When  it  is  re- 
ceived by  the  Commissioner  it  will  be  detached  from  the  abatement  claim 
and  forwarded  to  the  Surety  Bond  Section  of  the  Treasury  Department  for 
certification  as  to  the  sufficiency  of  the  sureties.  The  Surety  Bond  Section 
will  after  certification,  return  the  bond  to  the  Commissioner  for  his  approval. 
When  he  has  approved  the  bond  he  will  cause  it  to  be  attached  to  the  abate- 
ment claim. 

1509  In  case  the  claimant,  in  accordance  with  the  provisions  contained  in 
Section  1320  of  the  Revenue  Act  of  1918,  elects  to  offer,  in  lieu  of 

the  surety  or  sureties  provided  for  on  Form  1124,  United  States  Uiberty 
Bonds  or  other  bonds  of  the  United  States  as  security  he  should  execute  in 
duplicate  a bond  and  agreement  on  Form  1124a,  prescribed  below.  The 
original  should  accompany  the  United  States  bonds  offered  as  security;  the 
duplicate  should  be  forwarded  by  the  collector  with  the  abatement  claim  to 
the  Commissioner.  If  such  bond  and  agreement  is  executed  by  a corpora- 
tion duly  certified  copy  of  the  resolution  of  the  board  of  directors,  author- 
izing the  execution,  should  be  attached.  The  United  States  Liberty  Bonds 
or  other  bonds  of  the  United  States,  offered  as  security,  shall  at  their  par 
value  be  not  less  than  the  amount  of  the  penal  sum  of  the  bond  executed  on 
Form  1124a,  which  shall  be  in  double  the  amount  of  the  tax  covered  by  the 
abatement  claim.  The  bonds  so  offered  as  security  must  be  delivered  to  the 
Commissioner  of  Internal  Revenue  at  the  obligor’s  risk  and  expense.  Cou- 
pon bonds  cannot  safely  be  forwarded  by  registered  mail  unless  insured  by 
the  obligor  against  risk  of  loss  in  transit.  Registered  bonds  so  offered  as 

268  TAX 


INC. 


CREDITS  TO  INDIVIDUALS. 

security  must  be  registered  in  the  name  of  the  obligor  and  duly  assigned 
to  the  Commissioner  of  Internal  Revenue  at  or  before  the  date  of  deposit 
with  the  Commissioner  and  need  not  be  insured  when  forwarded  by  regis- 
tered mail,  unless  the  obligor  so  elects.  In  connection  with  effecting  in- 
surance of  bonds  shipped  reference  is  made  to  Article  187  (a)  of  Regula- 
tions No.  2,  Revised. 

1510  The  Commissioner  of  Internal  Revenue  will  issue  a receipt  in  dupli- 
cate for  United  States  Bonds  so  deposited  with  him  as  security,  the 

original  of  the  receipt  to  be  given  to  the  obligor  and  the  duplicate  to  be 
retained  by  the  Commissioner  for  his  files.  Upon  receipt  by  the  Commis- 
sioner of  the  United  States  Bonds  so  offered  as  security  and  upon  satisfying 
himself  as  to  their  ownership  and  as  to  the  sufficiency  of  the  agreement  for 
him  to  collect  or  sell,  and  in  case  of  registered  bonds  as  to  the  regularity  of 
the  assignments,  he  will  approve  the  bond  executd  on  Form  1124a,  and 
deposit  the  United  States  Bonds  offered  as  security  with  the  Treasurer  of  the 
United  States,  as  provided  in  paragraph  7 of  Department  Circular  No.  154 
(1919),  dated  June  30,  I9l9,  and  the  Treasurer  of  the  United  States  will,  as 
provided  in  said  circular,  give  receipt  therefor  in  duplicate  describing  the 
bonds  so  deposited,  the  original  to  be  delivered  to  the  Commissioner  of  In- 
ternal Revenue  and  the  duplicate  to  be  retained  by  the  Treasurer  for  his 
files. 

1511  Bonds  of  the  United  States  shall  be  returned  to  the  obligor  as  soon 
as  the  security  for  the  performance  of  such  penal  bond  is  no  longer 

necessary.  Registered  bonds  shall  be  reassigned  to  the  owner  when  the  lia- 
bility is  cancelled. 

1512  These  special  instructions  are  prescribed  for  the  guidance  of  col- 
lectors of  internal  revenue  pursuant  to  the  provisions  of  Treasury 

Department  Circular  No.  154  as  to  the  acceptance  of  United  States 
Bonds  in  lieu  of  surety  or  sureties  on  penal  bonds.  (T.  D.  2925,  Sep- 
tember 26,  1919.) 


1513  Lawp56.  Credits  Allowed  to  Individuals. — For  Normal  Tax 

Only. — “Sec.  216.  That  for  the  purpose  of  the  normal 
tax  only  there  shall  be  allowed  the  following  credits:” 

1514  Lawp57.  Dividends  as  Credit  for  Normal  Tax  Only. — “(a)  The 

amount  received  as  dividends  from  a corporation  which 
is  taxable  under  this  title  upon  its  net  income,  and  amounts  received  as 
dividends  from  a personal  service  corporation  out  of  earnings  or  profits 
upon  which  income  tax  has  been  imposed  by  Act  of  Congress 

1515  Law1[158.  All  Interest  on  Government  and  War  Finance  Cor- 

poration Bonds  which  has  been  Included  as  Gross 
Income  is  Credited  for  Normal  Tax  Purposes. — “(b)  The  amount  re- 
ceived as  interest  upon  obligations  of  the  United  States  and  bonds  issued 
by  the  War  Finance  Corporation,  which  is  included  in  gross  income  under 
section  213  [pi38] 

1516  For  the  purpose  of  imposing  the  normal  tax  the  taxpayer's  net 
income  as  computed  pursuant  to  section  212  of  the  statute  and 

articles  21-26  [beginning  at  117691  is  first  reduced  by  the  sum  of 
the  allowable  credits.  These  include  dividends  (as  defined  in  sec- 
tion 201  and  articles  1541-1549  [beginning  at  1f815]  received  other  than 

INC.  269 


TAX 


CREDITS  TO  INDIVIDUALS—SPECIFIC  EXEMPTION. 

from  foreign  corporations  having  no  income  from  sources  within  the  United 
States;  interest  not  entirely  exempt  from  tax  received  upon  obligations  of 
the  United  States  and  bonds  of  the  War  Finance  Corporation;  a personal 
exemption;  and  a credit  for  dependents.  _ Consequently,  the  normal  tax 
does  not  apply  to  dividends  from  domestic  corporations  or  from  foreign 
corporations  deriving  income  from  sources  within  the  United  States,  or  to 
interest  on  any  obligations  of  the  United  States  See  section  213  (b)  of  the 
statute  and  articles  77-82  [for  obligations  of  the  United  States,  pi39] 
and  1131  [for  dividends  from  certain  foreign  coi-porations  taxed  in  Forto 
Rico  and  the  Philippines,  11543].  For  the  purpose  of  imposing  the  surtp 
the  taxpayer’s  net  income  is  entitled  to  none  of  these  credits  As  to.  credits 
allowed  corporations,  see  section  236  and  article  591  [^1041].  (Art.  3 , 

Reg.  45,  Rev.,  April  17,  1919.) 

1517  Dividends  Received  from  Foreign  Corporations  Subject  to  In- 
come Tax  are  Exempt  from  Normal  Tax. — Receipt  is  acknowl- 
edged of  your  letter  dated  May  9,  1919,  in  which  you  request  advice 
as  to  whether  Article  301  [111516]  of  Regulations  45  contemplated  that 
normal  tax  imposed  bv  Section  210  of  the  Revenue  Act  oi  1918  does  not 
apply  to  dividends  received  from  foreign  corporations  deriving  any  income 
whatever  from  sources  within  the  United  States,  without  regarf  ® 

character  of  that  income  and  also  without  regard  to  the  proportion  which 
such  income  bears  to  the  entire  income  of  the  corporation.  In 
are  advised  that  Section  216  (a)  of  the  Act  upon  which  Article  301  of  the 
Regulations  is  based,  provides  that  for  the  purpose  of  the  normal  tax 
only  there  shall  be  allowed  as  a credit  “the  amount  received  as  dividends 
from  a corporation  which  is  taxable  under  this  title  upon  its  net  income. 
ISee  111325  also.]  Therefore,  Article  301  of  the  Regulations  contemplates 
that  the  normal  tax  imposed  by  Section  210  of  the  Act  does  not  apply  to 
dividends,  regardless  of  the  amount  of  such  dividends,  received  from  a 
foreign  corporation  taxable  upon  income  from  sources  within  the  United 
States,  however  small  such  income  may  be.  (Letter  to  The  Corporation 
Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
June  9,  1919.) 

1518  Law  11159.  A Specific  Exemption  of  Income  is  Allowed  for  Nor- 

mal Tax  Purposes. — Single  Persons.^ — (c)  In  the  case 
of  a single  person,  a personal  exemption  of  $1,000>  o'"” 

1519  Law  11160.  Married  Persons  Living  Together  and  Heads  of  Fa®' 

ilies.— “in  the  case  of  the  head  of  a family  or  a married 
person  living  with  husband  or  wife,  a personal  exemption  of  $2,000.” 

1520  Law  11161.  One  $2,000  Specific  Exemption  Only.— “A  husband 

and  wife  living  together  shall  receive  but  one  personal 
exemption  of  $2,000  against  their  aggregate  net  income 

1521  Law  11162.  $2,000  Specific  Exemption  May  Be  Prorated  Between 

Husband  and  Wife.— “and  in  case  they  make  separate 
returns,  the  personal  exemption  of  $2,000  may  be  taken  by  either  or  divided 
between  them;” 

1522  Personal  Exemption  of  Head  of  Family. — A head  of  a ^ 

person  who  actually  supports  and  maintains  m one  household  one 

or  more  individuals  who  are  closely  connected  with  him  by  blood 


270 


TAX 


INC. 


CREDITS  TO  INDIVIDUALS— SPECIFIC  EXEMPTION. 

relationship,  relationship  by  marriage,  or  by  adoption,  and  whose 
right  to  exercise  family  control  and  provide  for  these  dependent  individuals 
IS  based  upon  some  moral  or  legal  obligation.  In  the  absence  of  continu- 
ous actual  residence  together,  whether  or  not  a person  with  dependent  rela- 
tives  IS  a head  of  a family  within  the  meaning  of  the  statute  must  depend 
on  the  character  of  the  separation.  If  a father  is  absent  on  business  or  at 
war,  or  a chdd  or  other  dependent  is  away  at  school  or  on  a visit,  the 
common  home  being  still  maintained,  the  additional  exemption  applies  If 
moreover  through  force  of  circumstances  a parent  is  obliged  to  maintain 
his  dependent  children  with  relatives  or  in  a boarding  house  while  he  lives 
elsewhere,  the  additional  exmption  may  still  apply.  If,  however,  without 
necessity  the  dependent  continuously  makes  his  home  elsewhere,  his  bene- 
factor IS  not  the  head  of  a family,  irrespective  of  the  question  of  support. 
A resident  alien  with  children  abroad  is  not  the  head  of  a familv  f Art 
302,  Reg.  45,  Rev.,  April  17,  1919.) 

1523  Personal  Exemption  of  Married  Person.— In  the  case  of  a mar- 
man  or  married  woman  the  joint  exemption  replaces  the  in- 
dividual exemption  only  if  the  man  lives  with  his  wife  or  the  woman 
Ii\  es  with  her  husband.  In  the  absence  of  continuous  actual  resi- 
dence together,  whether  or  not  a man  or  woman  has  a wife  or  husband 
living  with  him  or  her  within  the  meaning  of  the  statute  must  depend  on 
the  chaiactei  of  the  separation.  If  merely  occasionally  and  temporarily  a 
v.ufe  IS  away  on  a visit  or  a husband  is  away  on  business,  the  joint  home 
being  maintained,  the  additional  exemption  applies.  The  unavoidable  ab- 
sence of  a wife  or  husband  at  a sanatorium  or  asylum  on  account  of  illness 
does  not  preclude  claiming  the  exemption.  If,  however,  the  husband  vol- 
untarily and  continuously  makes  his  home  at  one  place  and  the  wife  hers  at 
another,  they  are  not  living  together  for  the  purpose  of  the  statute,  irre- 
spective of  their  personal  relations.  A resident  alien  with  a wife  residing 
abroad  is  not  entitled  to  the  joint  exemption.  (Art  303  Reo-  45  Rev 
April  17,  1919.)  ■ ^ b-  , V., 

Law  Tf  163.  Additional  $200  wSpecific  Exemption  for  Each  Depend- 
(d)  $200  for  each  person  (other  than  husband 
or  wife)  dependent  upon  and  receiving  his  chief  support  from  the  taxpayer, 
if  such  dependent  person  is  under  eighteen  years  of  age  or  is  incapable  of 
self-support  because  mentally  or  physically  defective.” 

1525  A taxpayer  receives  a credit  of  $200  for  each  person  (other  than 

husband  or  wife),  whether  relatecl  to  him  or  not  and  whether  living 
with  him  or  not,  dependent  upon  and  receiving  his  chief  support  fronr 
the  taxpayer,  provided  the  dependent  is  either  (a)  under  18  or  (b) 
incapable  of  self-support  because  defective.  The  credit  is  based  upon  actual 
hnancial  dependency  and  not  mere  legal  dependency.  It  may  accrue  to  a 
taxpayer  who  is  not  the  head  of  a;  family.  Rut  a father  whose  children  re- 
ceive half  or  more  of  their  support  from  a trust  fund  or  other  separate 
source  is  not  entitled  to  the  credit.  (Art.  304,  Reg.  45,  Rev.,  April  17 


lo26  Date  Determining  Exemption.— The  status  of  the  taxpayer  on 
the  last  day  of  his  taxable  year  determines  his  right  to  an  additional 
exemption  and  to  a credit  for  dependents.  If  then  he  is  the  head  of 
a family,  the  personal  exemption  of  $2,000  may  be  taken.  If  then 

INC.  271 


TAX 


CREDITS  TO  CORPORATIONS. 


he  is  the  chief  support  of  a dependent  who  is  under  eighteen  years  of 
age  or  incapable  of  self-support  because  mentally  or  physically  defective, 
the  credit  of  $200  may  be  taken.  But  an  unmarried  individual  or  a married 
individual  not  living  with  husband  or  wife,  who  during  the  taxable  year  has 
ceased  to  be' the  head  of  a family  or  to  have  dependents,  is  entitled  only  to  the 
personal  exemption  of  $1,000  allowed  a single  person.  A husband  and  wife 
living  together  at  the  end  of  the  taxable  year  may  receive  but  one  personal 
exemption  of  $2,000,  divisible  as  they  please,  against  their  aggregate  net  in- 
come. If  an  individual  dies  during  the  taxable  year,  his  executor  or  admin- 
istrator in  making  a return  for  him  is  entitled  to  claim  his  full  personal  ex- 
emption according  to  his  status  at  the  time  of  his  death.  See  also  section  219 
(c)  of  the  statute  and  articles  326  and  421  [for  credits  to  trust,  estate  or 
beneficiary,  |f668  and  j|684].  If  a husband  or  wife  so  dies  and  the  joint 
personal  exemx:)tion  is  used  by  the  executor  or  administrator  in  making  a 
return  for  the  decedent,  an  undiminished  personal  exemption  according  to 
the  status  of  the  suiwivor  at  the  end  of  the  taxable  year  may  be  claimed  in 
the  survivor’s  return.  If  a taxpayer  makes  a return  for  a period  other  than 
a taxable  year,  the  last  day  of  such  period  shall  be  treated  as  the  last  day  of 
the  taxable  year  for  the  purpose  of  this  article.  See  section  226  and  articles 
431  [for  returns  when  accounting  period  changed,  p862]  and  1013  [for 
declaration  of  termination  of  taxable  period,  112074].  (Art.  305,  Reg.  45, 
Rev.,  April  17,  1919.) 


1527  Law  1f327.  Credits  Against  Income  Allowed  to  Corporations. — 

“Sec.  236.  That  for  the  purpose  only  of  the  tax  imposed 
by  section  230  [1[713]  there  shall  be  allowed  the  following  credits:” 

1528  Law  11328.  Any  Interest  from  Government  Obligations  and  from 

War  Finance  Corporation  Bonds  is  to  be  Credited  for 
Purposes  of  the  Income  Tax. — “(a)  The  amount  received  as  interest 
upon  obligations  of  the  United  States  and  bonds  issued  by  the  War 
Finance  Corporation,  which  is  included  in  gross  income  under  Section 
233  [11808];” 

1529  Law  11329.  The  Amount  of  War  and  Excess-Profits  Tax  Imposed 

for  the  Same  Taxable  Year  is  to  be  Credited  Against 
Income  for  Purposes  of  the  Income  Tax. — “(b)  The  amount  of  any  taxes 
imposed  by  Title  III  for  the  same  taxable  year:” 

1530  Law  11330.  War  and  Excess-Profits  Tax  Credit  in  the  Case  of 

Fiscal  Year  Corporations. — “Provided,  That  in  the 
case  of  a corporation  which  makes  return  for  a fiscal  year  beginning  in  1917 
and  ending  in  1918,  in  computing  the  tax  as  provided  in  subdivision  (a)  of 
section  205  [11613],  the  tax  computed  for  the  entire  period  under  Title  II 
of  the  Revenue  Act  of  1917  shall  be  credited  against  the  net  income  com- 
puted for  the  entire  period  under  Title  I of  the  Revenue  Act  of  1916  as 
amended  by  the  Revenue  Act  of  1917  and  under  Title  I of  the  Revenue  Act 
of  1917,  and  the  tax  computed  for  the  entire  period  under  Title  III  of  this 
Act  at  the  rates  prescribed  for  the  calendar  year  1918  shall  be  credited 
against  the  net  income  computed  for  the  entire  period  under  this  title ; and” 

1531  Law  11331.  Domestic  Corporations  Are  Allowed  a Specific  Credit 

of  $2,000. — “(c)  In  the  case  of  a domestic  corporation, 

$2,000.” 


f 

f 


# 

# 

€ 


INC. 


272  TAX 


TAX  ON  NONRESIDENT  ALIENS. 


1532  Law  |[4.  “Domestic  Corporation”  Defined.— “The  term  Momes- 

. tic  when  applied  to  a corporation  or  partnership  means 
created  or  organized  in  the  United  States  [T|1009] 

Credit  of  $2,000  Apportioned  When  Returns  Are  Being  Made  for 
a Changed  Accounting  Period.— [Read  at  |[1861.] 

1533  Credits  Allowed.— After  ascertaining  the  net  income  of  a domes- 
tic  corporation  it  is  allowed  as  credits  against  such  net  income  before 

the  application  of  the  income  tax  rate  the  sum  of  $2,000,  plus  the 
amount  of  any  war  profits  and  excess  profits  tax  assessed  or  to 
be  assessed  for  the  same  taxable  year,  and  plus  the  amount  of  interest  not 
entirely  exempt  from  tax  received  upon  obligations  of  the  United  States 
and  bonds  of  the  War  Finance  Corporation.  See  section  213  (b)  of  the 
statute  and  articles  77-82  [for  interest  on  government  obligations,  TF11391. 
Consequently,  m the  case  of  corporations  no  income  tax  is  imposed  on  any 
mterest  received  upon  obligations  of  the  United  States  or  bonds  of  the  War 
hmance  Corporation.  A foreign  corporation  is  allowed  the  same  credits 
. $2,000.  As  to  corporations  with  fiscal  years  beginning 

in  1917  see  section  205  and  article  1623  [|f623].  For  the  purpose  of  the 
war  profits  and  excess  profits  tax  a corporation  is  not  entitled  to  these 
credits.  (Art.  591,  Reg.  45,  Rev.,  April  17,  1919.) 

P295^^  Against  the  Tax  in  the  Case  of  a Corporation.— Read  at 


1535  Xax  on  Non-resident  Aliens, 
at  pis. 


-Who  is  a non-resident  alien. — Read 


1536  Law  1[75.  Normal  Tax  on  Non-resident  Aliens.— “Sec.  210.  That, 
in  lieu  of  the  taxes  imposed  by  subdivision  (a)  of  section 
1 of  the  Revenue  Act  of  1916  [Normal  income  tax  on  individuals!  and  by 
section  of  the  Revenue  Act  of  1917  [War-normal  tax  on  individuals:'  did 
not  apply  to  nonresident  aliens],  there  shall  be  levied,  collected,  and  paid 
tor  each  taxable  year  upon  the  net  income  of  every  individual  a normal 
tax  at  the  following  rates 

v^!r  IQ^r'^F®'  the  Calendar  Year  1918— “(a)  For  the  calendar 
year  1918,  12  per  centum  of  the  amount  of  the  net  income  in  excess  of  the 
credits  provided  in  section  216  [P513  and  ]fl570] 

1538  LawjfyS.  For  Calendar  Year  1919  and  Subsequent  Years.— “(b) 
For  each  calendar  year  thereafter,  8 per  centum  of  the 
ftfUn^nd  11U70]  '''  provided  in  section  216 

io39  LawpO.  Surtax  on  Non-resident  Aliens.— “Sec.  211.  (a)  That, 

1 r , T.  imposed  by  subdivision  (b)  of  sec- 

o®"".  Revenue  Act  of  1916  [Surtax  on  individuals]  and^  by  section 

2 of  the  Revenue  Act  of  1917  [Surtax  on  individuals],  but  in  addition  to 
he  normal  tax  imposed  by  section  210  [111538]  of  this  Act,  there  shall  be 
levied,^  collected,  and  paid  for  each  taxable  year  upon  the  net  income  of 
every  individual,  a surtax  equal  to  the  sum  of  the  following*  [Rates  same 
as  for  citizens  and  residents,  for  which  see  P85  ]” 


INC. 


273 


TAX 


TAX  ON  NONRESIDENT  ALIENS. 


1540  Law  ^83.  Net  Income  of  Non-resident  Aliens  Defined. — “Sec.  212. 

(a)  That  in  the  case  of  an  individual  the  term  “net 
income”  means  the  gross  income  as  defined  in  section  213  [p542],  less 
the  deductions  allowed  by  section  214  [p561].’ 

1541  Law|f84.  Annual  Accounting  Period  for  Non-resident  Aliens 

(Fiscal  Year  or  Calendar  Year,  as  the  Case  May  Be.) — 

Sec.  212.  (b).,  [Same  as  for  citizens  and  residents  for  which  see  p78.] 

1542  Law  p09. — Gross  Income  of  Non-resident  Aliens. — Sec.  213.  (a). 

(b) .  [Same  as  for  citizens  and  residents  for  which  see 
P02,  except  that] — “(c)  In  the  case  of  non-resident  alien  individuals, 
gross  income  includes  only  the  gross  income  from  sources  within  the 
United  States,” 

1543  LawplO.  Interest  on  Domestic  Securities  and  Dividends  on  Do- 

mestic Stock  as  Gross  Income  of  Nonresident  Aliens. — 

“including  interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of 
residents,  corporate  or  otherwise,  dividends  from  resident  corporations,  and” 

1544  Law  p 11.  Profits  on  the  Manufacture  and  Disposition  of  Goods 

Within  the  United  States  as  Gross  Income  of  Non- 
resident Aliens,  —“including  all  amounts  received  (although  paid  under 
a contract  for  the  sale  of  goods  or  otherwise)  representing  profits  on  the 
manufacture  and  disposition  of  goods  within  the  United  States.” 

1545  Gross  Income  of  Non-resident  Alien  Individuals. — In  the  case  of 
nonresident  alien  individuals  “gross  income”  means  only  the  gross 

income  from  sources  within  the  United  States.  This  includes  interest 
on  bonds,  notes  or  other  interest-bearing  obligations  of  residents, 
corporate  or  otherwise,  dividends  from  resident  corporations,  amounts  re- 
ceived representing  profits  on  the  manufacture  or  disposition  of  goods  within 
the  United  States,  rentals  and  royalties  from  property  and  income  from 
business  carried  on  in  the  United  States,  interest  on  deposits  in  banks  lo- 
cated within  the  United  States,  income  from  capital  otherwise  invested  in 
the  United  States,  and  income  from  services  rendered  or  labor  performed 
within  the  United  States.  For  what  is  a resident  corporation  see  article 
1509  [pOlO].  As  to  the  gross  income  of  foreign  corporations  see  section 
233  (b)  of  the  statute  and  article  550  [P018].  (Art.  91,  Reg.  45,  Rev., 
April  17,  1919.) 

1540  Income  of  Nonresident  Alien  Individuals  Not  Subject  to  Tax. — 

Salaries,  wages,  commissions  and  rents  paid  by  domestic  business 
enterprises  to  nonresident  alien  employees  for  services  rendered  entirely 
in  a foreign  country  or  for  property  located  in  a foreign  country  are  not 
subject  to  tax  as  income  from  a source  within  the  United  States.  Dividends 
on  stock  and  interest  on  notes  of  corporations  organized  in  the  United 
States,  but  doing  no  business  and  owning  no  property  therein,  paid  to  non- 
resident alien  individuals  or  corporations,  are  not  subject  to  the  tax.  The 
tax  does  not  apply  to  charter  money  or  freight  payments  received  by  a 
foreign  owner  in  regard  to  a vessel  operated  between  the  United  States 
and  foreign  ports,  if  the  person  receiving  the  income  maintains  no  regular 
agency  in' the  United  States  and  is  not  doing  business  in  the  United  States. 
Compensation  received  by  nonresident  alien  munitions  inspectors  and  pur- 

INC.  274  TAX 


TAX  ON  NONRESIDENT  ALIENS. 


chasing  agents  from  foreign  governments  is  not  subject  to  the  tax.  (Art. 
92,  Reg.  45,  Rev.,  April  17,  1919.) 

1547  When  the  Wages  of  a Nonresident  Alien  Seaman  Are  Derived 
from  Sources  Within  the  United  States.—While  resident  alien 

seamen  are  taxable  like  citizens  on  their  entire  income  from  whatever 
sources  derived,^  nonresident  alien  seamen  are  taxable  only  on  income 
from  sources  within  the  United  States.  Ordinarily,  wages  received  for 
services  rendered  inside  the  territorial  United  States  are  to  be  regarded  as 
from  sources  within  the  United  States.  The  wages  of  an  alien  seaman 
earned  on  a coastwise  vessel  are  from  sources  within  the  United  States,  but 
wages  earned  by  an  alien  seaman  on  a ship  regularly  engaged  in  foreign 
trade  are  not  to  be  regarded  as  from  sources  within  the  United  States, 
even  though  the  ship  flies  the  American  flag,  or  although  during  a part 
of  the  time  the  ship  touched  at  United  States  ports  and  remained  there  a 
reasonable  time  for  the  transaction  of  its  business.  The  presence  of  a 
seaman  aboard  a ship  which  enters  a port  for  such  purposes  of  foreign 
trade  is  merely  transitory  and  wages  earned  during  that  period  by  a non- 
resident alien  seaman  are  not  taxable.  There  is  no  withholding  from  the 
wages  of  alien  seamen  unless  they  are  nonresidents  within  the  rules  laid 
(lown  111  Articles  311  to  315.  Even  in  the  case  of  a nonresident  alien  seaman, 
the  employer  is  not  obliged  to  withhold  from  wages  unless  those  wages  are 
from  sources  within  the  United  States  as  defined  above.  As  to  when  alien 
seamen  are  to  be  regarded  as  residents  see  Art.  312a  fl[5l91.  (Art.  92a 
Reg.  45,  Rev.,  as  added  by  T.  D.  2869,  June  20,  1919.) 

1548  Article  92  (a)  fP 547],  which  is  added  to  Regulations  45  by  Treas- 
ury  Decision  2869,  provides  that  ‘‘Nonresident  alien  seamen  are 

taxable  only  on  income  from  sources  within  the  United  States”  and  further, 
that  “Wages  earned  by  an  alien  seaman  regularly  engaged  in  foreign  trade 
are  not  to  be  regarded  as  from  sources  within  the  United  States  even  though 
the  ship  flies  the  American  Fla.s,  or  although  during  a part  of  that  time 
the  ship  touched  at  U.  S.  ports  and  remained  there  a reasonable  time  for 
the  transaction  of  its  business.”  It  follows  therefore  that  in  such  cases  the 
wages  paid  to  nonresident  alien  seamen  by  an  employer  are  not  regarded  as 
income  from  sources  within  the  United  States  and  the  employer  is  not 
required  to  withhold.  It  should  be  remembered,  however,  that  for  pur- 
poses of  information  such  an  employer  is  required  by  Section  256,  Article 
1071  ^1^1736]  thereunder,  to  render  a return  to  the  Commissioner  on  Form 
1099,  in  all  cases  where  the  employer  made  payment  of  $1,000  or  over  of 
wages  to  resident  alien  seamen  in  any  taxable  year.  (Part  of  letter  to  Ship- 
owners’ Association  of  the  Pacific  Coast,  San  Francisco,  signed  by  P.  S. 
Talbert,  Acting  Assistant  to  the  Commissioner,  by  C.  R.  Trobridge,  Acting 
Head  of  Division,  and  dated  September  20,  1919.) 

1549  Income  of  Nonresident  Aliens  from  Dividends,  the  Record  Owner 
of  the  Stock  Being  a Person  in  the  United  States.— Read  at 

P776. 

1550  Income  of  Nonresident  Aliens  from  United  States  Bonds.— By 

virtue  of  section  4 of  the  Victory  Liberty  Loan  Act  of  March  3 1919 
amending  section  3 of  the  Fourth  Idberty  Bond  Act  of  July  9^  1918 
[^1551 1,  the  interest  received  on  and  after  March  3,  1919,  on  bonds  notes 
and  certificates  of  indebtedness  of  the  United  States  and  bonds  of  the  War 

INC.  275 


TAX 


TAX  ON  NONRESIDENT  ALIENS. 


Finance  Corporation,  while  beneficially  owned  by  a nonresident  alien  individ- 
ual, or  a foreign  corporation,  partnership  or  association,  not  engaged  in 
business  in  the  United  States,  is  exempt  from  all  income  and  war  profits 
and  excess  profits  taxes.  (Art.  93,  Reg.  45,  Rev.,  April  17,  1919.) 

1551  Sec.  4.  That  section  3 of  the  Fourth  Liberty  Bond  Act  is  hereby 

amended  to  read  as  follows : o j t -u  ^ 

“Sec.  3.  That,  notwithstanding  the  provisions  of  the  Second  Liberty 
Bond  Act  or  of  the  War  Finance  Corporation  Act  or  of  any  other  Act, 
bonds,  notes,  and  certificates  of  indebtedness  of  the  United  States  and  bonds 
of  the  War  Finance  Corporation  shall,  while  beneficially  owned  by  a non- 
resident afien  individual,  or  a foreign  corporation,  partnership,  or  associa- 
tion not  engaged  in  business  in  the  United  States,  be  exempt  both  as  to 
principal  and  interest  from  any  and  all  taxation  now  or  hereafter  imposed 
bv  the  United  States,  any  State,  or  any  of  the  possessions  of  the  United 
States  or  by  any  local  taxing  authority.”  (Section  4 of  “An  Act  to  amend 
the  Liberty  Bond  Acts  and  the  War  Finance  Corporation  Act,  and  for  other 
purposes,”  known  as  the  “Victory  Liberty  Loan  Act,”  approved  by  the 
President,  March  3,  1919.) 


1552  Sale  of  Stock. — When  a nonresident  alien  who  owns  stock  in  an 
American  corporation  disposes  of  same  by  sale,  the  sale  and  delivery 
being  made  within  the  United  States,  the  profit  will  be  held  to  have  been 
derived  from  sources  within  the  United  States  and  is  to  be  included  for  the 
the  purposes  of  income  tax.  (Art.  4,  1162,  Reg.  33,  Rev.,  Jan.  2,  1918.) 


1553  Foreign  Partnerships  and  the  Nonresident  Alien  Members  There- 
of.  A domestic  corporation  or  partnership  is  one  organized  or 

created  in  the  United  States,  including  only  the  States,  the  Terri- 
tories of  Alaska  and  Hawaii,  and  the  District  of  Columbia,  and  a 
foreign  corporation  or  partnership  is  one  organized  or  created  outside 
the  United  States  as  so  defined  [1[1008  and  1[1009].  The  nationality  or 
residence  of  members  of  a partnership  does  not  alfect  its  status.  A partner- 
ship created  by  articles  entered  into  in  San  Francisco  between  residents  of 
the  United  States  and  residents  of  China  is  a domestic  partnership  See 
also  articles  4 [for  “Who  is  a citizen,”  p\2]  and  312-315  [for  Who  is 
a nonresident  alien,  etc.,  beginning  at  1[518].  (Art.  1509,  Reg.  45,  Rev., 
April  17,  1919.) 


1554  Income  from  United  States  Sources  Received  Through  Foreign 
Partnership. — The  income  received  by  a nonresident  alien  part- 
nership from  sources  within  the  United  States  does  not  lose  its  identity  as 
to  source  when  distributed  to  a nonresident  alien  member  of  the  firm. 
Therefore,  the  nonresident  alien  member  will  be  required  to^ 
return  on  Form  1040  or  1040A,  as  the  case  may  be,  and  shall  include 
therein  his  distributive  share  of  the  taxable  profits  from  sources  within  the 
United  States.  (Part  of  letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  October  1,  1918.) 


1555  Profits  Accruing  to  Nonresident  Alien  Partnerships  on  Sale  of 
Stock  Negotiated  Through  Domestic  Bankers.— This  office  has 
before  it  your  letter  of  October  28,  1916.  It  appearing  from  paragraph  (e) 
of  your  letter  that  the  foreign  banking  house  referred  to  is  a co-partner- 
ship, the  following  answers  are  returned  to  your  several  inquiries: 


INC.  276  TAX 


TAX  ON  NONRESIDENT  ALIENS. 


1556  “A  foreign  banking  house  buys  through  a domestic  banking  house 
1,000  shares  of  stock  and  sells  the  stock  with  a profit  of  $30,000.  (a) 

Is  this  profit  taxable  ? (Answer)  Yes. 

1557  (b)  Should  the  domestic  firm  retain  the  normal  tax?  (Answer)  No. 

1558  (^c)  How  can  a foreign  firm  be  made  to  render  a tax  return  and  pay 
the  tax,  it  being  assumed  that  the  domestic  firm  or  agent  holds  no 

property  for  account  of  the  foreign  firm  after  the  transaction  is  conpleted? 
(Answer)  The  Government  will  proceed,  under  the  general  provisions  of 
the  law,  to  take  all  steps  necessary  to  secure  a required  return,  or  to  itself 
prepare  one,  and  a collection  of  the  amount  of  tax  assessed  against  that 
return. 

1559  ((i)  if  the  foreign  firm  does  not  render  a return,  will  the  domestic 
firm  be  held  responsible  for  the  tax  and  supertax,  if  any?  (Answer) 

The  foreign  firm  itself  is  not  required  [under  the  law  as  it  then  was]  to 
render  an  income  tax  return  covering  its  own  net  income  unless  specifically 
requested  to  do  so  by  the  Commissioner  of  Internal  Revenue  or  a Collector 
of  Internal  Revenue.  Whether  or  not  the  domestic  firm  which  has  acted  as 
agent  for  tlie  foreign  firm  would  be  required  to  render  a return  in  the  event 
that  the  latter  refused  to  do  so,  would  be  determined  by  the  facts  in  the 
C3.se. 

1560  (e)  The  foreign  firm  has  several  partners.  Is  the  $30,000  to  be 
considered  an  entity  for  the  purpose  of  supertax  or  may  the  several 

partners  declare  their  proportionate  shares  in  the  amount?  (Answer)  In- 
come Tax  is  not  computed  upon  the  amount  of  net  income  derived  by  a 
foreign  partnership  from  sources  within  the  United  States,  but  upon  the 
individual  share  of  each  member  in  such  net  income.  (Letter  to  The  Cor- 
poration Trust  Company,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
Dec.  6,  1916.) 


1561  Law  1fl49.  Deductions  Allowed  to  Nonresident  Aliens. — “Sec.  214. 

(b)  In  the  case  of  a nonresident  alien  individual  the  de- 
ductions allowed  in  paragraphs  (1)  [1111821,  (4)  [1fl303],  (7)  [P316], 
(8)  [111238],  (9)  [111376],  (10)  [111397],  (12)  [111467],  and  clause  (e) 
of  paragraph  (3)  [111564],  of  subdivision  (a)  shall  be  allowed  only  if  and 
to  the  extent  that  they  are  connected  with  income  arising  from  a source 
within  the  United  States 


1562  Law  1[150.  Apportionment  and  Allocation  of  Deductions. — “and 
the  proper  apportionment  and  allocation  of  the  deductions 
with  respect  to  sources  of  income  within  and  without  the  United  States  shall 
be  determined  under  rules  and  regulations  prescribed  by  the  Commissioner 
with  the  approval  of  the  Secretary.” 


1563  Law  11118.  Interest  Deductible  by  a Nonresident  Alien.— “Sec. 

214.  (a)  (2)  [111232]— or,  in  the  case  of  a nonresident 

alien  individual,  the  proportion  of  such  interest  which  the  amount  of  his 
gross  income  from  sources  within  the  United  States  bears  to  the  amount  of 
his  gross  income  from  all  sources  within  and  without  the  United  States 


1564  Law  11125.  Taxes  Deductible  by  a Nonresident  Alien. — “Sec.  214. 

(a)  (3)  [Taxes  set  forth  in  111246,  111247,  111248,  and  in 
addition  thereto]  (e)  in  the  case  of  a nonresident  alien  individual,  by  the 
authority  of  any  foreign  country  (except  income,  war-profits  and  excess- 
profits  taxes,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to 
increase  the  value  of  the  property  assessed),  upon  property  or  business , 


277  TAX 


INC. 


TAX  ON  NONRESIDENT  ALIENS. 

1565  Law  p 28.  Losses  Incurred  in  Transactions  Entered  Into  for 

Profit  Outside  of  Business  Deductible  by  Nonresident 
Aliens.— ‘Sec.  214.  (5)  [P310]— but  in  the  case  of  a nonresident  alien 
individual  only  as  to  such  transactions  within  the  United  States;” 

1566  LawiriSO.  Property  Losses  Outside  of  Business  Deductible  by 

Nonresident  Aliens. — “Sec.  214.  (a)  (6)  [p311]— (but 
in  the  case  of  a nonresident  alien  individual  only  property  within  the 
United  States)” 

1567  Lawp43.  Contributions  to  Religious,  Charitable,  Educational, 

etc..  Activities  Are  Deductible  to  a Limited  Amount. — 

“Sec.  214.  (b)  (11)  [p447] — In  the  case  of  a nonresident  alien  individual 
this  deduction  shall  be  allowed  only  as  to  contributions  or  gifts  made  to 
domestic  corporations,  or  to  such  vocational  rehabilitation  fund;” 

1568  In  the  case  of  a nonresident  alien  individual  the  deduction  for  inter- 
est paid  or  accrued  is  proportionate  to  his  income  from  sources 

within  the  United  States  (see  paragraph  (2)  of  subdivision  (a)  of 
section  214  of  the  statute)  [P563]  ; for  losses  incurred  in  any  trans- 
action entered  into  for  profit,  or  arising  from  casualty  or  theft,  is  confined 
to  transactions  and  property  within  the  L^nited  States  (5),  (6)  ; for  charit- 
able contributions  excludes  gifts  to  foreign  corporations  (11)  ; and  for  busi- 
ness expenses,  taxes  imposed  by  a foreign  country,  losses  in  trade,  bad  debts, 
depreciation,  amortization,  depletion,  and  loss  in  inventory  (1),  (3),  (4), 
(7),  (8),  (9),  (10)  and  (12),  is  allowed  only  if  and  to  the  extent  that  it  is 
connected  with  income  arising  from  a source  within  the  United  States.  See 
articles  91  [for  gross  income  of  nonresident  aliens,  P545]  and  311  [for 
allowance  of  deductions  and  credits  to  nonresident  aliens,  P575] — 316 
[for  allowance  of  personal  exemption  to  nonresident  aliens,  p570].  As 
to  deductions  allowed  foreign  corporations,  see  section  234  (b)  of  the 
statute  and  article  573  [p035].  (Art.  271,  Reg.  45,  Rev.,  April  17,  1919.) 

1569  Dividends  and  United  States  Bond  Interest  as  Credit  for  Normal 
Tax  (All  Individuals,  Including  Nonresident  Aliens). — Read  at 

P513. 

1570  Lawp64.  Specific  Exemption  as  Credit  for  Normal  Tax  to  Non- 

resident Aliens. — “Sec.  216.  (e) — In  the  case  of  a non- 
resident alien  individual  who  is  a citizen  or  subject  of  a country  which 
imposes  an  income  tax,  the  credits  allowed  in  subdivisions  (c)  [111518]  and 
(d)  [P524]  shall  be  allowed  only  if  such  country  allows  a similar  credit 
to  citizens  of  the  United  States  not  residing  in  such  country.” 

1571  Credits  to  Nonresident  Alien  Individual. — A nonresident  alien 
individual,  similarly  to  a citizen  or  resident,  is  entitled  for  the  pur- 
pose of  the  normal  tax  to  credit  dividends  from  domestic  or  resident 
foreign  corporations,  interest  on  obligations  of  the  United  States,  a 
personal  exemption,  and  $200  for  each  dependent,  except  that  if  he  is  a 
citizen  or  subject  of  a country  which  imposes  an  income  tax  a personal  ex- 
emption or  credit  for  dependents  is  allowed  him  “only  if  such  country  allows 
a similar  credit  to  citizens  of  the  United  States  not  residing  in  such  country.” 
“If  such  country  allows  a similar  credit”  means  if  such  country  in  imposing 
its  income  tax  allows  a personal  exemption  or  a credit  for  dependents,  as 

278  TAX 


INC. 


TAX  ON  NONRESIDENT  ALIENS. 


the  case  may  be,  and  allows  it  without  discrimination  to  citizens  of  the 
United  States  not  residing  in  such  country.  For  the  meaning  of  “country’^ 
see  article  382  [p292].  To  satisfy  the  requirement  of  a similar  credit  it 
is  not  necessary  that  the  personal  exemption  or  credit  for  dependents,  as 
the  case  may  be,  should  be  the  same  as  that  allowed  by  the  United  States 
statute.  The  status  as  to  residence  of  an  alien  individual  on  the  last  day  of 
his  taxable  year  determines  his  right  to  be  treated  as  a resident: or  as  a non- 
resident for  such  year.  [For  discussion  of  personal  exemption  generally 
read  at  jfl518].  (Art.  306,  Reg.  45,  Rev.,  April  17,  1919.) 

1572  When  Nonresident  Alien  Individual  Entitled  to  Personal  Ex- 
emption.— (a)  The  following  is  an  incomplete  list  of  countries 

which  either  impose  no  income  tax  or  in  imposing  an  income  tax  allow  both  a 
personal  exemption  and  a credit  for  dependents  which  satisfy  the  similar 
credit  requirement  of  the  statute : Argentina ; Belgium ; Bohemia ; Bolivia ; 
Bosnia;  Brazil;  Bukowina;  Canada;  Carinthia;  Carniola;  China;  Chile; 
Cuba;  Dalmatia;  Denmark;  Ecuador;  Egypt;  France;  Galicia;  Goritz; 
Gradisoa ; Herzegovina ; Istria ; Rower  Austria ; Mexico ; Montenegro ; Mor- 
avia; Morocco;  Newfoundland;  Nicaragua;  Norway;  Panama;  Paraguay; 
Persia;  Peru;  Portugal;  Roumania;  Russia  (including  Poles  owing  allegi- 
ance to  Russia)  ; Salzburg;  Santo  Domingo;  Serbia;  Siam;  Silesia;  Styria; 
Spain;  Trieste;  Tyrol;  Upper  Austria;  Union  of  South  Africa;  Venezuela, 
(b)  The  following  is  an  incomplete  list  of  countries  which  in  imposing  an  in- 
come tax  allow  a personal  exemption  which  satisfy  the  similar  credit  require- 
ment of  the  statute,  but  do  not  allow  a credit  for  dependents  : Bachka ; Banat 
of  Temesvar;  Croatia;  Salvador;  India;  Italy;  Slavonia;  Slovakia;  Transyl- 
vania. (c)  The  following  is  an  incomplete  list  of  countries  which  in  im- 
posing an  income  tax  do  not  allow  to  citizens  of  the  United  States  not  re- 
siding in  such  country  either  a personal  exemption  or  a credit  for  dependents 
and,  therefore,  fail  entirely  to  satisfy  the  similar  credit  requirement  of  the 
statute:  Australia;  Costa  Rica;  Great  Britain  and  Ireland;  Japan;  The 
Netherlands;  New  Zealand;  Sweden.  The  former  names  of  certain  of  these 
territories  are  here  used  for  convenience,  in  spite  of  an  actual  or  possible 
change  in  name  or  sovereignty.  A nonresident  alien  individual  who  is  a citi- 
zen or  subject  of  any  country  in  the  first  list  is  entitled  for  the  purpose  of  the 
normal  tax  to  such  credit  for  a personal  exemption  and  for  dependents  as 
his  family  status  may  warrant.  If  he  is  a citizen  or  subject  of  any  country 
in  the  second  list  he  is  entitled  to  a credit  for  personal  exemption,  but  to 
none  for  dependents.  If  he  is  a citizen  or  subject  of  any  country  in  the 
third  list  he  is  not  entitled  to  credit  for  either  a personal  exemption  or  for 
dependents.  If  he  is  a citizen  or  subject  of  a country  which  is  in  none  of 
the  lists,  then  to  secure  credit  for  either  a personal  exemption  or  for  depend- 
ents he  must  prove  to  the  satisfaction  of  the  Commissioner  that  his  country 
does  not  impose  an  income  tax  or  that  in  imposing  an  income  tax  it  grants 
the  similar  credit  required  by  the  statute.  (Art.  307,  Reg.  45  Rev.  as 
amended  by  T.  D.  2922,  September  18,  1919. 

1573  Credits  to  Nonresident  Aliens,  Citizens  of  Countries  Which  in 
Imposing  Income  Taxes  Levy  no  Income  Taxes  on  United  States 

Citizens  Not  Residing  Therein.— Reference  is  made  to  your  letter 
of  March  22,  1919,  in  which  you  refer  to  Treasury  Decision  2811 
[amended  by  T.  D.  2922,  1[1572]  and  ask  to  be  advised  concerning 
the  application  of  the  ruling  contained  therein  in  cases  where  an  individual 

INC.  279 


TAX 


TAX  ON  NONRESIDENT  ALIENS. 


is  a citizen  or  subject  of  a country  which  Imposes  an  income  tax  but  whic 
tax  does  not  apply  to  nonresident  aliens.  ^Tn  reply  you  are  advised  that  a 
citizen  or  subject  of  a country  which  imposes  an  income  tax  but  does  not 
levy  a tax  on  income  derived  from  such  country  by  citizens  of  the  United 
States  not  residing  therein  is  permitted  to  claim  the  credits  Provided  for  in 
paragraphs  (c)  and  (d),  Section  216  of  the  Revenue  Act  of  1918  in  pre- 
paring a return  of  income  derived  from  sources  within  the  United  ^ates. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  May  1,  1919.) 

1574  Law  11165.  Deductions  and  Credits  Allowed  Conditionally.  “Sec. 

217.  That  a nonresident  alien  individual  shall  receive 
the  benefit  of  the  deductions  and  credits  allowed  in  this  title  only  by 
or  causing  to  be  filed  with  the  collector  a true  and  accurate  return  of  ms 
total  income  received  from  all  sources  corporate  or  otherwise  in  the  United 
States,  in  the  manner  prescribed  by  this  title,  including  therein  all  the  in- 
formation which  the  Commissioner  may  deem  necessary  for  the  calcula- 
tion of  such  deductions  and  credits:” 

1575  Allowance  of  Deductions  and  Credits  to  Nonresident  Alien  Indi- 
vidual.—Unless  a nonresident  alien  individual  shall  render  a re- 
turn of  income  as  required  in  article  401  [1(1579],  the  tax  shall  be  col- 
lected on  the  basis  of  his  gross  income  (not  his  net  income)  from  sources 
within  the  United  States.  Where  a nonresident  alien  has  various  sources 
of  income  within  the  United  States,  so  that  from  any  one  source  or  from 
all  sources  combined  the  amount  of  income  shall  call  for  the  assessment 
of  a surtax,  and  a return  of  income  shall  not  be  filed  by  him  or  on  his  behalf, 
the  Commissioner  will  cause  a return  of  income  to  be  made  and  include 
therein  the  income  of  such  nonresident  alien  from  all  sources  concerning 
which  he  has  information,  and  he  will  assess  the  tax  and  collect  it  from  one 
or  more  of  the  sources  of  income  within  the  United  Staites  of  such  non- 
resident alien,  without  allowance  for  deductions  or  credits.  The  benefit 
of  the  credits  allowed  against  net  income  for  the  purpose  of  the  normal 
tax  mav  not  be  received  by  a nonresident  alien  by  filing  a claim  with  the 
withholding  agent,  but  only  by  Maiming  them  upon  filing 

except  as  permitted  in  article  316  [111577  and  m Article  * 

section  216  of  the  statute  and  articles  306  and  307  [for  credits  to  n^n^sident 
aliens,  p571  and  1(1572].  (Art.  311,  Reg.  45,  Rev.,  April  17,  1919.) 

1576  LawK166.  Specific  Exemption  May  Be  Claimed  at  the  Source.— 

“Provided,  That  the  benefit  of  the  credits  allowed  in  sub- 
divisions (c)  [P518]  and  (d)  [1(1524]  of  section  216  may  in  the  ^cre- 
tion  of  the  Commissioner,  and  except  as  otherwise  provided  in  subdivision 
(e)  [1(1570]  of  that  section,  be  received  by  filing  a claim  therefor  with  the 
withholding  agent.” 

1577  Allowance  of  Personal  Exemption  to  Nonresident  Alien  Em- 
ployee.-A  nonresident  alien  employee  provided  he  is  entitled 

under  section  216  of  the  statute  and  articles  301-307  [fl571  and 
1115721  to  credit  for  a personal  exemption  or  for  dependents  or  both 
may  claim  the  benefit  of  such  credit  by  filing  witn  his  employer  form  111^ 
duly  filled  out  and  executed  under  oath.  See  particularly  the  lists  of  fo  ^ 
countries  in  article  307  [111572].  On  the  filing  of  such  a claim  the  em- 

280  TAX 


INC. 


TAX  ON  NONRESIDENT  ALIENS. 


ployer  shall  examine  it.  If  on  such  examination  it  appears  that  the  claim 
is  in  due  form,  that  it  contains  no  statement  which  to  the  knowledge  of 
the  employer  is  untrue,  that  such  employee  on  the  face  of  the  claim  is  en- 
titled to  credit,  and  that  such  credit  has  not  yet  been  exhausted,  such  em- 
ployer need  not  until  such  credit  be  in  fact  exhausted  withhold  any  tax  from 
payments  of  salary  or  wages  made  to  such  employee.  Every  employer  with 
whom  affidavits  of  claim  on  form  1115  are  filed  by  employees  shall  pre- 
serve such  affidavits  until  the  following  calendar  year,  and  shall  then  file 
them,  attached  to  his  annual  withholding  return  on  Form  1042  (revised), 
with  the  collector  on  or  before  March  1.  In  case,  however,  when  the  fol- 
lowing calendar  year  arrives  such  employer  has  no  withholding  to  return, 
he  shall  forward  all  such  affidavits  of  claim  directly  to  the  Commissioner 
(Sorting  Division),  with  a letter  of  transmittal,  on  or  before  March  15. 
Where  any  tax  is  withheld  the  employer  in  every  instance  shall  show  on 
the  pay  envelope  or  shall  furnish  some  other  memorandum  showing  the 
name  of  the  employee,,  the  date  and  the  amount  withheld.  This  article  ap- 
plies only  to  payments  of  compensation  by  an  employer  to  an  employee. 
See  further  section  221  and  articles  361-376  [for  withholding  of  the  tax 
at  the  source,  beginning  at  p585].  (Art.  316,  Reg.  45,  Rev.,  April  17, 
1919.) 

1578  Personal  Exemption  of  Nonresident  Aliens  in  the  Case  of  Interest 
Payments  on  Tax-Free  Covenant  Bonds. — Read  at  p650. 

1579  Return  of  Income  of  Nonresident  Alien. — A nonresident  alien  in- 
dividual shall  make  or  have  made  a full  and  accurate  return  on  form 

1040  (revised)  or  form  1040  A (revised)  of  his  income  received  from 
sources  within  the  United  States,  regardless  of  amount,  unless  the  tax  on 
such  income  has  been  fully  paid  at  the  source.  See  section  217  of  the 
statute  and  articles  311  [for  allowance  of  deductions  and  credits,  p575] — 
316  [for  allowance  of  personal  exemption  to  nonresident  alien  employee, 
P577].  The  responsible  representatives  of  nonresident  aliens  in  connection 
with  any  source  of  income  which  such  nonresident  aliens  may  have  within 
the  United  States  shall  make  a return  of  such  income,  and  shall  pay  any  and 
all  tax,  normal  and  additional,  assessed  upon  the  income  received  by  them 
in  behalf  of  their  nonresident  alien  principals,  in  all  cases  where  the  tax  on 
income  so  in  their  receipt,  custody  or  control  shall  not  have  been  withheld  at 
the  source.  The  agent  of  a nonresidnet  alien  is  responsible  for  a correct 
return  of  all  income  accruing  to  his  principal  within  the  purview  of  the 
agency.  The  agency  appointment  will  determine  how  completely  the  agent 
is  substituted  for  the  principal  for  tax  purposes.  Where  upon- filing  a re- 
turn of  income  it  appears  that  a nonresident  alien  is  not  liable  for  tax,  but 
nevertheless  a tax  shall  have  been  withheld  at  the  source,  in  order  to  obtain 
a refund  on  the  basis  of  the  showing  made  by  the  return  there  should  be 
attached  to  it  a statement  showing  accurately  the  amounts  of  tax  withheld, 
with  the  names  and  post-office  addresses  of  all  withholding  agents.  [For 
claims  for  refund  read  at  pi  15.]  See  article  376  [for  return  of  income 
from  which  tax  is  withheld  p722].  (Art.  404,  Reg.  45,  Rev.,  April  17, 
1919.) 

1580  When  a Broker  is  Not  the  Agent,  for  Income  Tax  Purposes,  of  a 
Nonresident  Alien  Client. — This  office  is  in  receipt  of  your  letter 

of  Mar.  7,  1918,  in  which  you  ask  what  constitutes  an  agent  or  representative 
in  this  country  in  charge  of  property  of  a nonresident  alien,  and  by! way  of 

INC.  281  TAX 


I i 


WITHHOLDING  AT  THE  SOURCE. 


illustration  you  submit  the  following  statement:  ‘I  have  in  mind  the  ordi- 
nary relation  of  broker  and  client.  The  non-resident  alien  client  maintains 
an  account  with  a broker,  occasionally  buying  some  securities  on  margin 
and  selling  some  from  time  to  time ; interest  is  charged  on  balances  due  and 
dividends  as  paid  on  the  stocks  carried  are  credited  to  the  account.  All 
dealings  are  in  response  to  direction  from  the  customer.  Is  the  broker  in 
such  case,  agent  or  representative  of  the  alien  so  that  he  must  make  a return 
in  behalf  of  the  customer  and  become  responsible  for  normal  taxes  and  sur- 
taxes on  all  income  and  profits  passing  through  his  hands  ?”  Pn  reply  you 
are, advised  that  the  facts  set  forth  in  this  statement  do  not  constitute  the 
relationship  of  agency  between  these  parties  to  an  extent  which  will  make 
the  broker  responsible  for  filing  the  return  for  the  nonresident  client.  The 
broker  in  such, case,  however,  for  the  purposes  of  the  income  tax  is  con- 
sidered the  withholding  agent  and  should  withhold  the  2%  [8%]  normal 
tax  and  the  nonresident  alien  should  file  a return  on  Form  1040  [or  Form 
1040A],  including  all  income  received  from  sources  in  the  United  States. 
(Letter  to  Henry  W.  Beal,  Boston,  Mass.,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  April  17,  1918.) 

1581  Return  for  Nonresident  Alien  Beneficiary  by  Fiduciary.— See 
P05. 

1582  Law  p67.  Property  of  Nonresident  Alien  Subject  to  Distraint  for 

the  Tax. — “Sec.  217. — In  case  of  failure  to  file  a return, 
the  collector  shall  collect  the  tax  on  such  income,  and  all  property  belong- 
ing to  such  nonresident  alien  individual  shall  be  liable  to  distraint  for  the 
tax.'' 

1583  Law  11432.  “Sec.  1307.  That  in  all  cases  where  the  method  of 

collecting  the  tax  imposed  by  tliis  Act  is  not  specifically 
provided  in  this  Act,  the  tax  shall  be  collected  in  such  manner  as  the 
Commissioner,  with  the  approval  of  the  Secretaiy,  may  prescribe." 

1584  Payment  of  Tax  by  Nonresident  Aliens. — See  general  provisions 
governing  payment  of  the  tax,  112000. 


1585  Law  pOl.  Payment  of  Tax  at  the  Source  on  Account  of  Nonresi- 

dent Aliens. — “Sec.  221.  (a)  That  all  individuals,  cor- 

porations and  partnerships,  in  whatever  capacity  acting,  including  lessees 
or  mortgagors  of  real  or  personal  property,  fiduciaries,  employers,  and  all 
officers  and  employees  of  the  United  States," 

1586  Law  11202.  “having  the  control,  receipt,  custody,  disposal,  or  pay- 
ment of  interest,^  rent,  salaries  wages,  premiums,  annuities,  com- 
pensations, remunerations,  emoluments,  or  other  fixed  Or  determinable  an- 
nual or  periodical  gains,  profits,  and  income," 

* Payment  at  the  source,  of  tax  on  interest  on  corporate  obligations. 
— [Read  at  111625.] 

1587  Law  1[203.  “of  any  nonresident  alien  individual" 

1588  Lawl[204.  “(other  than  income  received  as  dividends  from  a cor- 

poration which  is  taxable  under  this  title  upon  its  net 

income)" 

282  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


1589  Law  ^205.  “shall  (except  in  the  cases  provided  for  in  subdivision 

(b)  [|fl636]  and  except  as  otherwise  provided  in  regu- 
lations prescribed  by  the  Commissioner  under  section  217  [p576]” 

1590  Law  ][206.  “deduct  and  withhold  from  such  annual  or  periodical 

gains,  profits,  and  income'' 

1591  Lawlf207.  “a  tax  equal  to  8 per  centum  thereof:" 

1592  In  general  withholding  is  required  (a)  of  a tax  of  8 per  cent  in 
the  case  of  fixed  or  determinable  annual  or  periodical  income  (other 

than  dividends  from  corporations  liable  to  the  income  tax  and  interest  upon 
corporate  bonds  containing  a tax-free  covenant  clause  [for  withholding  on 
tax-free  covenant  bond  interest  see  1[1636])  payable  to  a nonresident  alien 
individual  * * * (Art.  361  Reg.  45,  Rev.,  April  17,  1919.) 

1593  Withholding  is  required  from  income  of  a nonresident  alien  indi- 
vidual, except  as  provided  in  article  316  [allowance  for  personal 

exemption  to  non-resident  alien  employees,  1115771.  (Art.  363,  Reg-.  45 
Rev.,  April  17,  1919.)  ^ s ^ 

1594  No  Withholding  on  Dividends. — No  withholding  from  corporate 
dividends  (other  than  distributions  by  a personal  service  corpora- 
tion) is  required  in  any  case.  (Art.  363,  Reg.  45,  Rev.,  April  17,  1919.) 

1595  No  Withholding  Against  Domestic  and  Resident  Foreign  Corpo- 
rations.— The  income  of  domestic  and  resident  foreign  corpora- 
tions is  free  from  withholding.  [For  exemption  claims  in  connection  with 
corporate  obligation  interest  see  p697].  (Art.  363,  Reg.  45,  Rev.,  April 

17,  1919.)  > o , , F 

1596  Fixed  or  Determinable  Annual  or  Periodical  Income.— Only  (a) 
fixed  or  determinable  (b)  annual  or  periodical  income  is  subject  to 

withholding.^  Among  such  income,  giving  an  idea  of  the  general  character 
of  income  intended,  the  statute  specifies  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensations,  remunerations  and  emoluments.  But 
other  kinds  of  income  may  be  included,  (a)  Income  is  fixed  when  it  is  to 
be  paid  in  amounts  definitely  predetermined.  On  the  other  hand,  it  is  de- 
terminable whenever  there  is  a basis  of  calculation  by  which  the  amount 
to  be  paid  may  be  ascertained.^  (b)  The  income  need  not  be  paid  annually 
if  it  is  paid  periodically,  that  is  to  say,  from  time  to  time,  whether  or  not 
at  regular  intervals.  That  the  length  of  time  during  which  the  payments 
are  to  be  made  may  be  increased  or  diminished  in  accordance  with  some- 
one's will  or  with  the  happening  of  an  event  does  not  make  the  payments 
any  the  less^  determinable  or  periodical.  A salesman  working  by  the  montli 
for  a commission  on  sales'  which  is  paid  or  credited  monthly  receives  deter- 
minable periodical  income.  (Art.  362,  Reg.  45,  Rev.,  April  17,  1919.) 

1597  Duties  and  Obligations  of  Employers,  in  Connection  with  With- 
holding, in  the  Case  of  Nonresident  Aliens  Employed  in  the 

United  States.— Reference  is  made  to  your  letter  dated  March  25,  1919, 
transmitting  a copy  of  your  letter  dated  February  28,  1919,  in 

which  the  following  questions  are  submitted  with  respect  to  the  duty  of 
operators  of  bituminous  coal  mines  to  withhold  income  tax  from  salaries, 

INC.  283 


TAX 


WITHHOLDING  AT  THE  SOURCE. 

wages  and  other  compensation  paid  to  nonresident  aliens  employed  in  this 

coim^  y years  will  the  Department  attempt  to  make  collection 

of  such  items?  . . ^ y. 

“2.  In  the  absence  of  any  record  now  existing  as  to  the  nationality 

or  intentions  of  employees  who  have  left  the  service  of  a person  or  cor- 
poration which  employed  them  during  past  years,  what  action  on  the  pa.rt 
of  the  employers  will  be  necessary  to  relieve  them  from  any  further  liability 
for  this  tax?  Is  not  the  burden  of  proof  on  the  Government  m this  case. 

“3.  Will  a canvass  of  the  present  employees  with  a view  to  ascer- 
taining their  nationality  or  intentions  of  becoming  resident  taxpayers,  and  a 
collection  of  the  taxes  due  from  them  be  a satisfactory  solution  of  the  case. 
If  so,  how  far  back  should  employers  attempt  to  make  this  collection. 

“4.  It  is  customary  in  a great  many  mining  districts  to  let  out  a 
certain  portion  of  a mine  to  some  miner  who  is  usually  termed  a contractor 
who  employs  additional  labor  in  the  production  of  coal  from  the  section 
of  the  mine  assigned  to  him.  These  men,  usually  termed  back  hands 
sometimes  do  not  appear  upon  the  payroll  and  are  very  frequently  not 
officially  known  to  the  operator  or  employer.  Who  is  responsible  for  the 
collection  in  this  case,  the  operator  or  the  contractor?  The  operator  fre- 
quently does  not  know  the  amount  of  the  earnings  of  the  back  hand  or 
laborer  employed  by  tlie  contractor  and  the  latter  usually  keeps  no  books 

of  account.  . i ^ • 4.u 

“5.  Many  employees,  not  only  in  the  mining  industry  but  m other 

industries,  are  known  only  by  number.  Will  it  be  necessary  to  ascertain 
their  names  and  intentions  as  to  residence?  ^ 

“6.  Does  the  failure  of  the  employer  to  make  such  collections  make 
him  liable  for  the  full  amount  of  the  tax?  If  so,  how  far  back  of  the 
present  will  the  department  attempt  to  make  collections,  and  in  the  absence 
of  specific  information  as  to  the  nationality  of  past  employees,  upon  what 
evidence  will  they  base  their  action  during  the  past  period?” 

1598  In  reply  to  your  first  inquiry  you  are  advised  that  the  Department 
is  not  limited  as  to  years  in  regard  to  investigations  relative  to  the 

liability  of  employers  to  deduct  income  tax  at  the  source  from  ^ 

other  determinable  income  paid  to  nonresident  aliens  as  provided  by  the 
Revenue  Act  of  1918  and  the  acts  for  prior  years.  No  effort  will  be  made 
to  hold  employers  of  nonresident  aliens  liable  for  tax  prior  to  the  issuance 
of  Treasurv  Decision  2242,  September  17,  1915,  which  defined  a nonresi- 
dent alien  and  not  then  if  such  nonresident  alien  had  been  employed  con- 
tinuously by  the  same  person  or  corporation  for  a period  of  three  months 

or  more.  j ♦ j i.  r 

1599  In  reply  to  your  second  inquiry  you  are  advised  that  aliens  em- 
ployed in  the  United  States  are  prima  facie  regarded  as  non- 
resident aliens,  and  in  case  where  withholding  has  not  occurred  it  will  be 
necessary  for  the  employer  to  furnish  written  proof  of  facts  which 
come  that  presumption.  The  burden  of  proof  is  on  the  employer.  The 
records  of  a corporation,  such  as  the  cancelled  checks  representing  payment 
to  its  employees,  and  the  payrolls,  are  held  to  constitute  written  proof. 

1600  Referring  to  your  third  inquiry  you  are  advised  that  if  an  alien  has 
been  living  in  the  United  States  for  as  much  as  one  year  immedi- 
ately prior  to  the  time  he  entered  the  employment  of  the  withholding  agent, 
or  if  he  has  been  regularly  employed  by  an  individual  resident  m the 
United  States  or  by  a resident  corporation  in  the  same  city  or  county  for  as 

INC.  284  TAX 


WITHHOLDING  AT  THE  SOURCE. 


much  as  three  months  immediately  prior  to  any  payment  by  the  employer, 
he  may  be  treated  as  a resident  in  deciding  as  to  the  necessity  of  withholding 
part  of  such  payment,  provided  no  facts  are  known  to  the  employer  showing 
that  he  is  in  fact  a transient.  The  facts  with  regard  to  the  length  of  time 
the  alien  has  thus  lived  in  this  country  or  has  been  so  regularly  employed 
may  be  established  by  the  certificate  of  the  alien.  The  employer  may  also 
obtain  evidence  to  overcome  the  prima  facie  presumption  of  nonresidence 
by  securing  from  the  alien  Form  1078,  revised,  properly  executed  or  an 
equivalent  certificate  of  the  alien  establishing  residence.  Having  secured 
such  evidence^  from  the  alien,  the  employer  may  rely  thereon  unless  the 
statement  of  the  alien  was  false  and  he  has  reasonable  cause  to  believe  it  was 
false,  and  may  continue  to  rely  thereon  until  the' alien  ceases  to  be  a resident. 

1601  Referring  to  your  fourth  inquiry  you  are  advised  that  in  case  the 
owner  or  operator  of  a mine  leases  a portion  thereof  to  a contractor 

whose  operations  are  separate  and  distinct  from  that  of  the  corporation, 
the  individuals  being  actually  employed  by  the  contractor,  the  duty  to 
withhold  is  that  of  the  contractor  and  not  of  the  corporation. 

1602  Referring  to  your  fifth  inquiry  you  are  advised  that  in  every  case 
where  tlie  employee  is  a nonresident  alien,  withholding  is  required, 

except  for  1918,  in  which  case  a claim  for  exemption  may  be  filed  in  accord- 
ance with  the  provisions  of  Article  307  [][1572]  Regulations  45.  The  name 
and  address  of  such  employees  should  be  secured  regardless  of  the  fact  that 
for  the  convenience  of  the  operator,  the  individual  is  known  by  number. 

1603  Referring  to  your  sixth  inquiry  you  are  advised  that  this  question 
appears  to  be  covered  by  the  answer  to  your  third  inquiry. 

1604  Replying  to  the  next  to  the  last  paragraph  of  your  letter  you  are 
advised  that  the  employer  who  fails  to  withold  and  account  for 

income  tax  with  respect  to  income  paid  to  alien  employees,  may  submit 
any  evidence  which  will  substantiate  the  fact  that  such  employees  are  resi- 
dents of  the  United  States  within  the  meaning  of  Article  312  to  316  [begin- 
ning at  |f518]  of  Regulations  45.  As  to  what  action  will  be  taken  by  the 
Bureau  in  regard  to  the  collection  of  income  tax  at  the  source,  you  are 
advised  that  any  investigations  deemed  necessary  for  the  proper  admin- 
istration of  the  revenue  acts  will  be  made  in  order  that  taxpayers  may  satisfy 
their  obligations  to  the  Government. 

1605  Referring  to  the  inquiry  contained  in  your  letter  of  March  25,  1919, 
in  regard  to  aliens  who  have  been  employed  in  this  country  by 

the  corporation  for  a period  of  three  months,  you  are  advised  that  such 
circumstances  are  held  to  constitute  the  individual  a resident  of  the  United 
States  for  purpose  of  withholding,  and  no  further  tax  is  required  to  be  with- 
held at  the  end  of  that  period  provided  no  facts  are  known  to  the  employer 
tending  to  show  that  the  individual  is  a transient  as  described  in  Article  312 
[j[518].  Regulations  45.  (Letter  to  W.  B.  Reed,  Accounting  Secretary, 
National  Coal  Association,  Washington,  D.  C.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  May  26,  1919.) 

1606  In  reply  you  are  advised  that  where  the  status  of  an  alien  changes 
during  the  year  from  that  of  a resident  to  that  of  a nonresident,  or 

from  that  of  a nonresident  to  that  of  a resident,  the  status  which  exists  at  the 
end  of  the  taxable  year  is  the  one  which  determines  his  right  to  exemption  as 
to  the  whole  year.  Where  an  employer  has  withheld  wages  from  a nonresi- 
dent during  part  of  the  year,  and  thereafter  the  employee  became  a resident 
(before  the  employer  has  paid  over  to  the  United  States  the  amount  with- 

INC.  285  TAX 


WITHHOLDING  AT  THE  SOURCE. 

held),  the  employer  is  authorized  on  receiving  proof  of  the  change  to  refund 
to  the  employee  the  amounts  which  had  been  withheld  from  him  during  the 
earlier  part  of  the  taxable  year,  while  his  status  was  that  of  a nonresident. 

1607  The  ruling  contained  in  this  letter  supersedes  all  other  rulings  in  con- 
flict therewith.  (Letter  to  W.  B.  Reed,  Accounting  Secretary, 

National  Coal  Association,  Washington,  D.  C.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  June  12,  1919.) 

1608  Alien  Employees  — Resident  and  Nonresident — ^Withholding 
Upon  Change  of  Status. — Reference  is  made  to  your  letter  dated 

June  30,  1919,  which  is  quoted  here  in  part:  “Referring  to  our  tele- 
phone conversation  of  this  morning,  we  understand  that  in  the  case 
of  the  employment  of  alien  labor  that  where  such  labor  has  been  em- 
ployed for  three  months  or  more  continuously  his  status  is  established 
as  a resident  alien,  and  there  is  no  liability  upon  the  employer  for  further 
withholding  from  such  an  employee.  In  fact,  he  may  refund  the  amounts 
withheld  prior  to  that  time.  Assuming  that  such  an  employee  has  been  in 
the  service  of  an  employer  continuously  for  a sufficient  time  to  establish 
his  status  as  a resident  alien  until  for  example  November  15th.  The  em- 
ployer has  paid  over  to  him  all  of  the  money  which  is  due  him  up  to  that 
time.  The  employee  announces  his  intention  to  return  to  the  foreign 
country  from  which  he  came,  but  continues  to  work  for  the  employer  until 
the  first  of  January.  The  employer  now  has  information  as  to  the  intentions 
of  such  an  employee.  We  understand  that  there  is  no  liability  upon  him 
for  withholding  prior  to  the  time  in  which  these  intentions  became  known ; 
namely,  November  15th,  and  that  he  should  withhold  only  upon  the  basis 
of  the  earnings  of  the  employee  from  the  time  from  which  the  employer 
knew  of  the  intention  of  the  employee  to  quit  the  country.” 

1609  In  reply  you  are  advised  that  under  the  provisions  of  Article  315 
[jf523],  Regulations  45,  if  wages  are  paid  without  withholding  the 

tax,  the  employer  should  be  provided  with  written  proof  of  facts  which 
overcome  the  presumption  that  such  alien  is  a nonresident.  If  an  alien  has 
been  living  in  the  United  States  for  as  much  as  one  year  immediately  prior 
to  the  time  he  entered  the  employment  of  the  withholding  agent,  or  if  he 
has  been  regularly  employed  by  a resident  individual  or  corporation  in  the 
same  county  for  as  much  as  three  months  immediately  prior  to  any  payment 
by  the  employer,  he  may  be  treated  as  a resident  in  the  absence  of  facts 
known  to  the  employer  showing  that  he  is  in  fact  a transient. 

1610  In  the  case  tax  has  been  withheld  by  the  employer  from  wages  paid 
during  three  months  period  while  the  status  was  that  of  a nonresident 

alien,  the  amount  of  tax  may  be  refunded  in  accordance  with  the  data  con- 
tained on  Form  1115  [PS77].  This  form  is  provided  for  the  purpose  of 
receiving  the  benefit  of  personal  exemption  and  credit  for  dependents  in 
connection  with  income  tax  withheld  at  the  source  from  salaries,  wages  and 
similar  income.  In  case  tax  has  been  withheld  from  an  alien  employee  and 
his  status  as  a resident  has  been  established  by  the  execution  of  Form  1078 
[see  1[523],  any  income  tax  withheld  may  be  refunded  upon  receipt  of  that 
certificate.  The  fact,  however,  that  an  alien  has  been  employed  by  a cor- 
poration for  three  months  is  nob  in  itself  sufficient  grounds  upon  which  to 
refund  income  tax  withheld  at  the  source.  It  was  not  the  intention  that  Ar- 
ticle 315  of  Regulations  No.  45  referred  to  herein,  should  be  construed  as 
permitting  an  employer  to  withhold  from  nonresident  alien  employees  for  a 
period  of  only  three  months  and  refund  the  amount  of  tax  withheld  at  the 

286  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


end  of  that  period  merely  because  aliens  had  been  employed  by  him  for  that 
period  of  time. 

1611  If  the  status  of  a resident  employee  changes  to  that  of  a nonresident 
alien,  the  employer  should  withhold  income  tax  at  the  rate  of  eight 
per  cent  from^  all  wages  paid  to  the  nonresident  employee  on  and  after 
the  date  on  which  the  employer  had  knowledge  of  the  change.  Although  the 
employee,  in  such  case,  will  be  taxable  as  a nonresident  alien  for  the  entire 
taxable  year  during  which  his  status  is  changed  from  that  of  a resident  to 
that  of  a nonresident  alien,  the  employer  will  not  be  held  liable  for  the 
deduction  of  income  tax  with  respect  to  wages  paid  preceding  the  knowledge 
of  the  employer  as  to  the  change  in  status.  (Letter  to  W.  B.  Reed,  Ac- 
counting Secretary,  National  Coal  Association,  Washington,  D.  C.,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  August  6,  1919.) 


1612  Interest,  on  Accounts  Current  and  on  Deposits,  Accruing  to  Non- 

, Individuals  and  Foreign  Partnerships : Withhold- 

acknowledges  receipt  of  your 
letter  dated  March  17,  1919,  in  which  you  request  information  as  to 
whether  commission  merchants,  private  bankers,  and  others  are  re- 
quired under  Section  221  (a)  of  the  Revenue  Act  of  1918,  to  withhold  anv 
part  of  interest  accruing  on  mercantile  accounts  current,  or  upon  moneys 
held  on  deposit,  to  nonresident  alien  individuals  or  foreign  partnerships  if 
the  principal  amounts  so  due,  as  well  as  the  interest,  are  at  all  times  sub- 
ject to  call,  and  payable  on  demand,  pn  reply  you  are  advised  that  interest 
upon  deposits  or  accounts  current,  accruing  on  the  books  of  citizens  or  resi- 
dents  of  the  United  States,  domestic  partnerships  or  corporations  is  subject 
to  the  deduction  of  the  tax  at  the  source,  only  when  the  recipient  is  a non- 
resident  alien  individual.  The  amount  to  be  deducted  is  8%  of  the  interest 
credited  on  the  books  of  the  debtor,  at  the  time  of  crediting  same.  Such 
tax  as  IS  Avithheld  should  be  retained  by  the  withholding  agent  until  the  end 
of  the  calendar  year  and  remitted  to  the  Collector  of  Internal  Revenue  ac- 
^mpanied  by  a return  on  Form  1042  in  the  usual  manner.  (Letter  to 
Hughes,  Rounds,  Schurman  & Dwight,  New  York,  N.  Y.,  signed  by  I.  H. 
Callan,  Assistant  to  Commissioner,  and  dated  April  22,  1919.)  [See  lfl620  ] 

1613  Income  of  Nonresident  Aliens  Which  is  Not  Subject  to  Tax  and 
Hence  Not  Subject  to  Withholding.— Read  at  1jl546. 


1614 


Law  p32  Payment  of  Tax  at  the  Source  on  Account  of  Certain 
Foreign  Corporations.--Sec.  237.  That  in  the  case  of  foreign 
coipoiations  subject  to  taxation  under  this  title  not  engaged  in  trade  or 

business  therein  **  not  havin^^  any  office  or  place  of 


1615 


Law  p33.  '‘there  shall  be  deducted  and  withheld  at  the  source  in 

. same  manner  and  upon  the  same  items  of  income  as 

IS  provided  in  section  221  [1fl585]” 


1616  Law  jl334.  “a  tax  equal  to  10  per  centum  thereof,” 


1617  Lawt[335. 

in  that  section 


‘and  such  tax  shall  be  returned  and  paid  in  the  same 
manner  and  subject  to  the  same  conditions  as  provided 


INC.  287 


TAX 


WITHHOLDING  AT  THE  SOURCE. 


1618  In  general  withholding  is  required  * * * (b)  of  a tax  of  10% 
the  case  of  fixed  or  determinable  annual  or  periodical  income  (othei 

than  dividends  from  corporations  liable  to  the  income  tax  and  interest  upon 
corporate  bonds  containing  a tax-free  covenant  clause)  payable  to  a foreign 
corporation  not  engaged  in  trade  or  business  within  pe  United  Sta  es  and 
not  having-  any  office  or  place  of  business  therein.  ' (Art.  361,  Keg. 

45,  Rev.,  April  17,  1919.) 

1619  With  respect  to  payments  to  foreign  corporations  not  engaged  in 
trade  or  business  within  the  United  Sffites  and  not  having  any  office 

or  place  of  business  therein,  withholding  is  required  of  a tax  of  ^ 
cent  in  the  case  of  interest  payable  upon  corporate  bonds  or  other 
obligations  containing  a tax-free  covenant  clause,  and  of  a tax  ot  lU  pei 
cent  in  the  case  of  other  fixed  or  determinable  annual  or  periodical  income, 
other  than  corporate  dividends.  [For  withholding  in  the  case  ot 
on  corporate  obligations  read  at  111625.]  d'o  enable  debtors  in  the  United 
States  to  distinguish  between  foreign  corporations  which  have  and  those 
which  have  not  any  office  or  place  of  business  m the  United  States,  and 
also  to  enable  such  corporations  as  have  an  office  or  place  of  business  in  the 
United  States  to  claim  exemption  from  withholding  the  tax  on  bond  inte^st 
or  other  income,  a certificate  stating  that  any  such  corporation  has  an  office 
or  place  of  business  in  the  United  States  should  be  filed  by  it  with  the  debtoi. 
[Form  1001  in  connection  with  bond  interest,  p697.  No  specified  form 
has  been  provided  for  use  in  connection  with  miscellaneous  income  pay- 
ments]. (Art.  601,  Reg.  45,  Rev.,  April  17,  1919.) 


1620  Is  withholding  of  ten  per  cent  required  fro^^  interest  on  bank  de- 
posits paid  or  credited  to  nonresident  foreign  corporations . Please 
reply  collect.  (Answer.)  Tax  should  be  withheld  at  rate  of  ten  per 
cent  from  interest  credited  on  and  after  February  25,  1919,  on  bank 
deposits  of  nonresidents  alien  corporations  not  having  office  or  place  oi  busi- 
ness in  United  States.  [Note  that  the  question  at  ^1612  relates  to  indi- 
viduals and  partnerships  solely.]  (Telegram  from  The  Equitable  Trust 
Company  of  New  York  and  the  answer  thereto,  signed  by  Commissioner 
Daniel  C.  Roper  and  dated  May  23,  1919.) 


1621  Withholding  and  Tax  Liability  in  Connection  with  Credit  and 
Debit  Interest  Items  Involved  in  Transactions  Between  Domestic 
and  Foreign  Banks.— Reference  is  made  to  your  letter  dated  June 
30,  1919,  relative  to  withholding  of  the  tax  at  the  source  from  in- 
terest on  bank  balances  of  foreign  banks  on  deposit  in  domestic  banks, 
under  the  provisions  of  the  Revenue  Act  of  1918.  In  many  cases  the  ac- 
counts of  foreign  banks  are  at  times  overdrawn  and  instead  of  crediting 
interest  to  their  accounts  the  domestic  bank  is  obliged  to  debit  interest  for 
the  money  temporarily  advanced  to  the  foreign  bank.  In  some  cases  foreign 
banks  have  two  accounts  with  domestic  banks,  one  a deposit  account,  and 
the  other  a borrowing  account.  You  ask  whether  in  such  cases  the  domestic 
bank  should  deduct  the  tax  from  the  entire  amount  of  interest  credited  to 
the  foreign  bank  or  whether  the  domestic  bank  is  required  to  deduct  the  tax 
from  only  the  net  amount  of  interest  credited  to  the  foreign  bank  after  sub- 
tracting the  amount  of  interest  debited  or  only  from  the  excess  of  the  amount 

me:  2*88  tax  _ 


WITHHOLDING  AT  THE  SOURCE. 


or  interest  credited  to  the  deposit  account  of  the  foreign  bank  over  the 
amount  of  interest  charged  upon  the  borrowing  account.  In  this  connection 
you  are  advised  that  under  the  provisions  of  Sections  221  and  237  of  the 
Act,  domestic  banks  are  required  to  deduct  and  withhold  the  tax  from  the 
entire  amount  of  interest  credited  to  foreign  banks  upon  their  deposits  in 
the  domestic  banks  regardless  of  the  amount  of  interest  charged  the  foreign 
banks  on  money  advanced  to  them  through  loans  or  borrowing  accounts 
or  on  account  of  overdrafts  or  otherwise.  However,  if  the  foreign  banks 
render  returns  of  their  total  income  from  all  sources  within  the  United 
States  they  may  deduct  in  such  returns  the  interest  charged  upon  the  money 
advanced  to  them  by  the  domestic  banks  to  the  extent  provided  in  Sections 
214  (a,2)  and  234  (a, 2)  of  the  Act.  In  such  cases  the  foreign  bank  should 
include  in  its  gross  income  the  entire  amount  of  the  income  from  which  the 
tax  was  withheld  and  paid  at  the  source  as  well  as  income  from  all  other 
sources  within  the  United  States  without  deduction  for  the  tax  so  paid, 
but  any  tax  actually  so  withheld  is  to  be  credited  against  the  total  tax  as  com- 
puted in  its  return.  In  the  event  the  amount  of  tax  so  paid  at  the  source  by 
the  withholding  agent  is  in  excess  of  the  total  tax  liability  of  the  foreign 
bank,  a claim  for  refund  may  be  properly  filed  for  the  amount  overpaid. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  July  26,  1919.) 

1622  Law  ^22.  Definition  of  the  Term  “Withholding  Agent.” — “The 

term  ‘withholding  agent’  means  any  person  required  to 
deduct  and  withhold  any  tax  under  the  provisions  of  section  221  [j[1585] 
or  section  237  [1[1614] 

1623  A withholding  agent  may  be  a corporation  with  bonds  outstand- 
ing, a trustee  under  a corporate  mortgage,  or  any  corporation, 

partnership  or  private  individual.  (Art.  1533,  Reg.  45,  Rev.,  April  17, 
1919.) 

1624  Tax-Exempt  Corporations  Required  to  Withhold. — While  the  or- 

ganizations enumerated  in  section  11  of  this  title  are  themselves  ex- 
empt from  the  tax  on  any  income  received  by  them,  they  are  not  exempt 
from  the  requirements  of  the  title  with  respect  to  the  withholding  of  the 
normal  tax  on  bond  interest  * * * foreign  corporations  or 

bond  interest  paid  to  individuals  on  bonds  having  a tax  free  covenant  or 
from  furnishing  information  in  accordance  with  the  provisions  of  this  title 
as  amended  by  section  1205  of  Title  XIII  of  the  act  of  October  3,  1917. 
(Art.  81,  P36,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

Return  of  Taxes  Withheld. — [Read  at  j[1707.] 

Payment  of  the  Taxes  Withheld. — [Read  at  j[1708.] 


TAX  TO  BE  DEDUCTED  AT  THE  SOURCE  ON  INCOME  FROM 
INTEREST  ON  DOMESTIC  OBLIGATIONS. 

1625  Tax  Withheld  in  Case  of  Interest  on  Obligations  Not  Containing 
Tax-Free  Covenants. — [Applies  only  to  nonresident  alien  indi- 
vidual owners  (Law  provision  at  p585)  and  to  foreign  corporations  not 
engaged  in  trade  or  business  within  the  United  States  and  not  having 
any  office  or  place  of  business  therein  (Law  provision  at  1[1614.)] 

INC.  289  TAX 


WITHHOLDING  AT  THE  SOURCE. 


162G  In  general  withholding  is  required  (a)  of  a tax  of  8 per  cent  in  the 
case  of  fixed  or  determinable  annual  or  periodical  income  (other  than 
dividends  from  corporations  liable  to  the  income  tax  and  interest  upon 
corporate  bonds  containing  a tax-free  covenant  clause)  payable  to 
a nonresident  alien  individual;  (b)  of  a tax  of  10  per  cent  in  the 
case  of  fixed  or  determinable  annual  or  periodical  income^  (other  than 
dividends  from  corporations  liable  to  the  income  tax  and  interest  upon 
corporate  bonds  containing  a‘  tax-free  covenant  clause)  payable  to  a foreign 
corporation  not  engaged  in  trade  or  business  within  the  United  States  and 
not  having  any  office  or  place  of  business  therein;  (Art.  361,  Reg.  45,  Rev., 
April  17,  1919.) 

1627  Law  11208.  Owner  to  Be  Known  to  Withholding  Agent  or  Tax  is 

Withheld  in  Any  Case.— 'Provided,  That  the  Commis- 
sioner may  authorize  such  tax  [8%,  1|1591,  although  the  rate  of  tax 
against  corporations  is  10%,  If  1616.  Read,  f[1629.]  to  be  deducted  and 
withheld  from  the  interest  upon  any  securities  the  owners  of  which  are 
not  known  to  the  withholding  agent.” 

1628  Withholding  in  all  cases  at  the  highest  applicable  rate  is  also  required 
from  interest  on  bonds  or  other  securities  where  the  owner  of  such 

securities  is  unknown  to  the  withholding  agent.  (Art.  361,  Reg.  45,  Rev., 
April  17,  1919.) 

1629  It  seems  that  there  has  been  some  misunderstanding  as  to  the  mean- 
ing of  the  following  sentence  in  Article  361  [ljl628]  Regulations 

45  :_“Withholding  in  all  cases  at  the  highest  applicable  rate  is  also  required 
from  interest  on  bonds  or  other  securities  where  the  owner  of  such  securities 

is  unknown  to  the  withholding  agent.”  , s o ^ 

1630  The  “highest  applicable  rate”  as  used  above  is  (a)  2 per  cent  on 
interest  upon  bonds  or  other  obligations  of  domestic  or  resident  for- 
eign corporations  containing  a so-called  tax-free  covenant  clause;  (b)  8 
per  cent  in  the  case  of  fixed  or  determinable  annual  or  periodical  income 
(other  than  dividends  from  corporations  liable  to  the  income  tax  and  inter- 
est on  corporate  bonds  containing  a tax-free  covenant  clause)  payable  to  an 
unknown  owner.  (R — Mim.  2143,  June  2,  1919.) 


1631  Tax  Liability  and  Withholding  Obligation  on  Bond  Interest  Col- 
lected and  Paid  in  Year  Subsequent  to  That  in  Which  the  Inter- 
est Became  Due  and  Payable.— Bond  interest  represents  .income 
to  taxpayer  when  due  and  payable  in  accordance  with  article  54, 
Regulations  45  [11947].  No  tax  required  to  be  withheld  from  interest 
upon  bonds  due  prior  to  March  1,  1913,  but  paid  subsequent  to  that  date. 
Interest  due  on  and  after  March  1,  1913,  subject  to  withholding  at  rates  in 
force  at  time  of  payment  but  in  case  excess  tax  is  withheld  and  paid  to 
Government  claim  for  refund  on  Form  46  will  be  considered.  (Telegram 
to  A.  Iselin  & Co.,  New  York,  N.  Y.,  signed  by  P.  S.  Talbert,  Acting  As- 
sistant  to  the  Commissioner,  and  dated  September  8,  1919.) 


1633  Reference  is  made  to  office  letter  of  September  S,  1919,  in  which 
3’ou  were  given  a ruling  in  answer  to  your  inquiry^  of  June  ^o, 
1919,  relative  to  the  rate  of  withholding  which  attaches  to  interest  cou- 
pons maturing  in  one  year  and  presented  for  payment  in  a subsequent  year 

290  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 

during  which  withholding  is  required  at  a different  specified  rate.  fYou  are 
advised  that  after  further  consideration  of  the  subject  matter  of  your  letter 
of  June  26,  1919,  his  office  is  of  the  opinion  that  the  second  and  third  para- 
graph of  office  letter  of  September  5,  1919  should  have  read:  T[‘‘In  reply 
you  are  advised  that  Article  54  of  Regulations  45  [1|947]  states  specifically 
that  where  interest  coupons  have  matured  but  have  not  been  cashed,  such 
interest  payment  though  not  collected  when  due  and  payable,  is  nevertheless 
available  to  the  taxpayer  and  should  therefore  be  included  in  his  gross 
income  for  the  year  in  which  the  coupons  matured.  IfArticle  371  [111711] 
states  that  in  the  case  of  every  payment  made  after  February  24,  1919,  the 
withholding  agent  must  withhold  at  the  rates  prescribed  by  the  present 
statute  from  the  whole  payment,  not  merely  from  that  part  which  applies  to 
the  period  after  February  24,  1919.  Hence,  in  the  case  of  the  foreign  owners 
of  American  securities  whose  interest  coupons  matured  during  the  years 
1915,  1916,  1917  and  1918  but  which  were  not  presented  for  payment  until  the 
year  1919,  the  amount  of  these  coupons  should  have  been  entered  as  income 
on  their  returns  rendered  for  the  years  in  which  the  coupons  matured  but 
the  withholding  agent  was  required  to  withhold  from  these  coupons  at  the 
rate  in  force  at  the  time  of  payment  and  in  case  excess  tax  was  withheld  and 
paid  to  the  Government  by  reason  of  this  requirement,  the  owners  of  the 
bonds  to  which  you  refer  may  exercise  their  privilege  of  filing  with  the  col- 
lector on  Form  46  a claim  for  refund  of  that  portion  of  the  tax  withheld 
which  was  in  excess  of  their  true  liability.”  ^Therefore,  you  will  disre- 
gard office  letter  of  September  5,  1919  and  be  governed  by  the  ruling  given 
herein.  (Letter  to  Morris  F.  Fre}^  Guaranty  Trust  Company,  New  York, 
N.  Y.,  signed  by  P.  S.  Talbert,  Acting  Assistant  to  the  Commissioner,  by 
C.  R.  Trobridge,  Acting  Head  of  Division,  and  dated  September  23,  1919.) 

1633  Withholding  at  the  Source  on  Interest  on  Bonds  Having  No  Tax- 
Free  Covenant. — Your  telegram  May  29.  Bonds  without  tax-free 

covenant  not  permitted  to  be  considered  tax-free  bonds  at  option  of 
issuing  corporations.  HCorporation  only  allowed  to  withhold  tax  at  rate 
of  eight  and  ten  per  cent,  from  nonresident  alien  individuals  and  non- 
resident alien  corporations  respectively.  ^Corporation  prohibited  from  pay- 
ing tax  on  interest  derived  from  such  bonds  when  owned  by  citizens  or 
residents  of  United  States.  (Telegram  'to  the  Fanner’s  Loan  and  Trust 
Company,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  June  2,  1919.) 

1634  Coupons  of  Foreign-Ov/ned  Domestic  Bonds  Purchased  by  a Do- 
mestic Corporation. — In  case  bank  purchases  abroad  coupons 

from  bonds  issued  by  domestic  corporations  purchaser  held  prima 
facie  to  be  recipient  of  income.  Ownership  certificates  should  therefore  be 
secured  from  original  owners  of  bonds  in  order  that  tax  may  be  withheld  as 
provided  in  sections  221  and  237  Revenue  Act  1918.  (Telegram  M.  F. 
Frey,  Guaranty  Trust  Company,  New  York,  N.  Y.,  signed  by  Commis- 
sioner Daniel  C.  Roper,  and  dated  July  22,  1919.) 

l63o  No  Withholding  Against  Known  Citizens  or  Residents  in  the 
Case  of  Interest  on  Corporate  Obligations  Not  Containing  Tax- 
Free  Covenants. — Income  paid  to  citizens  or  residents  of  the  United 
States  is  subject  to  withholding  of  normal  tax  at  the  source  only  when 
derived  from  interest  on  bonds  and  mortgages,  or  deeds  of  trust,  jor  other 
similar  obligations  of  corporations,  joint  stock  companies,  etc.,  containing 

291  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


a so-called  “tax-free”  or  “no  deduction”  clause.  (Mimeograph  letter  to 
Collectors,  No.  1663,  Nov.  1,  1917.) 

Information  Relative  to  Ownership  to  Be  Disclosed  by  Means  of 
Ownership  Certificates  in  the  Case  of  Coupon  Interest.— [Read  at 
111659.] 


1636  Law  1f209.  Tax  Withheld  in  Case  of  Interest  on  Obligations  Con- 

taining Tax-Free  Covenants.— “(b)  In  any  case  where 
bonds,  mortgages,  or  deeds  of  trust,  or  other  similar  obligations  of  a cor- 
poration contain  a contract  or  provision  by  which  the  obligor  agrees” 

1637  Law  11210.11  “to  pay  any  portion  of  the  tax  imposed  by  this  title 

upon  the  obligee,  or” 

1638  Law  11211.  “to  reimburse  the  obligee  for  any  portion  of  the  tax, 

or” 

1639  Law  11212.  “to  pay  the  interest  without  deduction  for  any  tax 

which  the  obligor  may  be  required  or  permitted  to  pay 
thereon  or  to  retain  therefrom  under  any  law  of  the  United  States,” 

1640  Law  11213.  2%  to  be  Withheld  in  Case  of  Interest  on  Tax-Free 

Covenant  Obligations. — “the  obligor  shall  deduct  and 
withhold  a tax  equal  to  2 per  centum  of  the  interest  upon  such  bonds,  mort- 
gages, deeds  of  trust,  or  other  obligations,  whether  such  interest  is  payable 
annually  or  at  shorter  or  longer  periods  and” 

1641  Law  11214.  Withholding  of  2%  in  Case  of  Interest  on  Tax-Free 

Covenant  Obligations  Applies  Against  Nonresident 
Alien  Individuals,  Citizens  and  Residents,  and  Partnerships.— “whether 
payable  to  a nonresident  alien  individual  or  to  an  individual  citizen  or  resi- 
dent of  the  United  States  or  to  a partnership :” 

1642  Lawp35.  Withholding  of  2%  in  Case  of  Interest  on  Tax-Free 

Covenant  Obligations  Applies  Against  Foreign  Cor- 
porations Not  Engaged  in  Trade  or  Business  Within  the  United  States 
and  Not  Having  Any  Office  or  Place  of  Business  Therein.— Sec.  237 
[111614]  : “Provided.  That  in  the  case  of  interest  described  in  subdivision 
(b)  [111636]  of  that  section  the  deduction  and  withholding  shall  be  at  the 
rate  of  2 per  centum.” 

1643  Liability  of  Debtor  Corporation,  When  No  Exemption  is  Claimed, 
in  Case  of  Bond  Bearing  Covenant  to  Pay  Old  1%  Rate  Only. 

Sec.  9—Q  Act  of  September  8,  1916,  as  amended  [P636_and  111641  above], 
provides  that  normal  tax  of  2%  shall  be  deducted  and  withheld  from  inter- 
est payments  upon  bonds  owned  by  citizens  or  residents  of  United  States, 
if  such  bonds  contain  contract  or  provision  whereby  obligor  agrees  to  pay 
anv  portion  of  tax  imposed  by  that  title  upon  obligee.  Debtor  corporation 
will,  in  such  cases,  be  held  liable  for  2%  tax,  although  the  portion  of  tax 
guaranteed  is  only  1%.  (Telegram  to  S.  W.  Straus  & Co.,  New  York, 
N.  Y.,  dated  Feb.'^lS,  1918,  and  signed  by  Commissioner  Daniel  C.  Roper.) 

INC.  292  TAX 


WITHHOLDING  AT  THE  SOURCE. 


1644  Lawf215.  Owner  to  Be  Known  to  Withholding  Agent  or  Tax  is 
Withheld  in  Any  Case.— “Provided,  That  the  Com- 
missioner may  authorize  such  tax  [2%,  fl640]  to  be  deducted  and  withheld 
in  the  case  of  interest  upon  any  such  bonds,  mortgages,  deeds  of  trust  or 
a^nt owners  of  which  are  not  known  to  the  withholding 


Informadon  Relative  to  Ownership  to  be  Disclosed  by  Means  of 
Ownership  Certificates  in  the  Case  of  Coupon  Interest.— [Read  at  P659.] 

1645  In  General  Withholding  is  Required— * * * and  (c)  of  a tax  of 
z pel  cent  in  the  case  of  interest  payable  to  an  individual  or  a 

partnership  whether  resident  or  nonresident,  or  to  a foreign  corporation 
not  ei^aged  in  trade  or  business  within  the  United  States  and  not  having 
any  office  or  place  of  business  therein,  upon  bonds  or  other  obligations  of 
domestic  or  resident  foreign  corporations  containing  a so-called  tax-free 
covenant  ‘clause.  Bonds  issued  under  a trust  deed  containing  a tax-free 
covenant  are  treated  as  if  they  contained  such  a covenant.  A foreign  cor- 
poration  having  a fiscal  agency  in  this  country  is  required  to  withhold  a tax 
o^f  2 per  cent  upon  the  interest  on  its  tax-free  covenant  bonds.  fArt  361 
Reg.  45,  Rev.,  April  17,  1919.)  ^ 

1646  Lawj[216.  Tax  of  Two  Per  Cent  Not  to  be  Withheld  Against 

Citizens  and  Residents  in  the  Case  of  Interest  on 
Tax-Free  Covenant  Obligations  if  Personal  Specific  Exemption  be 
Claimed.  - Such  deduction  and  withholding  shall  not  be  required  in  the 
case  of  a citizen  or  resident  entitled  to  receive  such  interest,  if  he  files  with 
the  withholding  agent  on  or  before  February  i,  a signed  notice  in  writing 
benefit  of  the  credits  provided  in  subdivisions  (c)  [HISISI  and 
(d)  [P524]  of  section  216;” 


1647  Exemption  from  Withholding.-Withholding  from  interest  on 
bonds  or  other  obligations  containing  a tax-free  covenant  shall  not 
be  required  m the  case  of  a citizen  or  resident  alien  individual  if  he  files 
with  the  withholding  agent  when  presenting  interest  coupons  for  payment 
or  not  later  than  February  first  following  the  taxable  year,  an  ownership 
certificate  on  form  1001  (revised)  [see  P697]claiming'^a  persona";?- 
dependents.  See  section  216  of  the  statute  and  articles 
PU1-.5U5  [for  personal  exemption  discussion,  1115161.  (Art  363  Reg-  45 
Rev.,  April  17,  1919.)  j 


How  may  a citizen  or  resident  of  the  United  States  secure  the  benefit 
of  personal  exemption  to  which  he  is  entitled  when  receiving  a pay- 
ment of  interest  on  bonds  containing  a so-called  “Tax-Free”  or  “No  Deduc- 
tion ’ clause?  (Answer.)  By  attaching  to  the  interest  coupons  an  income 
cerrificate  and  claiming  thereon  the  amount  of  exemption 
desired.  The  amount  of  personal  exemption  claimed  on  such  certificates 
during  any  one  calendar  year  is  not  to  exceed  the  total  amount  of  personal 
exemption  to  which  he  is  entitled.  (Q.  104,  1918  Income  Tax  Primer.) 


649  Lawpn.  Tax  of  Two  per  cent  Not  to  be  Withheld  Against 
Non-resident  Aliens  in  the  Case  of  Interest  on  Tax- 
Covenant  Obligations,  if  Claim  for  Personal  Specific  Exemption 
at  the  Source  Has  Been  Authorized  by  Regulations,  and  Such  Claim 


INC.  293  TAX 


WITHHOLDING  AT  THE  SOURCE. 


be  Made. — “nor  in  the  case  of  a non-resident  alien  individual  if  so  pro- 
vided for  in  regulations  prescribed  by  the  Commissioner  under  section 
217  [P576].’’ 

1650  Providing  for  Relief  of  Domestic  Corporations  Which  Have  As- 
sumed Payment  of  Income  Tax  in  Respect  to  Tax-Free  Covenant 
Bonds,  Owned  by  Non-resident  Aliens,  Who  Are  Entitled  to  Credits  for 
Personal  Exemption  and  Dependents,  But  Whose  Incomes  from  Sources 
in  the  United  States  Do  Not  Exceed  Such  Credits. — The  final  edition 
of  Regulations  No.  45  is  amended  by  inserting  immediately  after  Article 
363,  a paragraph  which  will  be  known  as  Article  363a  as  follows: 

Article  363a.  Personal  Exemption  of  Nonresident  Aliens.— In  case  a 
nonresident  alien  is  entitled  to  personal  exemption  and  credits  for  de- 
pendents in  accordance  with  Paragraphs  (c),  (d),  (e),  of  Section  216  of 
the  Revenue  Act  of  1918,  and  his  gross  income  from  sources  in  the  United 
States,  including  bond  interest,  does  not  exceed  his  personal  exemption  and 
credits  for  dependents,  a certificate,  Form  lOOiB,  should  be  executed  and 
filed  with  the  withholding  agent,  if  any  part  of  rhe  gross  inconie  is  derived 
from  interest  upon  bonds  of  a domestic  corporation  which  contain  a tax-free 
covenant  clause.  The  certificate  may  be  filed  with  the  withholding  agent 
at  the  end  of  the  calendar  year  but  not  later  than  February  1 of  the  suc- 
ceeding year  and  all  such  certificates  should  be  attached  to  the  annual  list 
return.  Form  1013.  The  amount  of  tax  due  from  the  withholding  agent  as 
shown  by  Form  1013,  may  be  reduced  by  two  per  cent  of  the  aggregate 
amount  of  interest  payments  made  to  the  nonresident  alien  upon  tax-free  cov- 
enant bonds  during  the  calendar  year,  and  the  amount  of  tax  represented  by 
the  certificates,  payment  of  which  was  assumed  on  monthly  list  return.  Form 
1012,  will  not  be  included  in  the  assessment  against  the  withholding  agent. 
The  certificate  may  be  filed  only  by  a citizen  or  subject  of  the  countries  enu- 
merated in  Paragraph  (a)  or  (b)  of  Article  307,  as  amended  [|[1572].  In 
case  tax  in  excess  of  a non-resident  alien’s  tax  liability  has  been  withheld 
from  interest  upon  bonds  which  do  not  contain  a tax-free  covenant  clause, 
the  nonresident  alien  should  file  or  cause  to  be  filed  with  the  collector  of 
internal  revenue  a return  of  his  gross  income  from  all  sources  within  the 
United  States,  accompanied  by  a claim  for  refund  on  Form  46.  (Art.  363a, 
Reg.  45,  Rev.,  added  by  T.  D.  2920,  September  15,  1919.) 

1651  One  Form  of  a Qualified  Tax-Free  Covenant  Which  Relieves  the 
Debtor  from  Withholding  the  Amount  of  the  Normal  Tax  from 
Bond  Interest  Payments  to  Citizens  and  Residents.— With  further  ref- 
erence to  your  letter  of  Oct.  27,  1917,  herein  quoted,  “Please  advise  us  at 
the  earliest  possible  moment  whether  bonds  bearing  the  covenant  that 
‘Both  principal  and  interest  of  this  bond  are  payable  without  deduc- 
tions for  any  taxes,  assessments  or  other  governmental  charges  which 
the  company  may  be  required  to  pay  thereon  or  authorized  to  retain 
therefrom  under  any  present  or  future  law  or  lequirement  of  the  United 
States  of  America  (except  any  Federal  Income  Tax)  or  any  State, 
county,  municipality  or  other  governmental  subdivision  thereof, 
come  within  the  provisions  of  subsection  (c)  of  Section  9 of  ihe  Federal 
Income  Tax  Law  requiring  the  debtor  corporation  to  withhold  the  amount 
of  the  normal  tax  at  the  source.”, 

you  are  advised  that  interest  from  bonds  containing  the  covenant  quoted 
will  not  be  subject  to  withholding  as  provided  in  subsection  (c),  [111636] 
Section  9 of  the  Act  of  Sept.  8,  1916,  as  amended  by  Section  1205  of  the 

294  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


War  Revenue  Act  of  Oct.  3,  1917.  (Letter  to  Simpson,  Thatcher  & Bart- 
lett, New  York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and 
dated  Nov.  21,  1917.) 

1652  Federal  Income  Tax  Being  a Tax  on  Income  and  Not  a Tax  on 
the  Interest  on  a Bond,  per  se,  a Tax-Free  Covenant  in  a Bond 

Does  Not  Obligate  the  Debtor  to  Pay  the  Interest  Free  of  Income  Tax. 

[This  was  the  decision  (April  2,  1917)  of  the  Supreme  Court  of  Arkansas 
in  the  Urquhart  v.  Marion  Hotel  Company  case  (iQq  S.  W.  i).] 

1653  The  Term  “Debtor’’  Defined.— The  term  “debtor,”  as  hereinafter 
used  [in  connection  with  bond  interest]  shall  apply  to  all  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance  companies.  (Art. 
38,  Reg.  33,  Jan.  5,  1914.) 

1654  Withholding  and  Paying  Agents  May  Be  Appointed  by  Debtors. 

— [and]  Such  “debtor”  may  appoint  withholding  and  paying  agents 
to_  act  for  it  in  matters  pertaining  to  the  collection  of  this  tax,  upon  filing 
with  the  collector  of  internal  revenue  for  the  district  a proper  notice  of  the 
appointment  of  such  agent  or  agents.  (Art.  38,  Reg.  33,  Jan.  5,  1914.) 

1655  Filing  Notice  of  Appointment  of  Paying  Agent.— This  notice  of 
appointment  should  be  placed  on  file  in  the  office  of  the  collector  of 

internal  revenue  for  the  district  in  which  the  debtor  corporation  is  located 
or  has  its  principal  place  of  business,  and  the  said  collector  should  notify 
the  collector  of  internal  revenue  for  the  district  in  which  the  duly  authorized 
withholding  agent  is  located.  (T.  D.  2135,  Jan.  23,  1915.) 

1656  Where  Returns  and  Certificates  Are  to  be  Filed  by  Paying  Agents 
Appointed  by  Debtors. — Where  such  withholding  agent  is  so 

authorized  by  the  debtor  corporation,  he  may  file  with  the  collector  of  his 
district  the  required  returns  and  accompanying  certificates  in  which  case  the 
assessment  of  the  tax  withheld  by  him  will  be  made  in  that  district.  Unless 
such  authority  be  given,  such  reports,  etc.,  will  be  furnished  by  the  debtor 
corporation  to  the  collector  of  its  district  (i.  e.,  the  district  in  which  its 
principal  financial  or  business  office  is  located),  where,  in  such  cases,  assess- 
ment will  be  made.  (Art.  38,  Reg.  33,  Jan.  5,  1914.) 

1657  The  duly  authorized  withholding  agent  is  required  to  file  its  return 
with  the  collector  of  internal  revenue  for  the  district  in  which  the 

said  withholding  agent  is  located,  and  is  not  required  to  file  a return  with  the 
collector  for  the  district  in  which  the  debtor  corporation  is  located.  (T.  D. 
2135,  Jan.  23,  1915.) 

1658  The  Debtor  Corporation  Only  Deducts  the  Tax,  if  Any. — In  reply 
you  are  advised  that  this  office  holds  that  the  normal  tax,  to  be  with- 
held under  the  Act  of  Sept.  8,  1916,  as  amended  l.'y  Section  1205,  subdivision 
(c).  Act  of  Oct.  3,  1917,  is  required  to  be  deducted  only  by  the  debtor  cor- 
poration and  should  not  be  withheld  by  the  bank  by  whose  agency  collection 
is  made.  (Letter  to  Sackett,  Chapman  & Stevens,  New  York,  N.  Y.,  signed 
by  Deputy  Commissioner  L.  F.  Speer,  and  dated  Nov.  13,  1917.) 

295  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


1659  Ownership  Certificates  for  Interest  Coupons. — The  owners  of 
bonds  or  other  obligations,  whether  or  not  containing  a tax-free 

covenant,  issued  by  domestic  or  resident  foreign  corporations,  when  pre- 
senting interest  coupons  for  payment  shall  file  a certificate  of  ownership 
for  each  issue  of  bonds,  showing  the  name  and  address  of  the  debtor  cor- 
poration, the  name  and  address  of  the  owner  of  the  bonds,  whether  the 
payee  is  married  or  the  head  of  a family,  the  nature  of  the  obligations,  the 
amount  of  interest  and  its  due  date,  and  the  amount  of  any  tax  withheld. 
No  ownership  certificates  need  be  filed  in  the  case  of  interest  payments  on 
bonds  the  income  from  which  is  not  included  in  gross  income,  nor  in  the  case 
of  any  obligations  of  the  United  States.  See  section  213  (b)  of  the  statute 
and  articles  74-82  [for  state  and  federal  obligations,  pi35].  Where  in 
connection  with  the  sale  of  its  property  payment  of  the  bonds  or  other 
obligations  of  a corporation  is  assumed  by  the  assignee,  such  assignee, 
whether  an  individual,  partnership,  corporation,  or  a State  or  political  sub- 
division thereof,  must  deduct  and  withhold  such  taxes  as  would  have  been 
required  to  be  withheld  by  the  assignor  had  no  such  sale  and  transfer  been 
made.  (Art.  364,  Reg.  45,  Rev.,  April  17,  1919.) 

1660  Interrogatories  on  Ownership  Certificates  to  be  Answered  Fully. 

— All  information  called  for  on  ownership  certificates  must  be  sup- 
plied. Debtor  corporation  or  its  authorized  agent  will  be  held  responsible  for 
proper  execution  of  certificates  but  not  as  to  misstatements  by  bond  owners. 
Payment  of  bond  interest  should  be  refused  unless  data  is  complete.  In- 
formation necessary  for  efficient  administration  of  Revenue  Act.  (Telegram 
to  the  Southern  Pacific  Company,  New  York,  N.  Y.,  signed  by  Commission- 
er Daniel  C.  Roper,  and  dated  April  7,  1919.) 

1661  Numbers  of  Bonds;  Waiver  of  Requirements  for  Filling  in  on 
Certificates. — Notice  is  hereby  given  that  Regulation  requiring 

the  filling  in  on  certificates  of  numbers  of  bonds,  or  other  like  obligations  of 
corporations,  etc.,  from  which  interest  coupons  are  detached  or  upon  which 
registered  interest  is  to  be  paid — which  was  extended  to  Oct.  31,  1914,  by 
T.  D.  1985,  issued  May  28,  1914 — is  hereby  waived  until  further  notice. 
(T.  D.  2022,  Oct.  3,  1914-) 

1662  Full  Post  Office  Address  on  Certificates. — Replying  to  your  letter 
of  April  15,  1914,  relative  to  street  address  on  certificates  you  are 

advised  that  banks  should  exercise  care  in  securing  full  post  office  address 
on  certificates.  Where  no  street  address  is  given,  this  office  will  assume  that 
same  is  not  necessary  in  addressing  mail,  and  certificates  will  not  be 
returned  for  correction.  (Letter  to  National  Park  Bank,  signed  by  Deputy 
Commissioner  L.  F.  Speer,  and  dated  April  23,  1914.) 

1663  Address  May  Be  Omitted  from  Certificates  in  Certain  Cases. — 
Address  may  be  omitted  from  ownership  certificates  in  case  promi- 
nent corporation  and  in  its  place  description  bond  issue  inserted.  (Telegram 
to  Lee,  Higginson  & Co.,  Boston,  Mass.,  signed  by  Commissioner  Daniel  C. 
Roper,  dated  Feb.  ii,  1918.) 

1664  Banks  and  Trust  Companies  May  Use  Fac-simile  Signatures. — 

You  are  advised  that  as  a convenience  to  Banks  and  Trust  Companies 
having  a large  number  of  ownership  certificates  to  execute  in  the  collection 
of  interest  on  bonds,  it  is  hereby  provided  that  the  name  of  the  Bank  or 
Trust  Company  may  be  printed  or  stamped,  and  the  facsimile  of  the  signa- 
ture of  the  person  authorized  to  sign  for  the  Bank  or  Trust  Company  in 
executing  the  said  ownership  certificates  may  be  printed  or  stamped  on  the 
certificate:  Provided,  that  in  all  cases  the  Bank  or  Trust  Company  shall 

296  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 

first  file  with  the  Commissioner  of  Internal  Revenue  a certificate  of  its  au- 
thorization in  substantially  the  following  form: 


(City)  (Date> 

The  Commissioner  of  Internal  Revenue, 

Washington,  D.  C. 

The  undersigned  hereby  authorizes  the  use  of  the  facsimile  signature 
shown  below  upon  all  income  tax  ownership  certificates  issued  in  its  name 
until  this  authorization  is  revoked  by  written  notice  to  you. 


(Name  of  Bank  or  Trust  Co.) 

By 

(Signature  of  person  authorized  to  sign) 


(Official  position.) 

Facsimile  signature  of  person 
authorized  to  sign.) 

(T.  D.  2258,  Nov.  I,  i9i5.) 

1665  Use  of  Initials  on  Certificates  Authorized. — Replying  to  your  tele-* 
gram  of  the  6th  instant,  you  are  advised  that  in  writing  the  name 

at  top  of  certificate  initials  may  be  used.* 

1666  Married  Woman  in  Executing  Certificate  Should  Use  Her  Own 
Christian  Name. — A married  woman  should  sign  her  own  Chris- 
tian name  and  not  the  name  of  her  husband.* 


*[ Comment:  The  answers  embodied  in  paragraphs  above,  are  repro- 
duced, by  courtesy,  from  a letter  to  the  Central  Trust  Company  of  New 
York,  dated  Jan.  7,  1914,  signed  by  Deputy  Commissioner  L.  F.  Speer. 
These  are  printed  now  as  there  still  seems  to  be  confusion  on  the  points 
covered.] 

1667  Ownership  Certificates  in  the  Case  of  Fiduciaries  in  Control  of 
More  Than  One  Trust  and  in  the  Case  of  Joint  Owners. — When 

fiduciaries  have  the  control  and  custody  of  more  than  one  estate  or  trust, 
and  such  estates  and  trusts  have  as  assets  bonds  of  corporations  and  other 
securities,  a certificate  of  ownership  shall  be  executed  for  each  estate  or 
trust,  regardless  of  the  fact  that  the  bonds  are  of  the  same  issue.  When 
bonds  are  owned  jointly  by  several  persons,  a separate  ownership  certificate 
must  be  executed  in  behalf  of  each  of  the  owners.  (Art.  374,  Reg.  45,  Rev.» 
April  17,  1919.) 

1668  Separate  Ownership  Certificates  Required  for  Coupons  of  Differ- 
ing Maturity  Dates. — Separate  ownership  certificate  will  be  re- 
quired for  each  interest  coupon  of  different  maturity  date  even  though  of 
same  issue.  (Telegram  to  the  Southern  Pacific  Company,  New  York,  N.  Y.,. 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  24,  1919.) 

1669  Ownership  Certificates  Must  Be  Obtained. — This  office  has  re- 
ceived several  letters  with  reference  to  a letter  addressed  to  the  Old 

Colony  Trust  Company  of  Boston,  Massachusetts,  under  date  of  May  10, 
1915,  in  which  the  office  acquiesced  in  the  contention  of  various  debtor 
corporations  that  the  actual  facts  of  the  relation  of  firms,  organizations  and 
fiduciaries  to  the  withholding  provisions  of  the  Income  Tax  Law,  once 
established  to  their  satisfaction,  may  be  accepted  by  this  office  upon  the 
proper  showing  of  debtor  corporations  and  withholding  agents,  for  their 
own  convenience,  the  interest  of  the  Government  being  safeguarded  by  the 

INC.  297 


TAX 


WITHHOLDING  AT  THE  SOURCE. 


personal  liabilities  imposed  upon  them  by  law.  In  view,  however,  of  the 
confusion  created  in  the  matter  of  the  certificates  required  to  be  furnished 
with  coupons  or  interest  orders  showing  ownership  of  bonds  and  the  exemp- 
tion claimed,  you  are  advised  that  the  office  holds  that  certificates  of  this 
character  must  be  obtained  by  debtor  corporations  and  withholding  agents 
in  all  cases  as  required  by  the  Regulations.  (Mimeograph  letter  No.  1242 
to  Collectors,  July  8,  1915.) 

1670  Stamp  Indicating  “Satisfied  as  to  Identity  of  Agent  Not  Re- 
quired.— Receipt  is  acknowledged  of  your  letter  of  February  20, 

1918,  and  in  reply  you  are  advised  that  it  is  not  necessary  for  the  first  col- 
lecting agent  receiving  coupons  accompanied  by  an  ownership  certificate 
which  was  executed  by  an  agent  on  behalf  of  the  owner  to  affix  a stamp 
containing  the  words  “Satisfied  as  to  identity  and  responsibility  of  agent.” 
(Letter  to  the  Columbia  Trust  Company,  Neve  York,  N.  Y.,  signed  by 
Deputy  Commissioner  L.  F.  Speer,  and  dated  March  26,  1918.) 

1671  Person  First  Receiving  Coupons  or  Interest  Orders  for  Collection 
Need  Not  Endorse  on  the  Back  of  the  Certificate. — This  office 

is  in  receipt  of  your  letter  of  September  18,  1913,  inquiring  whether 
the  provision  in  T.  D.  1887,  October  25,  1913,  requiring  that,  “the  person 
or  corporation  first  receiving  coupons  or  interest  orders  for  collection  shall 
write  or  stamp  his  or  its  name  and  address  and  date  on  the  back  of  said 
certificates,”  is  still  in  force.  You  are  advised  that  this  requirement  appear- 
ing in  the  first  draft  of  the  Regulations  was  omitted  in  the  subsequent  draft 
of  the  Regulations,  and  as  they  now  appear  in  permanent  form  in  Regula- 
tions No.  33  adopted  January  5,  1914.  The  foregoing  endorsement  is  not 
now  required.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Dep- 
uty Commissioner  L.  F.  Speer,  and  dated  September  18,  1914.) 

1672  '‘You  are  advised  that  the  endorsement  provided  in  Treasury  De- 
cision 1887,  dated  October  25,  1913,  is  no  longer  required.”  (Extract 

from  a letter  to  the  National  Park  Bank,  signed  by  Internal  Revenue  Col- 
lector Anderson,  New  York,  and  dated  December  23,  1914.) 

1673  Proper  Ownership  Certificates  to  be  Used  by  Fiduciaries,  Whether 
Corporate  or  Individual. — Should  a corporate  fiduciary  acting  for 

an  individual  beneficiary  use  form  of  ownership  certificate  and  line  thereon 
designated  for  a corporation  or  that  designated  for  an  individual?  In  gen- 
eral are  discriminations  between  the  form  of  ownership  certificates  and  line 
thereon  to  be  used  by  fiduciaries  to  be  based  upon  the  status,  corporate  or 
individual,  of  the  fiduciary,  or  on  the  status,  corporate  or  individual,^  of  the 
beneficiary?  ^Fiduciary,  whether  corporate  or  individual,  must  use  lines  on 
ownership  certificates  provided  for  use  of  fiduciary.  Citizen  or  resident 
fiduciary  should  use  Form  1000  line  1 ; and  Form  1001,  line  1 or  line  2. 
Nonresident  alien  fiduciary  should  use  Form  1000,^  line  3.  (Telegram  of 
inquiry  from  the  First  National  Bank,  Cleveland,  Ohio,  and  the  reply  thereto 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  20,  1918.) 

1674  Exchange  of  Interest  Coupons  for  Funding  Bonds. — The  exchange 
of  interest  coupons  for  funding  bonds  is  a payrnent  of  interest  on  the 
bonds  and  the  income  tax  should  be  imposed  and  paid  upon  such  interest 
as  income  for  the  year  in  which  it  matures  and  such  payment  is  made  and 
in  the  absence  of  proper  claim  for  exemption  the  tax  should  be  deduced  and 
withheld  on  the  amount  represented  by  the  coupons.  (T.  D.  2090,  Dec.  14, 

1914.) 


INC. 


298  TAX 


WITHHOLDING  AT  THE  SOURCE. 


1675  Advance  Retirement  of  Bonds  Within  an  Interest  Period. — Where 
bonds,  under  contract  provisions  in  the  bonds,  are  retired  within  an 

interest  period  and  prior  to  the  expiration  of  the  full  term  of  the  bond, 
ownership  certificates  will  be  required  and  should  cover  that  part  of  the 
interest  period  affected  between  the  beginning  of  such  period  and  the  date 
of  the  retirement  of  the  bonds.  (T.  D.  2090,  Dec.  14,  i9i4.) 

1676  Receipt  is  acknowledged  of  your  letter  of  March  17,  1916,  wherein 
you  make  reference  to  certain  rulings  of  the  office  relative  to  the 

filing  of  certificates  of  ownership  in  cases  where  bonds  are  purchased 
by  the  debtor  corporation  and  retired  between  interest  dates.  In  reply  you 
are  advised  that  after  a careful  consideration  of  the  matter  the  ruling  con- 
tained in  office  letter  of  January  5,  1916,  addressed  to  Messrs.  White  & 
Case,  14  Wall  Street,  New  York  City,  has  been  annulled,  and  it  is  now  re- 
quired that  in  a case  wherein  the  corporation  which  issued  the  bond,  or  its 
^receiver  or  trustee,  is  the  purchaser,  and  the  bond  is  retired  and  all  its 
coupons  cancelled,  the  seller  of  the  bond  shall  execute  a certificate  of  owner- 
ship, claiming  or  not  claiming  exemption,  to  cover  such  coupons  as  are  due 
and  payable  at  date  of  sale,  but  are  still  attached  to  the  bond,  and  the  coupon 
covering  the  interest  which  had  accrued  from  last  interest  date  to  date  of 
sale.  In  short,  in  all  cases  where  bonds  are  retired  within  an  interest  period 
and  prior  to  the  expiration  of  the  full  term  of  the  bond,  whether  under  con- 
tract or  not,  ownership  certificates  will  be  required,  which  certificates  should 
cover  that  part  of  the  interest  period  affected  between  the  beginning  of  such 
period  and  the  date  of  the  retirement  of  the  bonds.  (Letter  to  one  of  our 
subscribers,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  April 
II,  1916.) 

1677  Purchase  and  Sale  of  Bonds  Between  Interest  Dates. — This  office 
acknowledges  receipt  of  your  letter  of  Dec.  20,  1915,  and  in  reply  you 

are  advised  that,  as  stated  in  office  letter  of  December  18,  1915,  it  is  held 
that  where  a bond  is  purchased  between  interest-bearing  dates,  the  seller  is 
not  required  to  execute,  for  Federal  Income  Tax  purposes,  an  ownership 
certificate  to  accompany  the  interest  coupon  which  is  not  due  and  payable 
and  is  not  detached  from  the  bond,  but  such  a certificate  will  be  required 
from  the  purchaser  of  the  bond,  when,  at  a later  date,  the  coupon  is  detached 
and  presented  for  payment  or  collection.  (Letter  to  White  & Case,  New 
York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F.  Speer,  and  dated  Jan.  5, 
1916.) 

1678  Usufruct  of  Foreign-Owned  Bonds  Belonging  to  an  American 
Citizen  or  Resident. — This  office  is  in  receipt  of  your  letter  dated 

November  9,  1914,  stating  that  you  had  received  a letter  from  one  of  your 
foreign  correspondents  containing  the  following  inquiry : 

“We  have  on  our  accounts  certain  American  bonds  which  are  the 
property  of  Swiss  citizens,  but  the  usufruct  of  which  belongs  to  an 
American  citizen ; when  collecting  the  coupons  of  these  bonds,  can  we 
sign  the  ownership  certificates  on  behalf  of  the  Swiss  owners,  or  is  it 
necessary  to  state  thereon  the  name  of  the  American  beneficiary  ?” 

1679  In  reply  to  your  request  for  a ruling  based  on  the  facts  given 
above  you  are  advised  that  the  coupons  should  be  accompanied  by 

a certificate  of  ownership  signed  by,  or  in  behalf  of,  the  person  entitled 
to  receive  the  income  from  the  bonds.  The  revised  form  of  certificates  of 

299  TAX  , 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


ownership  should  be  altered  to  show  that  such  person  is  entitled  to  receive 
the  interest  on  the  bonds.  For  example,  if  Form  looo,  Revised,  is  used, 
there  should  be  inserted  in  the  first  line  of  the  declaration  on  the  certificate 
the  words  “interest  on  the”  between  the  words  “the”  and  the  word  “above- 
described,”  so  that  the  certificate  will  read,  “I  do  solemnly  declare  that  I am 
a citizen  or  resident  of  the  United  States  and  am  the  owner  of  the  interest  on 
the  above-described  bonds,  etc.”  (Special  letter  of  Nov.  23,  1914.) 

1680  Bonds  Purchased  by  Trustee  Under  the  Mortgage  Deed  of  Trust 
But  Not  Retired. — With  reference  to  the  ruling  contained  in 

office  letter  of  November  18,  1916,  wherein  it  was  held,  in  a case  where  cor- 
porate bonds  are  purchased  “by  the  trustee  under  the  mortgage  deed  of  trust 
out  of  the  money  from  a sinking  fund  when  the  bonds  are  not  retired  or  can- 
celled but  held  alive  by  the  trustee  and  interest  is  continued  on  the  coupons, 
the  interest  so  paid  to  the  trustee  being  held  for  the  account  of  the  corpora- 
tion issuing  the  bond”  that  the  trustee  merely  acts  as  agent  for  the  debtor 
corporation  and  that  the  corporation  itself,  or  the  trustee  if  duly  authorized 
to  act  as  agent  for  the  corporation,  should  execute  income  tax  certificates. 
Form  1001,  Revised,  to  accompany  the  interest  coupons  detached  from  the 
bonds  so  purchased  and  held  when  such  coupons  are  presented  for  payment 
or  collection,  you  are  advised  as  follows : 

1681  The  office  now  holds  that  if  legal  title  to  the  bonds  rests  with  the 
trustee,  he  should  execute  * * * certificates  ’S'  * * to  accompany  the 

coupons  detached  from  the  bonds  when  they  are  presented  for  payment  or 
collection.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner W.  H.  Osborn,  and  dated  Dec.  6,  1916.) 

1682  Size,  Color,  etc.,  of  Certificates. — All  certificates  shall  be,  in  size, 
8 by  inches,  and  shall  be  printed  to  read  from  left  to  right  along 

the  8-inch  dimension. 

1683  All  paper  upon  which  certificates  shall  be  printed  shall  correspond 
in  weight  and  texture  to  white  writing  paper  21  by  32,  about  40 

pounds  to  the  ream  of  500  sheets. 

1684  Certificates  will  be  printed  by  the  Governm.ent  and  furnished  with- 
out cost  for  the  use  of  bond  owners. 

1685  Individuals  or  organizations  desiring  to  print  their  own  certifi- 
cates may  do  so,  but  certificates  so  printed  must  conform  in  size 

and  be  printed  in  similar  type,  upon  the  same  color,  shape,  and  weight  of 
paper  as  used  by  the  Government. 

1686  Sample  certificates  showing  size  of  type  and  color  of  paper  can  be 
secured  from  collectors  of  internal  revenue  in  their  several  districts 

or  from  the  Commissioner  of  Internal  Revenue  at  Washington,  D.  C.  (T. 
D.  1976,  May  2,  1914.) 

1687  The  department  will  furnish  blank  forms  of  certificates  to  be  used 
in  connection  with  the  collection  of  the  income  tax  by  such  parties 

as  may  make  application  for  the  same.  Private  corporations  and  others 
desiring  to  have  these  certificates  printed  for  themselves  may  do  so  if  they 
will  strictly  observe  the  requirements  of  the  department  as  to  size,  print, 
form,  color,  and  contents.  (T.  D.  1939.)  (T.  D.  2090,  Dec.  14,  1914.) 

1688  Ownership  Certificates  for  Use  by  Foreigners  May  Be  Printed  in 
Two  Languages. — Certificates  of  ownership  required  to  be  filed 

with  interest  coupons  or  orders  for  registered  interest  by  non-resident  for- 

3CX)  TAX 


INC. 


12-29-19. 

WITHHOLDING  AT  THE  SOURCE. 

eigners  * * * and  by  foreign  organizations,  shall  be  printed,  as  pre- 

scribed by  regulations,  in  the  English  language,  and  directly  under  each  line 
of  the  English  text,  on  each  of  the  above-mentioned  certificates,  there  may 
be  printed  the  text  of  said  certificate  in  a foreign  language. 

1689  In  executing  these  certificates,  however,  all  blanks  to  be  filled  in, 
with  amounts,  shall  be  filled  in  using  United  States  dollar  values. 

1690  These  certificates  shall  be  of  the  same  size  as  prescribed  by  regu- 
lations for  all  certificates  of  ownership.  (T.  D.  1926,  Dec.  30, 

1913.) 

1691  Authorizing  Debtor  Corporations  and  Withholding  Agents  to 
Accept  Old  Forms  of  Ownership  Certificates  With  Respect  to 

Interest  Due  on  and  Prior  to  November  1,  1919,  When  Received  from 
Continental  United  States  and  With  Respect  to  Interest  Due  on  and 
Prior  to  December  1,  1919,  When  Received  from  Abroad.— 1.  In  view 
of  the  fact  that  the  revised  forms  of  ownership  certificates  were 
placed  at  the  disposal  of  the  public  over  three  months  ago,  this  office  is  of 
the  opinion  that  a reasonable  period  of  time  has  elapsed  in  which  to  permit 
the  public  to  have  become  familiar  with  them.  In  order,  however,  to  pre- 
vent inconvenience  to  individuals  and  organizations  required  to  use  such 
forms,  old  forms  of  ownership  certificates  will  be  accepted  with  respect  to 
interest  due  on  and  prior  to  November  i,  1919,  when  received  from  conti- 
nental United  States,  and  with  respect  to  interest  due  on  and  prior  to  Decem- 
ber I,  1919,  when  received  from  abroad. 

1692  2.  Banks  and  collecting  agents,  debtor  corporations,  and  withhold- 
ing agents  shall  refuse  to  accept  the  old  forms,  in  connection  with 

interest  due,  after  the  respective  dates  named  herein,  and  Collectors  of  In- 
ternal Revenue  receiving  monthly  returns  accompanied  by  certificates  on  the 
old  forms,  when  it  shall  appear  that  such  certificates  were  filed  with  debtor 
corporations  or  withholding  agents,  with  respect  to  interest  due  subsequent 
to  such  dates,  shall  require  the  debtor  corporation  or  withholding  agent  con- 
cerned to  secure  certificates  on  the  revised  forms. 

1693  3.  In  order  that  the  fulfillment  of  the  requirements  herein  provided 
may  cause  as  little  hardship  as  possible  to  individuals,  banks,  col- 
lecting agents,  debtor  corporations,  etc..  Collectors  should  satisfy  them- 
selves that  they  have  a sufficient  supply  of  the  revised  forms  on  hand  to 
meet  anticipated  demands  and  where  the  supply  is  not  deemed  sufficient, 
requisition  should  be  made  without  delay  for  such  additional  quantity  as  may 
be  necessary.  ^ Collectors  are  requested  to  disseminate  this  information 
throughout  their  districts  as  quickly  as  possible.  (T,  D.  2923,  September  24, 
1919.) 

1694  Ownership  Certificates — Defining  Revised  Forms  and  Old  Forms. 
Referring  Treasury  Decision  2923,  please  define  Revised  Forms  and 

Old  Forms.  Do  you  consider  Forms  1000  and  1001  Revised  Febru- 
ary, 1919,  as  Revised  Forms  or  Old  Forms?  Please  telegraph  reply. 
(Answer)  Revised  Forms  of  ownership  certificates  are  those  issued  Feb- 
ruary, 1919,  and  those  issued  subsequently.  Old  Forms  are  certificates  in 
use  prior  to  February,  1919.  Forms  1000  Revised  February,  1919,  and  looi 
Revised  February,  1919,  considered  Revised  Forms.  (Telegram  from  The 
Chase  National  Bank,  New  York,  N.  Y.,  and  the  answer  thereto  signed  by 
iTommissioner  Daniel  C.  Roper,  and  dated  September  29,  1919.) 


INC.  301 


TAX 


wifrikOLiJiSiG'  ft'T'ifitfe'  ’sbkRClfe. 

1605  c:.  of  Certificate^  Where  Wit&or}(S^^  Rc^mred  — Form  lOQO 

3f f i i (revi^^ ) shall  be  used  (a)^  • Citi^eTi^ ; br"  tesideufe^  of : the  United 
States  tirheii  no  |>ersonal  exemption  of  bredit  is  daimed  5|aifet^  on 
bonds  containing  a tax-ffee  covenant  ;^(b)  l::^  rtohfe  alien  fnc^viduals 
■and  by '^orei'gn  eorpOrattons  not  en^ged  ih/^ade'of  business  w?thin  the 
united  States  and  nbt  having  "any  office  bb  plate '"of  Msines^  therein, 
'Whethet^  of  not  sueh'^ bonds ‘bbntain  a taX-iree  bovdnantj  (c)  by  partner- 
resident  dr  nonresident,  in  the^'tage  'bf  bdhlds  tdntainfng  a tax-free 
covenant.  (Art.  365,  Reg.  45,  Rev.,  April  17,  1919.) 


fiimg’ <4  Fbim  lOOO  by  pscr"sbnal  Servj<^‘C^b6f‘W6ns^in  Cdt- 
ot  joedeeHng  Ihtere^  5^  Tax-Free^0©Venaht  Bbnd^i^Sfesta^^^erence 
£somadevtCM-^ur>  li^tter?  Idated 
bWhMe  thii  Revenue  aet  'ol  ’^ffeWs 

simiiaar  to*a  pk#tnevahtp9no*p^<>Vi^Sn^^tfls  tfd  liave  b^bh^MaSe  tb  a?fbw 
a*  pers0mai:^aemee  corporation  to  d?a5^e  a4t^htage  dr  the  taX-ffee  disuse 
when  ob^lectihg  coupons  frotn^  bonds.  We  iaqurfe  ^if  a^^petsdnaT  service 
corporation  may  alter  f Certificate  Form  IGOO^-tyhen  collebtihg  coupons 
froinotax^free  ©bvenant  obligations.”  ' ^In^rep^% ^dU-a^e  adviseddhat 
Sonal  rservicd 'Corporations  are  to  be  treated,^ SCI dar  aS  p'raetldabld,  on  the 

same'basisiais.paftuef ships  £bf  the jpwtposesld^vMl^hhO Ming ‘^^^^Sdcfidd 

22fio(}h^i  XDfi  the  Revenue  Act  ©fi  191S;'  (A:)rp6rafidn^ 

notrcieifrom  theblncome  Tax>  Unit  that  their  f6t4fh'stas  'pfer^dtial  servibe 


CorporationirGontaining' a sbH:alled  tax-free  eovenahl  Clause^in  the  same 
mailnier  :as:a)h!d'td  the, same  extent  that  partnerships  arte  ‘authorized  to  uSe 
.4ltat . ilFhe  f oatiB'shouid  bear ; the  stanuped  oig  wf itten  iiotathbh  Ap* 
proved;  - hy.  the  Treasuryr  'Departmenti  as  Personal  ^Service' Corporation 
om  j ;( blatik  date ) ( Fetter  j to  The  Corporation  ’ T rusti  Company,  signed 
byj  Comn^issidne'i?  UanieFQ^  and  dated.  NoveTnber20plt9l9cip - 

i >3c:'  0 r.O  89 : Cofi  STJOSS  Oj  . 

Whefe_fe i^eqmre^,— Form 
“"O  ' '|r|yised)"^hhll  .bemused  t a) pi  the 


Uhiired 


'TOGI  '|r|yised)  ^Shali.be  Used'X?)joPy;fr9^^^^^  pi  th< 

d :Sfhths  wHbh  pefsbnal)ekempi^&n  3s°ciair&4  againsif  latcr^sf  on  Jiomi 


bbiit’aihing/  a taXri ree^  boven^fit"  and  wfen ' presehting r,cpuP9Pi,-ft W. 


therein,  whether  or  not  such  bonds  contain  a tax-free  covenant.  In  Case  a 
citizen  or  resident  alien  individual  receives  interest  on  bonds  containing  a 
taijofrde  feib^ehaBtim'JEXcefeS'pf  oi2per9bbai^>^^{ft1©R^<^iclf  mfe 

individual  may  /claim/iany-such  ,exeessomusCIbetrepoSe'd'  'iM3fPftn  1000 
{nredi)sed5^3ai(Aiit.  366i,  Reg.  4(5,)  Rem,:‘A^riFi^p^919.^)  ■:  oQ  armoT  r ' ' 
.viqs"  riqBig9l9t  98B9Fi  '^^rmo  l i)r lo  armoT  b98iv9iT  8£  ,Oipi  y ' 
-094  h9ri8;4  98oH)  9^15  89tB-;firj'-99  qi'i-norrv/o  lo  arrnoT  b9aiv9R  ^i9v;?n/.'- 
o?T9l si Sife  par^rapkTiiioted,  hcrt^ j prigi^lly f wassinduded  mi  <th e,^eomr 
pllatipnni^prror^iTntTOe'^lQprppraitvpUjTriU^bUompany^.-^^  ol  rohq  98:; 

sHT  mml  rnBi^,9f9T')  .amioT  bsaivail  bj'f^bianoD  ,piOi  ,vr£U’id9T_b9arv9^ 
id9b"‘ 


as  payments  made  to  or  for  citizens  or  residents  of  the  United  States.  With- 

XAT  ip£  .DXI 

INC.  302  TAX 


# 


WITHHOLDING  AT  THE  SOURCE. 


holding  at  the  source  is  accordingly  unnecessary  except  in  the  case  of 
interest  payments  on  corporate  bonds  or  other  obligations  containing  a tax- 
free  covenant  v/here  no  exemption  is  claimed.  The  alien  property  custodian 
should  use  form  looo  (revised)  in  collecting  interest  on  bonds  containing 
a tax-free  covenant  and  in  all  other  cases  should  use  form  looi  (revised). 
No  distinction  is  to  be  made  between  payments  directly  to  the  alien  property 
custodian  and  to  his  depositaries  and  between  interest  on  registered  bonds 
and  interest  on  coupon  bonds.  In  the  case  of  enemies  or  allies  of  enemies 
holding  a license  granted  under  the  provisions  of  the  Trading  with  the 
Enemy  Act,  withholding  is  required  as  in  the  case  of  any  nonresident  alien 
not  an  enemy  or  ally  of  enemy.  See  article  446  [for  extension  of  time  for 
filing  returns  in  the  case  of  enemies/’  p854).  (Art.  375,  Reg.  45,  Rev., 
April  17,  1919.) 

1700  Use  of  Substitute  Certificates. — Resident  collecting  agents  and 
responsible  banks  and  bankers,  receiving  interest  coupons  for  collec- 
tion with  ownership  certificates  attached,  may  present  the  coupons  with  the 
original  certificates  to  the  debtor  corporation  or  its  duly  authorized  with- 
holding agent  for  collection  or  may  detach  and  forward  the  original  cer- 
tificates directly  to  the  Commissioner,  provided  each  such  collecting  agent 
shall  substitute  for  such  original  certificates  its  own  certificates  (form  1058 
(revised)  or  form  1059  (revised),  and  shall  keep  a complete  record  of  each 
transaction,  showing  (a)  serial  number  of  item  received;  (b/  date  received; 
(c)  name  and  address  of  person  from  whom  received;  (d)  name  of  debtor 
corporation;  (e)  class  of  bonds  from  which  coupons  were  cut  (whether 
containing  a tax-free  covenant  or  not)  ; and  (f)  face  amount  of  coupons. 
For  the  purpose  of  identification  the  substitute  certificates  shall  be  numbered 
consecutively  and  corresponding  numbers  given  the  original  certificates  of 
ownership.  The  use  of  substitute  certificates  by  collecting  agents,  banks  and 
bankers  is  not  permitted,  however,  in  the  case  of  ownership  certificates  pre- 
sented with  coupons  for  collection  by  nonresident  alien  individuals,  partner- 
ships, or  corporations.  [Nor  is  it  in  the  collection  of  foreign  items, 
|[1752.]  (Art.  367,  Reg.  45,  Rev.,  April  17,  1919.) 

1701  No  License  Required  of  Collecting  Agents  for  Substituting  Their 
Own  Certificates  for  Ownership  Certificates. — Until  the  further 

ruling  by  this  department,  the  banks,  bankers,  and  other  collecting  agents 
who  may  substitute  their  certificates  for  the  certificates  of  owners  under  the 
foregoing  plan  will  not  be  required  to  secure  a license  from  the  Treasury 
Department  for  being  permitted  to  make  such  substitutions  of  their  own 
certificates  for  those  of  the  owners,  provided  these  regulations  are  strictly 
complied  with.  (T.  D.  1903,  Nov.  28,  1913.) 

1702  Endorsement  by  Collecting  Agent  Required  on  Certificates  of 
Ownership  for  Which  Own  Certificate  is  Substituted. — The  cer- 
tificate of  the  owner,  for  which  the  foregoing  certificate  of  the  collecting 
agent  may  be  thus  substituted  by  the  collecting  agent  first  receiving  said 
coupons  for  collection  must  be  given  the  follow/ng  indorsement  by  the  col- 
lecting agents  and  should  be  made  preferably  with  a rubber  stamp. 

Owner’s  certificate  No 


(Name  of  collecting  agency.) 

191—- 

(Give  date  of  certificate.) 

303  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 


The  counterpart  of  the  within  certificate  bearing 
like  number  was  attached  to  the  coupons  within 
mentioned  for  delivery  to  the  debtor  or  withhold- 
ing agent,  by  whom  the  coupons  are  payable. 

(T.  D.  1903,  Nov.  28,  1913.) 

1703  Fac-simile  Signature  May  Be  Used  by  Collecting  Agents  in  Sign- 
ing Their  Own  Certificates  Substituted  for  Ownership  Certificates. 

— You  are  advised  that  as  a convenience  to  banks  and  collecting  agents  who 
desire  to  substitute  their  certificates  Form  1058  and  1059  for  the  owner’s 
certificate  accompanying  the  coupons  deposited  for  collection,  it  is  hereby 
provided  that  the  name  of  the  bank  or  collecting  agent  may  be  printed  or 
stamped,  and  that  a fac-simile  of  the  signature  of  the  person  authorized  to 
sign  the  substitute  certificate  for  the  bank  or  collecting  agent  may  also  be 
printed  or  stamped  on  the  certificate:  Provided,  that  in  all  cases  the  bank 
shall  first  file  with  the  Commissioner  of  Internal  Revenue  a certificate  of  its 
authorization  in  substantially  the  form  following: 

(City)  (Date) 

The  Commissioner  of  Internal  Revenue: 

Washington,  D.  C. 

The  undersigned  hereby  authorizes  the  use  of  the  fac-simile  signature 
shown  below  upon  all  substitute  income  tax  certificates  issued  in  its  name 
until  this  authorization  is  revoked  by  written  notice  to  you. 

(Name  of  bank  or  collecting  agent.) 

By ; 

(Signature  of  person  authorized  to  sign.) 


(Fac-simile  signature  of  person 
authorized  to  sign.) 


Official  position. 
(T.  D.  i986.  May  29,  1914.) 


1704  Interest  Coupons  Without  Ownership  Certificates. — Where  in- 
terest coupons  are  received  unaccompanied  by  certificates  of  owner- 
ship the  first  bank  shall  require  of  the  payee  an  affidavit  showing  the 
name  and  address  of  the  payee,  the  name  and  address  of  the  debtor  corpora- 
tion, the  date  of  the  maturity  of  the  interest,  the  name  and  address  of  the 
payee,  the  name  and  address  of  the  debtor  corporation,  the  date  of  the  ma- 
turity of  the  interest,  the  name  and  address  of  the  person  from  whom  the 
coupons  were  received,  the  amount  of  the  interest,  and  a statement  that  the 
owner  of  the  bonds  is  unknown  to  the  payee.  Such  affidavit  shall  be  for- 
warded ot  the  collector  with  the  monthly  return  on  form  1012  (revised). 
The  first  bank  receiving  such  coupons  shall  also  prepare  a certificate  on 
form  1000  (revised),  crossing  out  ‘‘owner”  and  inserting  “payee”  and  enter- 
ing the  amount  of  interest  in  the  space  provided  for  a foreign  corporation 
having  no  office  or  place  of  business  within  the  United  States,  and  shall 
stamp  or  write  across  the  face  of  the  certificate  “Affidavit  furnished,”  add- 
ing the  name  of  the  bank.  (Art.  368,  Reg.  45,  Rev.,  April  17,  1919.) 


1705  When  interest  coupons  are  unaccompanied  by  ownership  certificates 
affidavits  should  be  secured  by  first  bank  as  provided  in  Article  368 
[P704],  Regulations  45.  Such  affidavit  should  accompany  the  own- 

304  TAX 


INC. 


WITHHOLDING  AT  THE  SOURCE. 

ership  certificates  to  debtor  corporation  or  withholding  agent  and  should  be 
forwarded  to  collector  Internal  Revenue  in  accordance  with  usual  procedure. 
Separate  affidavit  required  with  respect  to  each  interest  payment  upon  bonds 
of  different  issue  and  with  respect  to  each  different  due  date  of  same.  (Tele- 
grarn  to  Boissevain  & Co.,  New  York,  N.  Y.,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  September  i8,  1919.) 

1706  Interest  on  Registered  Bonds.— Where  a bondholder  files  no 

ownership  certificate  in  the  case  of  payments  of  interest  on  regis- 
tered bonds  the  withholding  agent  shall  make  out  such  a certificate 
in  each  instance  (a)  on  form  1000  (revised)  if  the  bondholder  is  a citizen 
or  resident  of  the  United  States  or  a resident  or  nonresident  partnership 
and  the  bonds  contain  a tax-free  covenant,  or  if  the  bondholder  is  a non- 
resident alien  individual  or  a foreign  corporation  not  engaged  in  trade  or 
business  within  the  United  States  and  not  having  any  office  or  place  of  busi- 
ness therein,  and  (b)  on  form  1001  (revised)  in  all  other  cases.  When  so 
used  forms  1000  (revised)  and  1001  (revised)  need  not  be  signed.  (Art. 
369,  Reg.  45,  Rev.,  April  17,  1919.) 

1707  Law  j[218.  Returns  of  Taxes  Withheld  at  the  Source. — ''(c)  Every 

individual,  corporation,  or  partnership  required  to  deduct 
and  withhold  any  tax  under  this  section  shall  make  return  thereof  on  or 
before  March  first  of  each  year  and” 

1708  Law  1[219.  Taxes  Withheld  to  be  Paid  to  the  Government. — "shall 

or  before  June  fifteenth  pay  the  tax  to  the  official  of 
the  United  States  Government  authorized  to  receive  it.” 

1709  (a)  Every  withholding  agent  shall  make  an  annual  return  to  the  col- 
lector of  the  tax  withheld  from  interest  on  corporate  bonds  or  other 

obligations  on  or  before  March  i on  form  1013  (revised).  He  shall  also 
make  a monthly  return  on  form  1012  (revised)  on  or  before  the  20th  day  of 
the  month  following  that  for  which  the  return  is  made.  The  original  own- 
ership certificates,  or  the  substitute  certificates  where  authorized,  must  be 
forwarded  to  the  collector  with  the  monthly  return,  (b)  Every  person  re- 
quired to  deduct  and  withhold  any  tax  from  income  other  than  such  bond 
interest  shall  make  an  annual  return  thereof  to  the  collector  on  or  before 
March  1 on  form  1042  (revised),  accompanied  by  a separate  report  on  form 
1098  (revised)  for  each  nonresident  alien  individual  or  foreign  corporation 
not  engaged  in  trade  or  business  within  the  United  States  and  not  having 
any  office  or  place  of  business  therein,  to  whom  income  other  than  bond 
interest  was  paid  during  the  previous  taxable  year.  In  every  case  of  both 
classes  the  tax  withheld  must  be  paid  on  or  before  June  15  of  each  year  to 
the  collector.  For  penalties  attaching  upon  failure  to  make  such  returns  or 
such  payment,  see  section  253  of  the  statute  and  article  1041  [1119031.  (Art. 
370,  Reg.  45,  Rev.,  April  17,  1919.) 

1710  Use  of  Information  Return  Where  No  Actual  Withholding.— 
Where  a debtor  corporation  or  its  duly  authorized  withholding  agent 

has  made  payments  of  interest  on  its  bonds,  but  in  certain  instances  has  been 
required  to  withhold  no  tax,  the  ownership  certificates  on  form  1001  (re- 
vised) filed  in  connection  with  such  payments  shall  be  transmitted  directly  to 
the  Commissioner  (Sorting  Division),  accompanied  by  a return  on  form 
1096A  showing  the  number  of  ownership  certificates  thus  transmitted  and 

INC.  305 


TAX 


WITHHOLDING  AT  THE  SOURCE. 

the  total  amount  of  interest  paid.  This  return  shall  be  made  by  the  20th  day 
of  each  month  following  that  for  which  the  return  is  made  and  need  not  be 
sworn  to.  An  annual  return  shall  be  forwarded  to  the  Commissioner^  not 
later  than  Alarch  15  of  each  year  on  form  1096  B,  on  which  shall  be  given 
a summary  of  the  monthly  returns.  To  the  extent  that  there  has  been  actual 
withholding  of  the  tax  returns  should  be  made  in  accordance  with  article 
370  [P709].  (Art.  373,  Reg.  45,  Rev.,  April  17,  1919.) 


1711  Withholding  in  1918. — In  the  case  of  payments  made  prior  to 
February  25,  1919,  where  a withholding  agent  pursuant  to  the  Reve- 
nue Acts  of  1916  and  i9i7  withheld  only  2 per  cent  from  the  income  of 
nonresident  alien  individuals,  he  need  return  only  such  sum.  -In  all  such 
cases  where  a withholding  agent  withheld  the  tax  pursuant  to  the  Reve- 
nue Acts  of  1916  and  1917  from  the  income  of  foreign  corporations  not 
engaged  in  trade  or  business  within  the  United  States  and  not  having  any 
office  or  place  of  business  therein,  he  need  return  only  the  sum  withheld,  to 
an  amount  not  in  excess  of  the  aggregate  sum  required  to  be  withheld  by 
the  terms  of  the  Revenue  Act  of  1918  from  the  income  paid  over  by  the 
withholding  agent.  In  the  case  of  every  payment  made  after  February  24, 
1919,  the  withholding  agent  must  withhold  at  the  rates  prescribed  by  the 
present  statute  from  the  whole  payment,  not  merely  from  that  part  which 
applies  to  the  period  after  February  24,  1919.  (Art.  371,  Reg.  45,  Rev., 
April  17,  1919.) 

1712  Employers  of  nonresident  aliens  were  not  required  in  making  pay- 
ments prior  to  February  25,  1919,  to  withhold  more  than  two  per 

cent  of  such  payments  and  as  to  such  payments  will  not  be  held 
responsible  for  more  than  two  per  cent  unless  they  actually  withheld  at 
a higher  rate.  This  ruling  does  not  affect  the  tax  liability  of  the  nonresi- 
dent alien  who  will  be  liable  for  tax  at  the  rates  prescribed  for  ninet^n 
eighteen  and  nineteen  nineteen  and  should  make  returns  accordingly.  He 
is  entitled  to  credit  for  the  amount  paid  to  the  Government  by  withholding 
agent.  (Telegram  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner Daniel  C.  Roper  and  dated  March  5,  1919.) 

1713  Referring  to  your  second  inquiry  you  are  advised  that  eight  per 
cent  income  tax  is  required  to  be  withheld  by  the  employer  from 

wages  paid  to  nonresident  alien  employees  only  on  and  after  February  25, 
1919.  As  nonresident  aliens  were  subject  to  a normal  tax  of  twelve  per 
cent  for  1918,  and  only  two  per  cent  was  required  to  be  withheld  during 
that  year,  the  balance  of  tax  due  should  be  accounted  for  in  the  individual 
income  tax  returns.  (Part  of  letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  May  21,  1919.) 

1714  Release  of  Excess  Tax  Withheld.— Any  sum  withheld  for  tax 
since  December  31,  1917,  in  excess  of  the  aggregate  amount  re- 
quired under  the  terms  of  the  Revenue  Act  of  1918,  shall  be  released  by 
the  withholding  agent  and  paid  over  to  the  person  from  whom  it  was  with- 
held or  his  proper  representative.  With  reference  to  how  a debtor  cor- 
poration may  release  and  pay  over  the  amount  of  tax  so  withheld  in  a 
case  where  a bank  or  other  collection  agency  detached  the  ownership  certi- 
ficate which  accompanied  an  interest  coupon  and  substituted  its  own  cer- 
tificate (form  1059),  which  does  not  disclose  the  name  and  address  of 

306  TAX 


INC. 


T-15-20. 


WITHHOLDING  AT  THE  SOURCK 

the  bond  owner,  in  such  cases  the  withholding  agent  shall  request  the 
bank  or  collection  agency  to  disclose  the  name  and  address  of  the  owner  of 
the  bonds,  as  shown  by  the  original  certificate,  and  it  shall  be  the  duty 
of  the  bank  or  collection  agency  to  make  such  disclosure  to  the  withhold- 
ing agent.  Where  withholding  agents  have  so  released  any  excess  of  tax, 
an  itemized  statement  showing  the  names,  addresses  and  amounts  refunded 
should  be  attached  to  the  annual  list  return  (form  1013),  in  order  to 
reconcile  any  discrepancy  between  the  aggregate  amount  of  taxes  returned 
as  shown  by  the  monthly  list  returns  (form  1012)  and  the  aggregate 
amoimt  as  shown  by  the  annual  list  return.  (Art.  372,  Reg.  45,  Rev.,  April 
17,  1919.) 

1715  Releasing  the  Two  Per  Cent.  Tax  Withheld  Against  Non-resident 
Foreign  Corporations  on  Dividends. — Receipt  is  acknowledged 

of  your  letter  dated  March  11,  1919,  requesting  information  in 

regard  to  releasing  the  2%  tax  withheld  on  account  of  dividends  paid  by 
you  to  nonresident  alien  corporations  during  the  year  1918.  Uln  reply  you 
are  advised  that  you  should  release  the  amount  withheld,  and  pay  same  to 
the  respective  nonresident  alien  corporations  from  whom  it  was  withheld, 
and  send  a statement  of  the  individual  amounts  released  to  the  Commis- 
sioner of  Internal  Revenue,  Sorting  Division,  Washington,  D.  C.  (Letter 
to  Bonbright  & Company,  New  York,  N.  Y.,  signed  by  J.  H.  Callan,  As- 
sistant to  the  Commissioner,  and  dated  March  24,  1919.) 

1716  Law1f220.  Withholding  Agents  Are  Liable  for  the  Tax  to  be 

Withheld. — “Every  such  individual,  corporation,  or 
partnership  is  hereby  made  liable  for  such  tax  and” 

1717  Law][221.  Withholding  Agents  Are  Indemnified. — [Every  with- 

holding agent]  “is  hereby  indemnified  against  the' claims 
and  demands  of  any  individual,  corporation,  or  partnership  for  the  amount 
of  any  payments  made  in  accordance  with  the  provisions  of  this  section.” 

1718  Law]f222.  Income  on  Which  Tax  Has  Been  Withheld  to  be 

Included  in  Recipient’s  Return  of  Income. — “(d)  In- 
come upon  which  any  tax  is  required  to  be  withheld  at  the  source  under 
this  section  shall  be  included  in  the  return  of  the  recipient  of  such 
income,” 

1719  Law  ]f223.  Amount  of  Tax  Withheld  at  the  Source  to  be  Credited 

Against  Amount  of  Tax  as  Computed  in  Creditor^si 
Return. — “but  any  amount  of  tax  so  withheld  shall  be  credited  against 
the  amount  of  income  tax  as  computed  in  such  return.” 

1720  Law  ]f224.  If  Tax  Required  to  be  Withheld  is  Paid  by  Creditor, 

Such  Tax  is  Not  to  be  Recollected  from  the  With- 
holding Agent. — “(e)  If  any  tax  required  under  this  section  to  be  deduc- 
ted and  withheld  is  paid  by  the  recipient  of  the  income,  it  shall  not  be  re- 
collected from  the  withholding  agent;” 

1721  Law  ]f225.  If  Tax  Required  to  be  Withheld  be  Paid  by  the  Cred- 

itor no  Penalty  Attaches  for  Innocent  Failure  to  Make 
Return  or  to  Pay  Tax. — “nor  in  cases  in  which  the  tax  is  so  paid  shall 
any  penalty  be  imposed  upon  or  collected  from  the  recipient  of  the  income 
or  the  withholding  agent  for  failure  to  return  or  pay  the  same,  unless  such 
failure  was  fraudulent  and  for  the  purpose  of  evading  payment.” 

INC  307  TAX 


INFORMATION  AT  THE  SOURCE. 


172a  Return  of  Income  from  Which  Tax  Withheld. — The  entire  amount 
of  the  income  from  which  the  tax  was  withheld  shall  be  included  in 
gross  income  without  deduction  for  such  payment  of  the  tax.  But 
any  tax  actually  so  withheld  shall  be  credited  against  the  total  tax 
as  computed  in  the  taxpayer's  return.  If  the  tax  is  paid  by  the  recipient 
of  the  income  or  by  the  withholding  agent  it  shall  not  be  recollected  from 
the  other,  regardless  of  the  original  liability  therefor,  and  in  such  event  no 
penalty  will  be  asserted  against  either  person  where  no  fraud  or  purpose  to 
evade  payment  is  involved.  (Art.  376,  Reg.  45,  Rev.,  April  17,  1919.) 

1723  If  for  any  reason  there  is  included  in  the  return  which  a foreign 
corporation  is  required  to  make  of  all  income  received  from  sources 

within  the  United  States  any  income  upon  which  tax  has  been  withheld  at 
the  source,  such  foreign  corporation  may  take  credit  against  the  amount 
of  tax  due  for  the  amount  of  the  tax  so  withheld  at  the  source;  pro- 
vided a statement  is  attached  to  the  return  setting  forth  the  source  and 
amount  of  the  income  upon  which  the  tax  was  so  withheld.  (Art.  201, 
11602,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1724  If  a corporation  shall  have  returned  as  income  interest  received  on 
bonds,  the  interest  upon  which  the  debtor  corporation  had  agreed 

to  pay 'without  deduction  of  income  taxes,  and  if  the  debtor  corporation 
shall  have  actually  paid  the  income  tax  assessable  on  such  interest  income, 
it  will  be  permissible  for  the  corporation  receiving  such  interest  to  take 
credit  against  the  tax  assessable  on  the  basis  of  its  net  income  returned, 
for  the  amount  of  tax  paid  thereon  by  the  debtor  corporation.  (Art.  199, 
11593,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1726  Refund  of  Amounts  Withheld  in  Excess  of  Tax  Liability. — Read 
at  P053  and  at  p579. 

1726  Amount  of  Tax  Paid  by  Debtor  on  Tax-Free  Covenant  Bond 
Interest  is  Additional  Taxable  Income  to  the  Creditor. — Read  at 

11869. 

1727  Penalty  for  Failure  to  Make  Return  and  to  Pay  Tax. — Read  at 
P902. 


1728  Law1f391.  Returns  of  Information  at  Source. — '‘Sec.  256.  That 
' <:  all  individuals,  corporations,  and  partnerships,  in  whatever  capac- 
ity acting,  including  lessees  or  mortgagors  of  real  or  personal  property, 
fiduciaries,  and  employers,'' 

1729  Lawp92.  “making  payment  to  another  individual,  corporation, 

or  partnership," 

1780  Law  p93.  “of  interest,  rent,  salaries,  wages,  premiums,  annuities, 
compensations,  remunerations,  emoluments,  or  other 
fixed,  or  determinable  gains,  profits,  and  income." 

1731  Law1[394.  “(other  than  payments  described  in  sections  254  [divi- 
dends 1fl762]  and  255  [profits  paid  to  customers  by 

brokers,  p764]). 


INC  308  TAX 


INFORMATION  AT  THE  SOURCE. 

1732  Law  |f395.  ''of  $1,000  or  more  in  any  taxable  year,” 

1733  Law  p96.  ''or,  in  the  case  of  such  payments  made  by  the  United 

, . . States,  the  officers  or  employees  of  the  United  States 

information  as  to  such  payments  and  required  to  make  returns  in 
g rd  thereto  by  the  regulations  hereinafter  provided  for,”  [no  return 

”<• 

1734  Law  p97.  ''shall  render  a true  and  accurate  return  [P902]  to  the 

f , Commissioner,  under  such  regulations  and  in  such 

the  aoDro^rnTfln^''^  prescribed  by  him  with 

^ Secretary,  setting  forth  the  amount  of  such  gains, 

payment  income,  and  the  name  and  address  of  the  recipient  of  such 

1735  Law  1[401.  Information  at  the  Source  Provisions  Apply  to  Calen- 

annlv  tn  1 Year  1919.— "The  provisions  of  this  section  shall 
apply  to  the  calendar  year  1918  and  each  calendar  year  thereafter,” 

1736  Return  of  Information  as  to  Payments  of  $1,000.— All  persons 

iri7431  service  corporations,  and  fiduciaries 

ff)7r  I’  , where  no  return  of  information  required  1117441’ 

in7^’  information  as  to  interest  on  corporate  bonds’  1fl748l’ 

il7S2  10^9  [foreign  i4emi’ 

1fl7S2].  rhe  return  shall  be  made  in  each  case  on  form  1099  frevisedl  ac’ 

companied  by  a letter  of  transmittal  on  form  1096  (revised)  showing’ the 

ents.  The  street  and  number  where  the  recipient  of  the  oavnient 
hJ^ctf,t”4  whether  he  is  single,  married  or  head  of  a family  should 
e stated,  if  possible.  Where  no  present  address  is  available^ the  last 
ret?r'!^n  address  must  be  given.  Although  to  make  necessary  a 

return  of  information  the  income  must  be  fixed  or  determinable  it  need 
not  be  annual  or  periodical.  See  article  362  [for  definition  of ’fixed  or 
determinable  income,  pS96].  (Art.  1071,  Reg:  45,  Rev.,  April  17  191^) 

1737  Tax  Exempt  Organization  to  Furnish  Information  at  the  Source. 

^r^A  ^ ^ IS  held  that  the  corporation  itself  is  exempt  from  the  income 

and  excess  profits  taxes,  it  is  not,  however,  exempt  from  the  withholding 
requirements  nor  froin  furnishing  information  in  accordance  with  the 
provisions  of  the  Act  of  October  3,  1917.  (T.  D.  2693,  April  8,  1918.) 

1 ‘38  Return  of  Information  as  to  Payments  to  Employees.— The  names 

whether  Payments  excee<ling  $1,000  a year  are  made, 

er  such  total  sum  is  made  up  of  wages,  salaries,  commissions  or 

k"  de  reported.  Heads  of  branch 

offices  and  subcontractors  employing  labor,  who  keep  the  only  complete 
record  of  payments  therefor,  should  file  returns  of  information  in  regard 

Ind  branrrnfflre  Commissioner.  When  both  main  office 

and  branch  office  have  adequate  records,  the  return  should  be  filed  by 

309  TAX 


INC. 


INFORMATION  AT  THE  SOURCE. 


the  main  ofSce.  In  the  case  of  an  employer  having  a large  number  of 
employees  who  are  moved  from  place  to  place  as  the  exigencies  of  the 
service  require,  and  who  consequently  has  no  complete  record  of  annual 
payments  to  them  at  any  one  place,  the  salary  of  two  representative  months 
may  be  taken  to  establish  a fair  monthly  wage,  and  unless  the  yearly  p^ 
ment  based  on  this  estimate  in  the  case  of  an  employee  amounts  to  $1,0W 
or  more,  no  return  of  payments  to  such  employee  is  required.  See  articles 
32-34  [for  compensation  for  personal  services,  as  income,  beginning  at 
l[873i.  (Art.  1072,  Reg.  45,  Rev.,  April  17,  1919.) 

1739  Returns  of  information  as  to  Payments  to  Employees  in  Board  and 
Lodging,  etc.— Reference  is  made  to  your  letter  of  May  19,  1919, 
in  which  you  present  the  following  inquiry:  “As  Article  1072, 
Regulations  45,  appeared  in  the  preliminary  draft,  it  contained  two  sen- 
tences not  included  in  the  Revised  and  complete  regulations.  Are  we  to 
understand  from  the  omission  of  the  last  two  sentences  that  living  quarters 
and  board  are  to  be  ignored  in  making  returns  of  infomation.  Ihe 
portion  of  Article  1072  of  the  Preliminary  Regulations  No.  45,  to  which 
YOU  refer,  was  omitted  from  the  last  edition  of  the  regulations  for  the 
reason  that  the  subject  treated  in  this  part  of  the  original  article  is  now 
covered  by  Article  33  [P89],  which  was  not  contained  in  the  prelim- 
inary editiL.  As  stated  in  the  first  part  of  Article  1072,  returns  of  inf^ 
mation  are  required  for  “all  employees  to  whom  payments  exceeding  ?1(^ 
a year  are  made,  whether  such  total  sum  is  ^ade  up  of  wages  salaries, 
commissions  or  compensation  in  any  other  form,  which  includes  those 
cases  where  board  and  lodging  are  considered  a part  of  the  comj^nsation 
for  the  services  rendered.  (Letter  to  The  Corporation  Trast  Company, 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  June  2,  1919.) 

1740  Returns  of  Information  Covering  Payments  Made  to  Insurance 
Agents  and  Agencies. — Replying  to  your  l^ter  of  February  26, 

1918  relative  to  the  reporting  on  Forms  1096  and  1099  of  commissions  paid 
to  insurance  agents  during  1917,  you  are  advised  that  if  the  commissions 
are  paid  to  soliciting  agents  for  personal  service  in  securing  insurance 

contracts  the  amount  must  be  reported.  . i j i 

1741  If  ’ however,  the  agent  conducts  a branch  office,  or  is  employed  by 
an  insurance  company  under  a contract  that  makes  it  necess^y 

bear  the  expenses  of  the  Lanch  office,  and  all  payments  received  are 
intended  to  cover  such  expenses,  it  is  not  then  necessary  that  reports  on 
F^s  1096  and  1099  be  filed.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Commissioner  Daniel  C.  Roper  and  dated  March  28,  19  8.) 

1743  Return  of  Information  at  the  Source 

Wage  Payments  to  Employee  Aggregate  $1,000  for  the  Year 
Irresoective  of  the  Basis  for  Such  Wage  Payments.— Receipt  is  acknowl- 
edged of  your  letter  dated  October  15,  1917,  requesting  that  you  be  advised 
Sier  tL  provisions  of  Section  28  added  to  the  Act  of  September  8,  1916, 
W Section  1211,  Act  of  October  3,  1917,  apply  to  employers  of  woAmen 
oaid  bv  the  hour  or  by  the  piece,  stating  in  this  connection  as  fohows  • 
“One  of  our  clients  employs  some  three  thousand  workmen  who  are  almost 
aU  on  piece  work  on  an  hourly  basis  and  a large  number  of  them  will  be 
all  on  pie  during  the  year.  Their  wages,  however,  are  not 

fi«d“s  woJld  bt  a weekty  or  monthly  salary,  pajroents  to  them  being 
variable  from  week  to  week  and  even  from  day  to  day.  (Answer.) 

INC.  310  TAX 


INFORMATION  AT  THE  SOURCE. 


reply  you  are  advised  that  in  accordance  with  the  provisions  of  the  law  as 
Stated  in  the  Section  referred  to  above  each  person,  corporation,  partner- 
ship etc.,  IS  authorized  and  required  to  render  a true  and  accurate  return 
to  the  Commissioner  of  Internal  Revenue  setting  forth  the  amount  of  sal- 

address  of  each  employee  who  is 
u-1-  I during  the  year  1917,  and  subsequent  tax  years. 

Ihe  liability  for  such  return  attaches  in  all  cases  of  payments  of  salary  or 
compensation  amounting  to  [$1,000]  or  more  during  the  year,  without 
regard  to  the  basis  of  payment  of  the  period  during  the  year  in  which  it  was 
earned  and  for  which  it  was  paid.  [See  T|1596  for  fixed  or  determinable 
income.]  ^ (Letter  to  Palmer  and  Series,  New  York,  N.  Y.,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  October  25,  1917  ) 


1743  Return  of  Information  by  Partnerships,  Personal  Service  Cor- 
porations and  Fiduciaries.— Partnerships  and  personal  service 
corporations  shall  prepare  reports  on  form  1099  (revised)  for  each 
member  of  the  partnership  or  personal  service  corporation,  and 
fiduciaries  shall  prepare  such  reports  for  each  beneficiary  of  the  estate  or 
trust  showing  in  every  case  the  distributive  shares  of  the  members  or 
beneficiaries,  whether  or  not  actually  distributed.  The  words  “Partnership 
Personal  service  corporation”  or  “Fiduciary,”  as  the  case  may  be,  should 
be  entered  on  the  blank  line  of  the  form  under  “Kind  of  income  paid  ” 
Such  reports  on  form  1099  (revised)  are  to  be  filed  with  the  collector 
with  the  returns  of  income  of  such  partnerships,  personal  service  cor- 
porations or  fiduciaries,  instead  of  being  transmitted  to  the  Commissioner 
accompanied  by  form  1096  (revised).  (Art.  1073,  Reg.  45,  Rev.,  April 


1744  Cases  Where  no  Return  of  Information  Required.— Payments  of 
the  following  character,  although  over  $1,000,  need  not  be  reported 
in  returns  of  information  on  form  1099  (revised)  : (a)  payments  of  inter- 
est on  obligations  of  the  United  States  [see  P745]  ; (b)  dividends  paid  by 
domestic  or  resident  foreign  corporations  (other  than  distributions  by 
personal  service  corporations)  ; (c)  payments  by  a broker  to  his  customers; 
(d)  payments  made  to  corporations;  (e)  bills  paid  for  merchandise,  tele- 
grams, telephone,  freight,  storage  and  similar  charges;  (f)  payments  to 
employees  for  board  and  lodging  while  traveling  in  the  course  of  their 
employment;  (g)  annuities  representing  the  return  of  capital;  (h)  pay- 
ments of  rent  made  to  real  estate  agents  (but  the  agent  must  report  pay- 
ments to  the  landlord  if  they  amount  to  $1,003  or  more  annually)  ; (i)  pay- 
ments made  by  branches  of  business  houses  located  in  foreign  countries  to 
alien  employee  serving  in  foreign  countries  [see  Art  92,  T[1546,  for  cer- 
tain items  which  are  not  considered  taxable  income  to  nonresident  aliens, 
and  which,  consequently  are  not  to  be  reported  in  returns  of  informa- 
tion] ; and  (j)  payments  made  by  the  United  States  Government  to  sailors 
and  soldiers  and  to  its  civilian  employees.  (Art.  1074,  Reg.  45.  Rev  April 
17,  1919.)  ’ ^ 


I74.’>  |[402.  Information  at  the  Source  Provisions  Do  Not  Apply  to 

Payments  of  Interest  on  Government  Obligations. — 
“but  [the  information  at  the  source  provisions]  shall  not  apply  to  the  pay- 
ment of  interest  on  obligations  of  the  United  States.”  [See  (a)  in  Tfl744, 
above.] 


INC. 


311  TAX 


INFORMATION  AT  THE  SOURCE. 


1746  Return  of  Information  as  to  Payments  to  Nonresident  Aliens.— 

In  the  case  of  payments  of  annual  or  periodical  income  to  nonresi- 
dent alien  individuals  or  to  foreign  corporations  not  engaged  in  trade  or 
business  within  the  United  States  and  not  having  any  office  or  place  of 
business  therein,  the  returns  by  withholding  agents  on  forms  1098  (re- 
vised) and  1042  (revised)  shall  constitute  and  be  treated  as  returns  of  in- 
formation. See  sections  221  and  237  of  the  statute  and  articles  361-376 
[for  withholding  at  the  source  beginning  at  fl585,  and  particularly 
jfl709].  (Art.  1076,  Reg.  45,  Rev.,  April  17,  1919.) 

1747  Lawp98.  Returns  of  Information  of  Payments  of  Corporate 

Obligation  Interest. — “Such  returns  may  be  required, 
regardless  of  amounts,  (1)  in  the  case  of  payments  of  interest  upon  bonds, 
mortgages,  deeds  of  trust,  or  other  similar  obligations  of  corporations,  and” 

1748  In  the  case  of  payments  of  interest,  regardless  of  amount,  upon 

bonds  and  similar  obligations  of  domestic  or  resident  foreign  cor- 
porations, the  original  ownership  certificates,  when  duly  filed,  shall 
constitute  and  be  treated  as  returns  of  information.  If  a bondholder  files 
no  ovv^nership  certificate  in  the  case  of  payments  of  interest  on  registered 
bonds,  the  withholding  agent  shall  make  out  such  a certificate  in  each  in- 
stance and  file  it  with  his  monthly  return.  See  sections  221  and  237  of  the 
statute  and  articles  361-376  [for  withholding  at  the  source  beginning  at 
^1585  and  particularlylll709  and  p710].  (Art.  1075,  Reg.  45,  Rev.,  April 
17,  1919.) 


1749  Lawp99.  Returns  of  Information  Concerning  the  Collection  of 

Foreign  Items.— “(2)  [Such  returns  may  be  required, 
regardless  of  amounts]  in  the  case  of  collections  of  items  (not  payable  in 
the  United  States)  of  interest  upon  the  bonds  of  foreign  countries  and 
interest  upon  the  bonds  of  and  dividends  from  foreign  corporations  by 
individuals,  corporations,  or  partnerships,  undertaking  as  a matter  of  busi- 
ness or  for  profit  the  collection  of  foreign  payments  of  such  interest^^or 
dividends  by  means  of  coupons,  checks,  or  bills  of  exchange  [p755].” 

1750  Source  of  Information  as  to  Foreign  Items. — The  terms  “foreign 
item,”  as  here  used,  means  any  dividend  upon  the  stock  of  a non- 
resident foreign  corporation  or  any  item  of  interest  upon  the  bonds 
of  foreign  countries  or  nonresident  foreign  corporations,  whether 
or  not  such  dividend  or  interest  is  paid  in  the  United  States  or  by  check 
drawn  on  a domestic  bank,  (a)  Wherever  a foreign  country  or  nonresi- 
dent foreign  corporation  issuing  bonds  has  appointed  a paying  agent  in 
this  country,  charged  with  the  duty  of  paying  the  interest  upon  such  bonds, 
such  paying  agent  shall  be  the  source  of  information.  If  such  foreign 
country  or  foreign  corporation  has  no  such  agent,  then  the  last  bank  or 
collecting  agent  in  this  country  shall  be  the  source  of  information,  (b) 
In  the  case  of  dividends  on  the  stock  of  a nonresident  foreign  corporation, 
however,  the  first  bank  or  collecting  agent  accepting  such  item  for  collec- 
tion shall  be  the  source  of  information.  (Art.  1077,  Reg.  45,  Rev.,  April 
17,  1919.) 

1751  Ownership  Certificates  for  Foreign  Items.— (a)  Where  bonds  of 
foreign  countries,  or  bonds  or  stocks  of  nonresident  foreign  corpora- 
tions, are  owned  by  citizens  or  residents  of  the  United  States,  individual  or 

INC.  312  TAX 


INFORMATION  AT  THE  SOURCE. 


fiduciary,  or  by  domestic  or  resident  foreign  corporations  or  partnerships, 
ownership  certificate  form  1001  A (revised)  shall  be  executed  by  the  actual 
owner  or  by  his  duly  authorized  agent  when  presenting  the  item  for  collec- 
tion, whether  such  item  is  a dividend  or  an  interest  payment,  except  in  the 
case  of  a foreign  country  or  a foreign  corporation  having  a fiscal  agent  in 
this  country  and  issuing  bonds  which  contain  a tax-free  covenant  clause. 
[For  dividends  of  resident  foreign  corporations,  see  p744  (b).]  In  such 
a case  the  fiscal  agent  is  required  to  withhold  the  normal  tax  upon  the  inter- 
est on  such  bonds  and  ownership  certificate  form  1000  (revised),  modified 
to  show  the  name  and  address  of  the  fiscal  agent,  should  be  used,  unless  the 
owner  (if  so  entitled)  desires  to  claim  exemption,  in  which  case  form 
1001  A (revised)  should  be  filed,  (b)  Where  such  foreign  bonds  or  stocks 
are  owned  by  nonresident  alien  individuals,  corporations  or  partnerships, 
ownership  certificate  form  1001  A (revised)  shall  be  used  on  behalf  of  such 
owners  by  any  responsible  bank  or  banker,  either  foreign  or  domestic,  hav- 
ing knowledge  of  such  ownership.  In  such  a case  the  bank  or  banker  need 
not  fill  in  the  names  of  the  owners.  (Art.  1078,  Reg.  45,  Rev.,  April  17, 
1919.) 

1752  Return  of  Information  as  to  Foreign  Items. — In  the  case  of  col- 
lections of  foreign  items,  regardless  of  amount,  the  original  owner- 
ship certificates,  when  duly  filed,  shall  constitute  and  be  treated  as  returns 
of  information,  (a)  In  the  case  of  dividends,  as  to  which  the  first  bank 
or  collecting  agent  is  the  source  of  information,  it  shall  detach  the  ownership 
certificate  and  indorse  on  the  item  the  words,  “Certificate  detached  and  in- 
formation furnished,”  adding  its  name  and  address.  When  foreign  items 
have  been  indorsed  as  above  prescribed,  the  cerlificates  shall  be  forwarded 
to  the  Commissioner  (Sorting  Division)  on  or  before  the  20th  day  of  the 
month  following  that  during  which  the  items  were  accepted,  accompanied 
by  a return  on  form  1096  A shov/ing  the  number  of  certificates  and  the 
aggregate  amount  of  foreign  items  disclosed  thereon.  An  annual  return  on 
form  1096  B shall  be  forwarded  to  the  Commissioner  not  later  than  March 
15  of  each  year,  on  which  shall  be  given  a summary  of  the  monthly  returns, 
(b)  In  the  case  of  interest  items,  as  to  which  the  paying  agent  or  the  last 
bank  or  collecting  agent  in  this  country  is  the  source  of  information,  the 
ownership  certificate  shall  accompany  the  coupon  to  such  agent  or  source  of 
information,  who  shall  forward  the  ownership  certificate  to  the  Commis- 
sioner in  the  same  manner  as  above  provided  with  respect  to  dividend  items. 
Where  ownership  certificate  form  1000  (revised)  is  used,  a monthly  return 
shall  be  made  on  form  1012  (revised)  and  an  annual  return  on  form  1013 
(revised),  as  provided  in  articles  361-376  [particularly  Art.  370,  p709]. 
Forms  1012  (revised)  and  1013  (revised),  wdien  so  used,  should  be  modified 
to  show  the  name  and  address  of  the  paying  agent.  The  use  of  substitute 
certificates  is  not  permitted  in  the  collection  of  foreign  items.  (Art.  1079, 
Reg.  45,  Rev.,  April  17,  1919.) 

1753  Law  T[400.  Name  and  Address  of  Recipient  of  Income  to  be  Fur- 

nished on  Request. — “When  necessary  to  make  effec- 
tive the  provisions  of  this  section  the  name  and  address  of  the  recipient  of 
income  shall  be  furnished  upon  demand  of  the  individual,  corporation,  or 
partnership  paying  the  income.” 

1754  Information  as  to  Actual  Owner. — When  the  person  receiving  a 
payment  falling  within  the  provisions  of  the  statute  for  information 

at  the  source  is  not  the  actual  owner  of  the  income  received,  the  name  and 

313  TAX 


INC. 


INFORMATION  AT  THE  SOURCE. 


address  of  the  actual  owner  shall  be  furnished  upon  demand  of  the  individ- 
ual, corporation  or  partnership  paying  the  income,  and  in  default  of  a com- 
pliance with  such  demand  the  payee  becomes  liable  to  the 
See  section  253  of  the  statute  and  article  1041  [for  penalties,  111903 J.  (Art. 
1080,  Reg.  45,  Rev.,  April  17,  1919.) 

1755  Law  11410.  License  Required  for  the  Collection  of  Foreign  Items. 

—‘‘Sec.  259.  That  all  individuals,  corporations,  or 
partnerships  undertaking  as  a matter  of  business  or  for  profit  the  col- 
lection of  foreign  payments  of  interest  or  dividends  by  means  of  coupons, 
checks,  or  bills  of  ^exchange  [P749]  shall  obtain  a license  from  the 
Commissioner  and” 


1756  Law  11411.  All  Persons  Collecting  Foreign  Items  to  be  Subject  to 

Regulations.— “shall  be  subject  to  such  regulations 
enabling  the  Government  to  obtain  the  information  required  under  this  title 
as  the  Commissioner,  with  the  approval  of  the  Secretary,  shall  prescribe, 

1757  Law  11412.  “and  whoever  knowingly  undertakes  to  collect  such 

payments  without  having  obtained  a license  therefor,  or 
without  complying  with  such  regulations,  shall  be  guilty  of  a misde- 
meanor and  shall  be  fined  not  more  than  $5,000,  or  imprisoned  for  not 
more  than  one  year,  or  both.” 


1758  License  to  Collect  Foreign  Items. — Banks  or  agents  collecting 
foreign  items,  as  defined  in  article  1077  [P750],  and  required  by 

article  1078  [lfl752]  to  make  returns  of  information  with  respect 
thereto,  must  obtain  a license  from  the  Commissioner  to  engage  in 
such  business.  Application  form  1017  for  such  license  may  be  procured 
from  collectors.  The  license  is  issued  without  cost  on  form  1010.  Foreign 
items  shall  not  be  accepted  for  collection  by  any  bank  or  collecting  agent  so 
licensed  unless  properly  indorsed  or  accompanied  by  proper  ownership 
certificates  giving  all  the  information  called  for  by  such  certificate.  See  sec- 
tion 256  and  articles  1077-1079  [for  source  of  information,  ownephip  cer- 
tificates and  returns  of  information  as  to  foreign  items,  beginning  at 
[P750].  (Art.  nil,  Reg.  45,  Rev.,  April  17,  1919.) 

1759  Each  Bank  Handling  a Foreign  Item  Before  it  Reaches  the  Source 
of  Information  is  Required  to  be  Licensed. — Receipt  is  acknowl- 
edged of  your  letter  of  recent  date,  referring  to  Treasury  Decision  2759 
{superseded  by  Art.  1079,  111752]  as  follows:  “In  instances  where  a foreign 
country  or  corporation  has  no  paying  agent  in  this  country  the  above  num- 
bered Treasury  Decision  requires  the  last  bank  to  be  the  source  of  informa- 
tion. It  may  be  that  several  banks  may  handle  a foreign  item  before  it 
reaches  the  source  of  information.  We  inquire  if  each  of  the  banks  hand- 
ling a foreign  item  before  it  reaches  the  last  bank  in  this  country  must  take 
out  a license?”  Pn  reply  you  are  advised  that  the  provision  referred  to  is 
applicable  only  to  interest  coupons  detached  from  bonds  issued  by  a for- 
eign government,  corporation,  etc.  In  cases  v/here  a dividend  check  or 
warrant  is  presented  for  collection,  the  first  bank  accepting  the  item  is  held 
to  be  the  source  of  information.  HThe  first  bank  making  payment  of  a for- 
eign item  and  the  last  bank  in  this  country  handling  same,  as  well  as  the 
intermediary  banks  concerned  in  the  transmission  of  the  item  beUveen  these 
two  agencies,  are  required  to  obtain  a license.  (Letter  to  The 

Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  No- 
vember 28,  1918.) 


INC. 


314  TAX 


INFORMATION  AT  THE  SOURCE. 


1760  Licenses  Required  for  Branch  Offices  of  Persons  or  Firms  Col- 
lecting Foreign  Items. — When  any  person,  firm,  or  corporation 

shall  have  branch  offices  and  desire  to  collect  foreign  interest  or  dividend 
income  through  such  branch  offices,  the  application  for  license  or  licenses 
shall  be  made  by  the  person,  firm,  or  corporation  through  its  principal  office 
for  its  branch  office  or  offices.  Application  for  licenses  in  such  cases  shall 
be  made  to  the  collector  of  internal  revenue  for  the  district  in  which  the 
home  office  is  located.  (Art.  57,  Reg.  33,  Jan.  5,  1914.) 

1761  License  for  Branch  Office  of  Person  or  Firm  Collecting  Foreign 
Items  Having  Branch  Office,  to  be  Issued  by  Collector  of  District 

Where  Branch  is  Located. — The  names  and  addresses  of  the  branch 
offices  shall  be  furnished  to  the  collector  in  the  application  of  the  said  prin- 
cipal, and  if  the  requirements  of  the  foregoing  regulations  have  been  com- 
plied with  to  the  satisfaction  of  the  collector,  he  shall  certify  this  fact  to 
the  collector  of  internal  revenue  for  the  district  in  which  the  branch  office 
is  located,  and  the  collector  to  whom  this  certification  is  made  shall  issue 
to  such  branch  office  a license,  as  in  the  case  provided  in  article  55 
[Article  1111,  paragraph  1758].  (Art.  57,  Reg.  33,  Jan.  5,  1914.) 

1762  Law  ]J389.  Returns  of  Information  Relative  to  Payments  of  Divi- 

dends to  be  Rendered  When  Required. — “Sec.  254. 
That  every  corporation  subject  to  the  tax  imposed  by  this  title  and  every 
personal  service  corporation  [1[593]  shall,  when  required  by  the  Commis- 
sioner, render  a correct  return  [P902]  duly  verified  under  oath  [P789], 
of  its  payments  of  dividends,  stating  the  name  and  address  of  each  stock- 
holder, the  number  of  shares  owned  by  him,  and  the  amount  of  dividends 
paid  to  him.” 

1763  Return  of  Information  as  to  Payments  of  Dividends. — When  di- 
rected by  the  Commissioner,  either  specially  or  by  general  regulation, 

every  domestic  or  resident  foreign  corporation  and  every  personal 
service  corporation  shall  render  a return  on  form  1097  of  its  pay- 
ments of  dividends  and  distributions  to  stockholders  for  such  period  as  may 
be  specified,  stating  the  name  and  address  of  each  stockholder,  the  number 
and  class  of  shares  owned  by  him,  the  date  and  amount  of  each  dividend 
paid  him,  and  when  the  surplus  out  of  which  it  was  paid  was  accumulated. 
(Art.  1051,  Reg.  45,  Rev.,  April  17,  1919.) 

1764  Law]f390.  Returns  of  Information  by  Brokers  to  be  Rendered 

When  Required. — “Sec.  255.  That  every  individual, 
corporation,  or  partnership  doing  business  as  a broker  shall,  when  required 
by  the  Commissioner,  render  a correct  return  [|fl902]  duly  verified  under 
oath  [P789],  under  such  rules  and  regulations  as  the  Commissioner,  with 
the  approval  of  the  Secretary,  may  prescribe,  showing  the  names  of  cus- 
tomers for  whom  such  individual,  corporation,  or  partnership  has  transacted 
any  business,  with  such  details  as  to  the  profits,  losses,  or  other  information 
which  the  Commissioner  may  require,  as  to  each  of  such  customers,  as  will 
enable  the  Commissioner  to  determine  whether  all  income  tax  due  on  profits 
or  gains  of  such  customers  has  been  paid.” 

1765  Return  of  Information  by  Brokers. — When  directed  by  the  Com- 
missioner, either  specially  or  by  general  regulation,  every  person 

doing  business  as  a broker  shall  render  a return  on  form  1100,  show- 

INC.  315 


TAX 


RETURNS. 


ing  the  names  and  addresses  of  customers  to  whom  payments  were 
made  or  for  whom  business  was  transacted  during  the  calendar  year  or 
other  specified  period  next  preceding  and  giving  the  other  information  called 
for  by  the  form.  (Art.  1061,  Reg.  45,  Rev.,  April  17,  1919.) 


1766  Lawj[233.  Returns  by  Individuals. — “Sec.  23.  That  every  indi- 

vidual having  a net  income  for  the  taxable  year  of  $1,000 
or  over  if  single  or  if  married  and  not  living  with  husband  or  wife,” 

1767  Law  ^[234.  “or  of  $2,000  or  over  if  married  and  living  with  hus- 

band or  wife,” 

1768  Law1|235.  “shall  make  under  oath  1^789]  a return  stating  specif- 

ically the  items  of  his  gross  income  and  the  deduc- 
tions and  credits  allowed  by  this  title.” 

1769  LawTf236.  Joint  or  Separate  Returns  of  Husband  and  Wife. — 

“If  a husband  and  wife  living  together  have  an  aggregate 
net  income  of  $2,000  or  over,  each  shall  make  such  a return  unless  the 
income  of  each  is  included  in  a single  joint  return.” 

1770  Individual  Returns.— Every  individual  whose  net  income  as  de- 
fined in  section  212  of  the  statute  and  articles  21-26  [beginning  at 

1F7711,  is  $1,000  or  over  for  the  taxable  year  must  make  a return 
of  income  unless  married  and  living  with  husband  or  wife  as  defined 
in  article  303  1111523].  The  return  shall  be  for  his  taxable  year,  whether 
calendar  or  fiscal.  Whether  or  not  an  individual  is  the  head  of  a family 
or  has  dependents  is  immaterial  in  determining  his  liability  to  render  a 
return.  If  an  individual  is  a married  person  living  with  husband  or  wife, 
no  return  need  be  made  where  their  aggregate  ne:  income  is  less  than  $2  000; 
but  a separate  return  must  be  made  by  each  of  them,  regardless  of  the 
amount  of  the  individual  income  of  each,  where  their  aggregate  net  mcome 
is  $2,000  or  over,  unless  they  join  a single  return.  The  husband  shall  in- 
clude in  his  return  the  income  derived  from  services  rendered  by  the  wife 
or  from  the  sale  of  products  of  her  labor  if  she  does  not  file  a separate  return 
or  join  with  him  in  a return  setting  forth  her  income  separately,  h or  re- 
turns by  partnerships  see  section  224  and  articles  411  and  412  [11560]  , by 
fiduciaries  see  section  225  and  articles  421-425  111684]  ; by  personal  service 
corporations  see  section  239  and  article  624  [11597]  ; and  by  other  corpora- 
tions see  sections  239  and  240  and  articles  621-626  [regularly,  111780]  and 
631-638  [for  consolidated  returns,  111821]. _ See  also  section  227  and  ar- 
ticles 441-448  [for  general  provisions  relative  to  the  filing  of  returns,  be- 
ginning at  111814].  (Art.  401,  Reg.  45,  Rev.,  April  17,  1919.) 

1771  Husband  and  Wife  Filing  Separate. — Where  husband  and  wife 
file  separate  returns  of  income,  one  of  them  being  filed  in  time  and 

the  other  delinquent,  such  returns  are  not  supplemented  of_  each  other  and 
delinquency  must  be  answered  for  by  the  one  in  connection  with  whose 
return  it  occurred.  (Art.  25,  11182,  Reg.  33,  Rev.,  Jan.  2,  19  .) 

1772  Advisable  to  Make  Return  Even  Though  No  Net  pcome,  if 
Due  to  Deductible  Losses  Claimed.— Reference  is  made  to  your 

letter  of  March  10,  1919,  in  which  you  ask  the  following  question: 

316  TAX 


INC. 


RETURNS. 


''An  individual  has  had  a loss  determined  in  1918  by  the  Courts  that 
will  exceed  all  income.  In  view  of  the  fact  that  the  income  is  large,  and  my 
client  has  always  filed  a report,  would  it  be  wise  to  file  a report  this  year 
and  thus  dispose  of  the  matter  rather  than  to  omit  such  filing  and  eventually 
have  the  Government  take  up  the  matter  of  non-filing,  etc.’'  Uln  reply  you 
are  advised  that  if  this  individual’s  net  income  for  1918  was  less  than  the 
exemption  to  which  he  was  entitled  according  to  his  marital  status  on 
December  31,  1918,  he  is  not  required  to  file  an  income  tax  return.  How- 
ever, as  you  state  he  has  filed  a return  for  all  previous  years  it  would  be  ad- 
visable for  him  either  to  fill  out  a return  showing  his  total  income  and 
deductions,  or  notify  the  Collector  of  the  circumstances  which  precluded 
his  rendering  a return  for  1918,  in  order  that  it  may  be  determined  whether 
the  loss,  which  he  has  sustained,  is  deductible  for  income  tax  purposes. 
(Letter  to  Alexander  John  Lindsay,  New  York,  N.  Y.,  signed  by  J.  A.  Cal- 
lan.  Assistant  to  the  Commissioner,  and  dated  May  6,  1919.) 

1773  Form  of  Return  for  Individuals. — The  return  shall  be  on  Form 
1040  (revised),  except  that  it  may  be  on  short  form  1040  A (revised) 
where  the  net  income  does  not  exceed  $5,000  and  the  net  income  subject  to 
the  normal  tax,  that  is,  after  applying  the  personal  exemption  and  other 
credits,  does  not  exceed  $4,000.  The  forms  are  provided  by  the  Commis- 
sioner and  may  be  had  from  the  collectors  of  the  several  districts.  In  the 
case  of  a person  owning  State,  municipal,  United  States,  farm  loan  or  War 
Finance  Corporation  bonds,  his  return  shall  contain  a statement  showing 
the  number  and  amount  of  such  obligations  owned  by  him,  the  income  re- 
ceived therefrom,  and  the  other  information  called  for  in  the  form.  See 
section  213  (b)  (4)  of  the  statute  [for  law  provision  covering  return  of 
government  securities,  etc.,  j[1130].  The  return  may  be  made  by  an  agent 
* * * [for  which  read  at  1[674].  (Art.  402,  Reg.  45,  Rev.,  April  17,  1919.) 

17  <4  Manner  of  Reporting  Tax-Free  Covenant  Bond  Interest  and  Rent 
Payments  on  Form  1040. — Reference  is  made  to  your  letter  dated 
February  15,  1918,  in  regard  to  the  execution  of  income  tax  return  Form 
1040.  You  inquire  if  a taxpayer  in  filling  in  Block  G [F],  interest  on  "tax- 
free”  covenant  bonds,  is  required  to  itemize  the  payments  or  only  show  the 
total  amount  of  interest  received  during  the  calendar  year.  Uln  reply,  you 
are  advised  that  it  is  not  necessary  to  enter  in  Block  G [F]  the  separate 
payments  of  interest  on  "tax-free”  covenant  bonds,  but  the  total  amount 
of  interest  received  during  the  calendar  year  fiom  each  debtor  corporation 
should  be  shown. 

1775  You  also  inquire  if  the  name  and  address  of  each  tenant  must  be 
listed  separately  under  Block  D [E],  income  from  rents  and  royal- 
ties, and  you  state  that  in  the  case  where  a large  office  building  is  owned 
by  a taxpayer  it  would  be  difficult  for  him  to  furnish  the  names  and  ad- 
dresses of  all  the  tenants  and  it  would  also  be  difficult  to  apportion  repairs 
and  property  losses.  Ifln  reply  to  this  inquiry,  you  are  advised  that  in  cases 
where  a large  office  building  is  owned  by  an  individual,  the  amount  received 
from  each  tenant  should  be  reported  separately  under  Block  D [E]  in  cases 
where  the  amount  of  rent  received  from  the  tenant  equals  $800  [$1,000]  or 
more,  but  only  the  total  amount  of  income  received  from  the  tenants  paying 
rental  less  than  $800  [$1,000]  is  required  to  be  shown.  It  will  not  be  neces- 
sary to  apportion  the  repairs  and  property  losses  with  respect  to  each  tenant 
in  the  building,  but  the  total  thereof  must  be  shown.  (Letter  to  The  Cor- 
poration Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  March  22,  1918.) 


INC.  317 


TAX 


RETURNS. 


177G  Manner  of  Reporting  Profits  and  Losses  in  Block  C on  Form  1040. 

—Reference  is  made  to  your  letter  of  February  7,  1918,  in  which  you 
state  that  the  Collector's  office,  Third  Massachusetts  District,  is  requiring 
individuals  who  fill  out  income  tax  returns.  Forms  1040,  to  submit  a list 
of  all  securities,  together  with  the  information  called  for  in  C [D],  and  you 
ask  if  it  is  necessary  to  submit  a list  detailing  each  sale,  tin  reply  you 
are  advised  that  if  the  profits  or  losses  on  sales  made  through  any  one 
broker  aggregated  [$1,000]  or  more,  you  should  report  the  transactions 
■on  a separate  line  with  the  name  and  address  of  the  broker.  The  total  of 
other  transactions  should  be  reported,  but  it  is  not  necessary  to  give  de- 
tails. If,  however,  this  office  should  ask  for  further  information  the  tax- 
payer should  be  able  to  furnish  all  the  details  requested.  (Letter  to  Lee, 
Higginson  & Company,  Boston,  Mass.,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  March  25,  1918.) 

1777  Return  of  Corporate  Dividends. — Dividends  on  stock  of  domestic 

corporations  or  resident  foreign  corporations  are  prima  facie  in- 
come of  the  record  owner  of  the  stock,  and  such  record  owner  will  be 
liable  for  any  additional  tax  based  thereon,  unless  a disclosure  of  the 
actual  ownership  is  made  to  the  Commissioner  on  form  1087  (revised) 
which  shall  show  that  the  record  owner  is  not  the  actual  owner  and  who 
the  owner  is  and  his  address.  In  all  cases  where  the  actual  owner  is  a 
non-resident  alien  individual  and  the  record  owner  is  a person  in  the 
United  States,  the  record  owner  will  be  considered  for  tax  purposes  to 
have  the  receipt,  custody,  control  and  disposal  of  the  dividend  income  and 
will  be  required  to  make  return  for  the  actual  owner,  regardless  of  the 
amount  of  the  income,  and  to  pay  any  surtax  found  by  such  return  to  be 
due.  (Art.  405,  Reg.  45,  Rev.,  April  17,  1919.) 


1778  Law  p43.  Returns  by  Corporations. — “Sec.  239.  That  every  cor- 

poration subject  to  taxation  under  this  title  and  every 
personal  service  corporation  [11593]  shall  make  a return,  stating  sj^- 
cifically  the  items  of  its  gross  income  [11808]  and  the  deductions  [11118UJ 
and  credits  [|[1527]  allowed  by  this  title. 

1779  Lawj[347.  “Returns  made  under  this  section  shall  be  subject  to 

the  provisions  of  sections  226  [‘Returns  when  ac- 
counting period  is  changed,’  111855]  and  228  [‘Understatement  in  Returns,’ 
111864].” 

1780  Corporation  Returns. — Every  corporation  not  expressly  exempt 
from  tax  and  every  personal  service  corporation  must  make  a 

return  of  income,  regardless  of  the  amount  of  its  net  income.  In 
the  case  of  ordinary  corporations  the  return  shall  be  on  form  1120. 
For  returns  of  insurance  companies  see  article  623  [111002]  ; of  personal 
service  corporation  see  article  624  [11597]  ; of  foreign  corporations  see 
article  625  [111044]  ; and  of  affiliated  corporations  see  section  240  oi  the 
statute  and  articles  631-638  [111821].  A corporation  having  an  existence 
during  any  portion  of  a taxable  year  is  required  to  make  a return.  A 
corporation  which  has  received  a charter,  but  has  never  perfected  its 
organization,  and  which  has  transacted  no  business  and  had  no  income 
from  any  source,  may  upon  presentation  of  the  facts  to  the  collector  be 
relieved  from  the  necessity  of  making  a return  so  long  as  it  remains  in 

318  TAX 


INC. 


RETURNS. 


an  unorganized  condition.  In  the  absence  of  a proper  showing  to  the 
Collector  such  a corporation  will  be  required  to  make  a return.  A cor- 
poration which  was  dissolved  in  1918  or  1919  prior  to  the  enactment  of  the 
present  statute  is  not  relieved  from  the  necessity  of  rendering  returns 
thereunder  for  1918  and  for  such  portion  of  1919  as  elapsed  before  its 
dissolution.  [For  returns  by  corporations  going  into  liquidation,  see 
^1816.]  See  further  section  228  of  the  statute  and  articles  406  [for  veri- 
fication of  returns,  p789],  407  [for  use  of  prescribed  forms,  p787]  and 
451  [for  understatement  of  income,  P866].  (Art.  621,  Reg.  45,  Rev., 
April  17,  1919.) 

1781  Corporations  Dissolving  Before  the  Time  for  Making  Returns. — 
A corporation  which  has  continued  in  business  through  a calendar 

year  cannot  evade  liability  for  the  special  excise  tax  imposed  by  Act  of 
August  5 1919,  Section  38,  by  dissolving  before  the  time  when  it  is  re- 
quired to  make  a return  of  said  business  to  the  collector  of  internal 
revenue  and  the  assessment  of  the  tax. — United  States  v.  General  Inspec- 
tion & Loading  Co.,  192  Fed.  223. 

1782  Under  Corporation  Act  N.  J.  Sections  53-55,  the  officers  of  a dis- 
solved corporation  who  are  also  directors  have  authority  to  make 

return  to  the  collector  of  internal  revenue  of  its  business  of  the 
preceding  year  on  which  it  has  incurred  liability  for  the  special  tax  imposed 
by  Act  5,  1909,  Section  38.  Id. 

1783  Corporation  Dissolved  Prior  to  October  4,  1917. — A corporation 
which  was  dissolved  in  1917,  prior  to  the  passage  of  the  war- 

revenue  act  of  October  3,  1917,  is  subject  to  tax  under  the  act  of  September 
8,  1916,  as  amended,  and  ^so  to  the  war  income  tax  and  the  war  excess 
profits  tax  imposed  by  the  act  of  October  3,  1917  (Brady  et  al.  v.  Ander- 
son, 240  Fed.  665).  A corporation  so  situated  -will  make  a return  on 
revised  Form  1031,  covering  the  period  in  1917  during  which  it  was  in 
business  prior  to  its  dissolution.  If  it  shall  have  previously  made  a re- 
turn covering  this  period  and  shall  have  paid  any  excess  profits  tax  under 
the  act  of  March  3,  1917,  it  shall  be  entitled  to  credit  for  the  amount  of 
such  tax  so  paid  against  any  excess  profits  tax  assessable  against  it  under 
Title  II  of  the  act  of  October  3,  1917.  (Art.  61,  11304,  Reg.  33,  Rev., 
Jan.  2,  1918.) 

1784  Change  of  Corporate  Name. — A mere  change  in  name  does  not 
constitute  a new  corporation.  If  the  business  was  continuous 

throughout  the  year,  no  change  in  management  or  operation  other  than  the 
change  in  name  having  occurred,  the  return  should  be  made  covering  the 
business  transacted  throughout  the  year,  such  return  to  be  made  by  the 
corporation  in  the  name  which  it  bears  at  the  end  of  the  year,  with  a nota- 
tion on  the  return  to  the  effect  that  the  name  had  been  changed,  giving 
both  the  old  and  the  new  names.  (Art.  206,  11613,  Reg.  33,  Rev.,  Jan.  2, 
1918.) 

1785  Law  11346.  Receivers,  Trustees  in  Bankruptcy,  and  Assignees 

Operating  the  Property  or  Business  of  Corporations, 
to  Make  Returns. — “In  cases  where  receivers,  trustees  in  bankruptcy,  or 
assignees  are  operating  the  property  or  business  of  corporations,  such  re- 
ceivers, trustees,  or  assignees  shall  make  returns  for  such  corporations  in 

INC.  319 


TAX 


RETURNS. 


the  same  manner  and  form  as  corporations  are  required  to  make  returns. 
Any  tax  due  on  the  basis  of  such  returns  made  by  receivers,  trustees,  or 
assignees  shall  be  collected  in  the  same  manner  as  if  collected  from  the 
corporations  of  whose  business  or  property  they  have  custody  and  control.’* 


1786  Returns  by  Receivers. — Receivers,  trustees  in  dissolution,  trustees 
in  bankruptcy,  and  assignees,  operating  the  property  or  business 
of  corporations,  must  make  returns  of  income  for  such  corpora- 
tions on  form  1120,  covering  each  year  or  part  of  a year  during 
which  they  are  in  control.  Notwithstanding  that  the  powers  and  functions 
of  a corporation  are  suspended  and  that  the  property  and  business  are  for 
the  time  being  in  the  custody  of  the  receiver,  trustee  or  assignee,  subject 
to  the  order  of  the  court,  such  receiver,  trustee  or  assignee  stands  in  the 
place  of  the  corporate  officers  and  is  required  to  perform  all  the  duties 
and  assume  all  the  liabilities  which  would  devolve  upon  the  officers  of  the 
corporation  were  they  in  control.  A receiver  in  charge  of  only  part  of 
the  property  of  a corporation,  however,  as  a receiver  in  mortgage 
closure  proceedings  involving  merely  a small  portion  of  its  property,  need 
not  make  a return  of  income.  See  articles  424  [for  further  discussion  of 
returns  by  receivrs,  pOl]  and  547  [for  gross  income  of  a corporation  in 
liquidation  and  return  by  receiver,  11968].  (Art  622,  Reg.  45,  Rev., 
April  17,  1919.) 


1787  Use  of  Prescribed  Forms.— Copies  of  the  prescribed  return  forms 
will  so  far  as  possible  be  furnished  taxpayers  by  collectors.  Fail- 
ure on  the  part  of  any  taxpayer  to  receive  a blank  form  \vill  not, 
however,  excuse  him  from  making  a return.  Taxpayers  not  supplied  with 
the  proper  forms  should  make  application  therefor  to  the  collector  in 
ample  time  to  have  their  returns  prepared,  verified  and  filed  with  the 
collector  on  or  before  the  last  due  date.  Each  taxpayer  should  carefully 
prepare  his  return  so  as  fully  and  clearly  to  set  forth  the  data  therein 
called  for  Imperfect  or  incorrect  returns  will  not  be  accepted  as  meeting 
the  requirements  of  the  statute.  In  lack  of  a prescribed  form  a statement 
made  by  a taxpayer  disclosing  his  gross  income  and  the  deductions  there- 
from may  be  accepted  as  a tentative  return,  and  if  filed  within  the  pre- 
scribed time  a return  so  made  will  relieve  the  taxpayer  from  liability  to 
penalties,  provided  that  without  unnecessary  delay  such  a tentative  return 
is  replaced  by  a return  made  on  the  proper  form.  See  further  articles  443- 
446  [for  extensions  of  time  and  tentative  returns,  beginning  at  11184^]. 
(Art.  407,  Reg.  45,  Rev.,  April  17,  1919.) 


1788  Law  p44.  Returns  to  be  Made  Under  Oath.— -The  [corporation] 
return  shall  be  sworn  to  by  the  president,  vice  presi- 
dent, or  other  principal  officer  and  by  the  treasurer  or  assistant  treasurer. 
“Every  individual  shall  make  under  oath  a return,  1[1768. 

“The  return  shall  be  sworn  to  by  any  one  of  the  partners, 

“Every  fiduciary  shall  make  under  oath  a return  for  the  individual, 
estate  or  trust  for  which  he  acts,”  [[676. 


1789  All  income  tax  returns  must  be  verified  under  oath  or  affirmation, 
before  an  officer  duly  authorized  to  administer  oaths  either  by  the 
laws  of  the  United  States  or  by  the  laws  of  the  state  or  territory  where 
such  officer  resides.  Persons  in  the  naval  or  military  service  of  the  United 


320  TAX 


INC. 


RETURNS. 


States  may  verify  their  returns  before  any  official  authorized  to  adminis- 
ter oaths  for  the  purposes  of  those  services.  Income  tax  returns  executed 
abroad  may  be  attested  free  of  charge  before  United  States  consular  offi- 
cers. Where  a foreign  notary  or  other  official  having  no  seal  shall  act  as 
attesting  officer,  the  authority  of  such  attesting  officer  should  be  certi- 
fied to  by  some  judicial  official  or  other  proper  officer  having  knowledge 
of  the  appointment  and  official  character  of  the  attesting  officer.  (Art. 
406,  Reg.  45,  Rev.,  as  amended  by  T.  D.  2951,  November  19,  1919.) 

1790  Law][440.  Sec.  3165,  Revised  Statutes. — “Every  collector,  deputy 

collector,  internal-revenue  agent,  and  internal-revenue 
officer  assigned  to  duty  under  an  internal-revenue  agent,  is  authorized  to 
administer  oaths  and  to  take  evidence  touching  any  part  of  the  administra- 
tion of  the  internal-revenue  laws  with  which  he  is  charged,  or  where  such 
oaths  and  evidence  are  authorized  by  law  or  regulation  authorized  by  law 
to  be  taken.’' 

Referring  to  your  suggestion  at  a personal  conference  that  revenue 
agents,  inspectors,  and  special  employees  be  commissioned  as  deputy 
collectors  without  additional  compensation  for  the  purpose  of  qualifying 
them  to  administer  oaths,  you  are  advised  that  the  suggestion  has  been 
given  careful  consideration  by  this  office,  and  it  is  of  the  opinion  that 
there  is  no  legal  objection  thereto  and  the  plan  is  both  practicable  and 
desirable.  Manifestly  it  will  save  much  time  and  some  expense  to  taxpayers, 
as  well  as  result  in  a prompter  filing  of  returns  by  persons  found  to  be 
liable  for  taxes  if  such  officers  are  in  position  to  secure  a return  properly 
sworn  to  on  the  spot. 

1792  Collectors  will  therefore  be  authorized  to  issue  commissions  to 
such  officers  serving  in  their  districts,  the  commissions  to  expire 

with  the  regular  employment  of  the  officer  so  commissioned. 

1793  A copy  of  this  letter  will  be  published  in  Treasury  Decisions  as 
authority  to  collectors  for  such  action.  (T.  D.  2235,  Aug.  28,  1915.) 

1794  In  reply  to  your  letter  of  the  11th  instant,  requesting  to  be  advised 
whether  in  issuing  commissions  to  officers  mentioned  in  T.  D.  2235 

it  should  be  stated  that  the  commission  is  only  issued  for  the  purpose  of 
administering  oaths,  you  are  advised  that  this  office  doubts  the  legality  of 
such  a limited  commission,  and  a regular  commission  should  be  issued 
with  a proviso  that  the  service  is  to  be  without  additional  compensation,  but 
the  officers  instructed  that  their  activities  as  deputy  collectors  should  be 
confined  to  the  administering  of  oaths,  as  it  is  not  necessary  for  such 
officers  to  collect  moneys. 

1795  There  is  no  objection  to  your  requiring  that  the  officers  to  whom 
such  commissions  are  issued  furnish  you  a bond,  the  same  as  other 

deputies  appointed  by  you.  (T.  D.  2238,  Sept.  17,  1915.) 

1796  This  office  is  in  receipt  of  your  letter  of  the  8th  instant  referring 
to  Treasury  Decision  2235  [paragraphs  1791  plus]  authorizing  Col- 
lectors to  commission  Revenue  Agents,  Inspectors  and  Special  Employees 
as  Deputy  Collectors  without  additional  compensation  for  the  purpose  of 
administering  oaths,  and  requesting  to  be  advised  whether  or  not  this  de- 
cision can  be  extended  to  apply  to  clerks  on  the  Income  Tax  Roll,  stating 
that  the  Deputies  in  your  office  are  too  busy  on  other  assignments  to  assist 
in  the  Income  Tax  Department  and  it  would  be  advisable  to  have  Income 
Tax  Clerks  empowered  to  administer  oaths. 

321  TAX 


INC. 


RETURNS. 


1797  In  reply,  you  are  advised  that  this  office  sees  no  objection  to  the 
commissioning  by  Collectors  of  Income  Tax  or  other  clerks  as 

Deputy  Collectors  without  additional  compensation  under  the  same  pro- 
visions and  with  the  same  restrictions  as  applied  in  Treasury  Decision 
2235  to  the  commissioning  of  the  field  officers  named.  ^ _ 

1798  A copy  of  this  letter  will  be  published  in  Treasury  Decisions  as 
authority  to  Collectors  for  such  action.  (T.  D.  2293,  Feb.  10,  1916.) 

1799  The  annual  return  must  be  verified  by  oath  =5*  * * of  the  person 
making  the  same.  Collectors  are  directed  by  law  to  require  every 

return  to  be  so  verified  by  the  person  rendering  it.  The  affidavit  may  be 
made  before  the  collector  for  the  district  or  before  any  officer  authorized 
by  law  to  administer  oaths.  (Art.  22,  Reg.  33,  Jan.  5,  1914.) 

1800  (2)  If  a return  is  executed  in  a State  before  a notary  who  is  not  re- 
quired by  the  laws  of  the  State  to  use  a seal,  and  none  is  used  the 

notary  should  file  with  the  Commissioner  of  Internal  Revenue  the  certificate 
of  an  officer  possessing  a seal,  showing  that  he  is  duly  commissioned  and 
authorized  to  administer  oaths;  otherwise  the  certificate  will  not  be  recog- 
nized. (T.  D.  2090,  Dec.  14,  1914.) 

1801  Replying  to  your  letter  of  the  23d  ultimo  you  are  informed  that 
affidavits  to  tax  returns  may  be  made  before  Justices  of  the  Peace  or 

any  officer  authorized  by  law  to  administer  oaths.  ^ 

1802  If  made  before  a Notary  Public  who  is  not  required  by  the  laws  of 
the  State  to  use  a seal,  and  none  is  used  or  if  made  before  a Justice 

of  the  Peace  who  has  no  seal,  certificates  of  the  Clerk  of  Jv 

their  authority  to  administer  oaths  may  be  waived  m your  State  or  in  a y 
other  State  where  such  jurats  are  accepted  m the  State  either  with 

or  without  seal,  and  without  a certificate  showing  authority,  (i.  i^. 

March  12,  1915.) 

1803  Assistance  from  Collectors  in  Preparing  Returns.— All  Collectors 

of  Internal  Revenue  who  have  not  already  done  so  will  please  ar- 
range to  inform  the  public,  in  their  respective  districts,  through  the  press  or 
othfr  means  of  publicity  without  cost  to  the  Government  or  by  posting 
nmnriate  notices,  that  any  assistance  or  information  whi^  may  be  re 
quired  in  connection  with  preparing  and  filing  Income  Tax  ® 

gladly  and  promptly  furnished  by  applying  to  or  calling  at  any  Internal 

^04  "In  pmsuance  of  the  above.  Collectors  should  assign  from  the  pres- 
ent office  forces,  an  employee  or  employees,  as  the  case  may  « 
quire,  who  should  be  thoroughly  posted  on  the  provisions  of  the  Income 
Tax  law  and  all  Treasury  Decisions  and  Regulafions  in  connection  with 
same  oarticularly  with  relation  to  the  P ersonal  Tax  and  the  filing  of  - 
dt”durLturns!  to  promptly  furnish  the  public  with  mfo.^at,^ 
sired  when  calling  at  the  various  Internal  Revenue  offices.  (Letter  to 
Collectors,  Feb.  10,  1914.) 

1805  A large  part  of  the  volume  of  correspondence  coming  to  this  office 
asking  for  information  relative  to  making  return  and  ascertainment 
of  net  income,  etc.,  for  the  income  tax,  is  sufficiently  covered  by  regulations, 
and  should  be  answered  in  the  offices  of  collectors. 


322 


TAX 


INC. 


RETURNS. 


1806  Collectors  are  therefore  advised  that  letters  coming  to  this  office  ask- 
ing for  information  which  should  be  supplied  by  collectors  in  accord- 
ance with  instructions  and  regulations  furnished  them,  will  be  re- 
ferred to  collectors  for  reply  and  writers  of  the  letters  advised  of  the  refer- 
ence._  Collectors,  upon  receipt  of  letters  referred  to  them  by  this  office,  will 
give  immediate  attention  to  the  subject-matter  of  the  inquiry,  in  accordance 
with  the  regulations  and  instructions  bearing  upon  the  same.  (T.  D 1949 
Feb.  14,  1914,  and  T.  D.  1956,  Feb.  14,  1914.) 

1807  Lawp58.  Time  for  Filing  Returns.— ‘‘Sec.  241.  (a)  That  returns 

of  corporations  shall  be  made  at  the  sam.e  time  as  is 
provided  in  subdivision  (a)  of  section  227  [p808  below].'' 

1808  Law  ][253.  Time  for  Filing  Returns  on  Fiscal  Year  Basis. — “Sec. 

227.  (a)  That  returns  shall  be  made  on  or  before  the 

fifteenth  day  of  the  third  month  follov/ing  the  close  of  the  fiscal  year,  or," 

1809  Law  1[254.  Time  for  Filing  Return  on  Calendar  Year  Basis.— “if 

the  return  is  made  on  the  basis  of  the  calendar  year,  then 
the  return  shall  be  made  on  or  before  the  fifteenth  day  of  March." 

Comment:^  [All  returns  of  net  income  are  “for  the  taxable  year." 
Taxable  year ' is  defined  at  l[/95,  in  general,  as  being  coextensive  with 
the  taxpayers  annual  accounting  period.  If  the  taxpayer  has  no  account- 
ing period,  or  keeps  no  books,  his  taxable  year  is  the  calendar  year.] 

1810  Returns  of  income  miust  be  made  on  or  before  the  fifteenth  day  of 
March  following  the  taxable  year,  except  that  returns  on  the  basis 

of  a fiscal  year  other  than  the  calendar  r^ear  must  be  made  on  or 
before  the  fifteenth  day  of  the  third  month  following  the  close  of  the 
fiscal  year.  Returns  on  the  basis  of  fiscal  years  ending  in  1918  of  taxpayers 
who  made  returns  on  the  calendar  year  basis  for  the  year  1917  shall  be  made 
on  or  before  the  fifteenth  day  of  March,  1919.  (Art.  441,  Reg  45  Rev 
April  17,  1919.)  > & . 

1811  Lawjf256.  Where  Returns  Are  to  be  Filed  by  Individuals.— “(b) 

. Returns  shall  be  made  to  the  collector  for  the  district  in 

which  is  located  the  legal  residence  or  principal  place  of  business  of  the 
person  making  the  return,  or," 

1812  Law  |[257.  if  he  has  no  legal  residence  or  principal  place  of 

^ , . business  in  the  United  States,  then  to  the  collector  at 

Baltimore,  Maryland." 

1813  Law  p59.  Where  Returns  Are  to  be  Filed  by  Corporations. “(b) 

Returns  shall  be  made  to  the  collector  of  the  district  in 
which  IS  located  the  principal  place  of  business  or  principal  office  or  agencv 
of  the  corporation,  or," 

1814  LawpeO.  “if  it  has  no  principal  place  of  business  or  principal 

. -o  1 • or  agency  in  the  United  States,  then  to  the  collector 

at  Baltimore,  Maryland." 

1815  Place  for  Filing  Return.— Returns  of  income  must  be  delivered 

^ ^ or  mailed  to  the  collector  for  the  district  of  the  legal  residence  or 

principal  place  of  business  of  the  person  making  the  return  Persons 
having  no  domicile  or  place  of  business  in  the  United  States,  and  persons 

INC.  323 


TAX 


RETURNS. 


in  the  military  or  naval  service  of  the  United  States,  may  file  their  returns  of 
income  with  the  collector  at  Baltimore.  (Art.  448,  Reg.  45,  Rev.,  April  17, 
1919.) 

1810  Returns  of  income  must  be  made  on  or  before  the  fitteenth  day 
of  the  third  month  following  the  close  of  the  fiscal  or  calendar 
year,  as  provided  in  section  227  of  the  statute  and  articles  441-W  [be- 
o-innino-  at  ^1810  above  and  continuing  through  this  discussion].  A 
corporSion  going  into  liquidation  during  any  taxable  year  may  upon  the 
con^^pletion  of  such  liquidation  prepare  a return  covering  its  income  for 
the  fractional  part  of  the  year  during  which  it  was  engaged  in  business  and 
may  immediately  file  such  return  with  the  collector.  ^ 
an  office  or  agency  in  the  United  States  must  make  its  return  to  the  collector 
of  the  district  in  vdiich  is  located  its  principal  office  or  agency.  Other 
corporations  must  make  their  returns  to  the  collector  at  Baltimore.  (Art. 
651,  Reg.  45,  Rev.,  April  17,  1919.) 

1817  The  principal  place  of  business  of  a corporation  is  the  place  or 
office  in  which  are  kept  the  books  of  account  and  other  data  from 

which  the  return  is  to  be  prepared.  (T.  D.  2090,  Dec.  14,  1914.) 

1818  Liquidating  Corporations. — [Read  1[1816.]  Before  distributing  its 

assets  a dissolving  corporation  should  reserve  funds  sufficient  to  pay  any 
fncome  tax  assessible  aVinst  it.  Otherwise  the  tax  may  be  collected  by 
suit  against  the  stockholders.  (Art.  205,  t 612,  Reg.  33,  Rev.,  Jan.  2,  9 .) 

1819  Dissolved  Corporation  to  Make  Final  Return.  All  corporations 
having  an  existence  as  such  during  all  or  any  portion  of  a year, 

unless  coming  within  the  class  specifically  enumeiyed  as  exempt,  are  re- 
quired to  make  leturns.  Corporations  dissolved  during  the  year  and 
Those  fiscal  vear  coincides  with  the  calendar  year  will  niake  returns  cover- 
ing the  period  from  January  1,  to  date  of  dissolution  and  such  corporations 
haUng  a fiscal  year  (ither  than  the  calendar  year,  will  make  returns  covering 
the  piriod  froil  the  beginning  of  the  fiscal  year  to  the  date  of  dissolution 
andffiew  corporations  will  make  returns  for  the  period  froni  the  date  of 
organization  to  December  31,  unless  a fiscal  year  is  designated  in  the  pioper 
manner,  in  which  case  returns  for  a period  from  the  date  of  organization  to 
the  close  of  the  fiscal  vear  so  established,  in  no  case  to  exceed  12  months,  will 
be'filed.  (Art.  203, 1(608,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1830  Last  Due  Date.— The  last  due  date  is  the  last  day  upon  which  a 
return  is  reouired  to  be  filed  in  accordance  with  the  provisions^  of 
the  statute  or  the 'last  day  of  the  period  covered  by  an  extension 
of  time  granted  by  the  collector  or  Commissioner.  When  the  last  due  date 
falls  on  lunday  or  a legal  holiday,  the  last  due  date  for  filing  returns  will  be 
the  dT  Svhig  such  Sunday  or  legal  holiday.  If  placed  in  the  mails  the 
return  should  be  posted  in  ample  time  to  reach  the  collector  s office,  under 
ordffiarV  Tndling  of  the  mails,  on  or  before  the  date  on  which  the  return 
is  required  to  beVd.  If  a return  is  made  and  placed  in  the  mails  m due 
course  properly  addressed  and  postage  paid,  in  ample  time  to  reach  the 
Xce  oTthe^  collector  on  or  before  the  last  due  date  no  pena  ty  will  attach 
should  the  return  not  be  actually  received  by  such  officer  until  subsequent  y 
to  that  date.  Where  a question  may  be  raised  as  to  whether  or  not  the  return 
was  posted  in  ample  time  to  reach  the  collector  s office  on  or  before  the  due 


INC. 


324 


TAX 


CONSOLIDATED  RETURNS. 


date,  the  envelope  in  which  the  return  was  transmitted  will  be  preserved 
by  the  collector  and  forwarded  to  the  Commissioner  with  the  return.  (Art. 
447,  Reg.  45,  Rev.,  April  17,  1919.) 


1821  Lawp49.  Consolidated  Returns  by  Affiliated  Corporations. — 

“Sec.  240.  (a)  That  corporations  which  are  affiliated 

within  the  meaning  of  this  section  shall,  under  regulations  to  be  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  make  a consoli- 
dated return  of  net  income  and  invested  capital  for  the  purposes  of  this  title 
and  Title  III  [excess  profits  tax],  and  the  taxes  thereunder  shall  be  com- 
puted and  determined  upon  the  basis  of  such  return 

1822  Law  j[350.  Corporation  Deriving  Chief  Income  from  Government 

Contracts. — “Provided,  That  there  shall  be  taken  out 
of  such  consolidated  net  income  and  invested  capital,  the  net  income  and 
invested  capital  of  any  such  affiliated  corporation  organized  after  August 
1,  1914,  and  not  successor  to  a then  existing  business,  50  per  centum  or 
more  of  whose  gross  income  consists  of  gains,  profits,  commissions,  or 
other  income,  derived  from  a Government  contract  or  contracts  made  be- 
tween April  6,  1917,  and  November  11,  1918,  both  dates  inclusive.  In 
such  case  the  corporation  so  taken  out  shall  be  separately  assessed  on  the 
basis  of  its  own  invested  capital  and  net  income  and  the  remainder  of  such 
affiliated  group  shall  be  assessed  on  the  basis  o.f  the  remaining  consolidated 
invested  capital  and  net  income.” 

1823  In  the  case  of  any  affiliated  corporation  organized  after  August  1, 
1914,  and  not  a successor  to  a then  existing  business,  50  per  cent  or 

more  of  whose  gross  income  consists  of  gains,  profits,  commissions 
or  other  income  derived  from  a Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive, 
the  net  income  and  invested  capital  of  such  corporation  shall  be  taken  out  of 
the  consolidated  net  income  and  invested  capital  of  the  group  of  affiliated 
corporations  and  the  corporation  so  segregated  shall  be  separately  assessed 
on  the  basis  of  its  own  invested  capital  and  net  income,  the  remainder  of 
such  affiliated  group  being  assessed  on  the  basis  of  the  remaining  con- 
solidated invested  capital  and  net  income.  See  section  1 of  the  statute  and 
article  1510  [for  definition  of  Government  contract,  11579].  (Art.  635, 
Reg.  45,  Rev.,  April  17,  1919.) 

1824  Law1[351.  In  the  Case  of  Consolidated  Returns  the  Tax  is  As- 

sessed as  a Unit  and  Then  Apportioned. — “In  any 
case  in  which  a tax  is  assessed  upon  the  basis  of  a consolidated  return,  the 
total  tax  shall  be  computed  in  the  first  instance  as  a unit  and  shall  then  be 
assessed  upon  the  respective  affiliated  corporations  in  such  proportions  as 
may  be  agreed  upon  among  them,  or,  in  the  absence  of  any  such  agreement, 
then  on  the  basis  of  the  net  income  properly  assignable  to  each.” 

1825  Law  1f352.  In  the  Case  of  Consolidated  Returns  One  Specific 

Credit  of  $2,000  Only  is  Allowed. — “There  shall  be 
allowed  in  computing  the  income  tax  only  one  specific  credit  of  $2,000  (as 
provided  in  section  2v36  [1fl531])  ; [The  following  is  applicable  to  the  ex- 
cess profits  tax  only.]  in  computing  the  war-profits  credit  (as  provided 
in  section  311)  only  one  specific  exemption  of  $3,000;  and  in  computing 
the  excess-profits  credit  (as  provided  in  section  312)  only  one  specific 
exemption  of  $3,000.” 


INC,  325 


TAX 


CONSOLIDATED  RETURNS. 


1826  The  Underlying  Necessity  for  Consolidated  Returns.— The  pro- 
vision of  the  statute  requiring  affiliated  corporations  to  file  consoli- 
dated returns  is  based  upon  the  principle  of  levying  the  tax  accord- 
ing to  the  true  net  income  and  invested  capital  of  a single  business 
enterprise,  even  though  the  business  is  operated  through  more  than  one 
corporation.  Where  one  corporation  owns  the  capital  stock  of  another 
corporation  or  other  corporations,  or  where  the  stock  of  two  or  more  coipora- 
tions  is  owned  by  the  same  interests,  a situation  results  which  is  closely 
analogous  to  that  of  a business  maintaining  one  or  more  branch  establish- 
ments. In  the  latter  case,  because  of  the  direct  ownership  of  the  property 
the  invested  capital  and  net  income  of  the  branch  form  a part  of  the  invested 
capital  and  net  income  of  the  entire  organization.  Where  such  branches 
or  units  of  a business  are  owned  and  controlled  through  the  medium  of 
separate  corporations,  it  is  necessary  to  require  a consolidated  return  m 
order  that  the  invested  capital  and  net  income  of  the  entire  group  may  be 
accurately  determined.  Otherwise  opportunity  would  be  afforded  tor  the 
evasion  of  taxation  by  the  shifting  of  income  through  price  fixing,  charges 
for  services  and  other  means  by  which  income  could  be  arbitrarily  assigned 
to  one  or  another  unit  of  the  group.  In  other  cases  without  a consolidated 
return  excessive  taxation  might  be  imposed  as  a result  of  purely  artincia 
conditions  existing  between  corporations  within  a controlled  group,  bee 
articles  785,  791,  802  and  864-869  [all  having  to  do  with  excess  profits  tax. 
—War  Tax  Service].  (Art.  631,  Reg.  45,  Rev.,  April  17,  1919.) 


1837  Forms  for  Use  in  Making  Consolidated  Returns  and  the  Contents 
Thereof. — Affiliated  corporations,  as  defined  in  the  statute  m 
article  633  [1118381,  are  required  to  file  consolidated  returns  on  form  IIZU. 
The  consolidated  return  shall  be  filed  by  the  parent  or  principal  reporting 
corporation  in  the  office  of  the  collector  of  the  district  in  which  it  has  ly 
principal  office.  Each  of  the  other  affiliated  corporations  shall  file  in  the 
office  of  the  collector  of  its  district  form  1122,  along  with  the  several  sched- 
ules indicated  thereon.  The  parent  or  principal  corporation  filiy  a con- 
solidated return  shall  include  in  such  return  a statement  specifically  sethng 
forth  (a)  the  name  and  address  of  each  of  the  subsidiary  or  affiliaty  Mr 
porations  included  in  such  return,  (b)  the  par  value  of  the  total  outstanding 
capital  stock  of  each  of  such  corporations  at  the  beginning  of  the  tax^le 
yeL,  (c)  the  par  value  of  such  capital  stock  held  by  the 
or  by  the  same  interests  at  the  beginning  of  the  taxable  year,  (d)  m ffie  case 
of  affiliated  corporations  owned  by  the  same  interests  a list  of  the  indi- 
viduals or  partnerships  constituting  such  interests,  with  the  yrcentage 
the  total  outstanding  stock  of  each  affiliated  corporatiy  held  by  y^h  o 
such  individuals  or  partnerships  during  all  of  the  taxable  year,  and  (y  a 
schedule  showing  the  proportionate  amount  of  the  total  tax  which  U is 
agreed  among  them  is  to  be  assessed  upon  each  affiliated  ^ 

eign  corporations  and  personal  service  corporations  need  iwt  file  consoh- 
dated  returns.  See  article  1524  [for  corporations  which,  under  no  c™- 
stances,  are  to  be  considered  as  personal  service  corporations,  p84J. 
(Art.  632,  Reg.  45,  Rev.,  April  17,  1919.) 

1838  Consolidated  Net  Income  of  Affiliated  Corporations.  Subject  to 
the  provisions  covering  the  determination  of  taxable  net  income  o 
separate  corporations,  and  subject  further  to  the  ehminatmn  of  ’"tfcom- 
paW  transactions,  the  consolidated  taxable  net  income  ^all 
bined  net  income  of  the  several  corporations  consolidated,  except  that  the 


326 


TAX 


INC. 


CONSOLIDATED  RETURNS. 


net  income  of  corporations  coming  within  the  provisions  of  article  635 
[111823]  shall  be  taken  out.  In  respect  of  the  statement  of  gross  income  and 
deductions  and  the  several  schedules  required  under  form  1120,  a corpora- 
tion filing  a consolidated  return  is  required  to  prepare  and  file  such  state- 
ments and  schedules  in  columnar  form  to  the  end  that  the  details  of  the 
Items  of  gross  income  and  deductions  for  each  corporation  included  in  the 
consolidation  may  be  readily  audited.  (Art.  637,  Reg.  45,  Rev.,  April  17 


1829  Apportionment  and  Payment  of  Tax.— In  connection  with  the 
assessment  and  payment  of  income  and  profits  taxes  of  affiliated 
corporations,  the  opinion  apparently  prevails  among  taxpayers  that 
the  tax  must  be  assessed  against  and  paid  by  each  corporation  within 
an  affiliated  group.  Unless  a subsidiary  has  made  a payment,  the  Bureau 
greatly  prefers  that  the  parent  or  principal  reporting  corporation  take  up 
and  pay  the  entire  tax,  making  any  desired  adjustment  thereof  by  charging 
the  affiliated  corporations  through  their  own  records. 


1830  The  amount  reported  by  the  subsidiary  in  answers  to  Question  9, 
Form  1122,  will  be  used  as  the  basis  for  assessment  and  payment.  If 
the  subsidiaries  have  reported  an  apportionment  in  this  manner,  but  the 
parent  corporation  has  paid  the  tax  installments  on  account  of  such  sub- 
sidiaries, an  amended  Form  1122  showing  “none”  in  answer  to  Question  9, 
should  be  filed.  If  the  last  condition  obtains,  but  the  taxpayer  insists  upon 
apportionment,  the  Collector  of  the  subsidiary  s district  will  request  abate- 
ment of  such  portion  of  the  subsidiary’s  tax  as  may  have  been  previously 
paid  by  the  parent  corporation  in  another  district. 


1831  As  a basis  for  such  advice,  the  latter  Collector  will  secure  from  the 
parent  corporation  a schedule  showing  apportionment  of  the  total 
tax  and  installments  to  the  respective  affiliated  corporations.  If  a subsidiary 
has  filed  a tentative  return  and  paid  an  installment  of  the  tax,  it  should  be 
assessed  the  amount  shown  on  Form  1122,  and  will  pay  future  install- 
ments as  they  fall  due.  (I.  T.-Mim.  2221,  August  8,  1919.) 


1832  Different  Fiscal  Years  of  Affiliated  Corporations.— In  the  case  of 
all  consolidated  returns,  consolidated  invested  capital  must  be  com- 
puted as  of  the  beginning  of  the  taxable  year  of  the  parent  or  prin- 
cipal reporting  company  and  consolidated  income  must  be  computed  on  the 
basis  of  Its  taxable  year.  Whenever  the  fiscal  year  of  one  or  more  sub- 
sidiary or  other  affiliated  corporations  differs  from  the  fiscal  year  of  the 
parent  or  principal  corporation,  the  Commissioner  should  be  fully  advised 
by  the  taxpayer  in  order  that  provision  may  be  made  for  assessing  the  tax 
in  respect  of  the  period  prior  to  the  beginning  of  the  fiscal  year  of  the  parent 
or  principal  company.  See  section  226  of  the  statute  and  article  431  [for 
returns  when  accounting  period  changed,  P862].  (Art.  638,  Reg.  45  Rev 
April  17,  1919.) 


1833  Consolidated  Return  of  Fiscal  Year  Parent  and  Affiliated  Calen- 
dar Year  Public  Utility. — We  are  asking  for  a ruling  relating  to 
consolidated  returns  on  the  state  of  facts  contained  below,  and  ask 
for  your  ruling  by  telegram,  collect.  corporation  owns  all  the  capital 
stock  of  another  corporation.  The  corporation  owning  the  capital  stock 
makes  its  Income  Tax  Return  on  fiscal  year  basis  ending  Mar.  31,  1919 

INC.  327 


TAX 


CONSOLIDATED  RETURNS. 

tlic  other  corpoi'tition  makes  its  Income  Tax  Return  on  calendar  year  basis 
ending  Dec.  dlst.  pt  is  our  understanding  that  under  Article  633  [P838J 
such  corporations  will  be  deemed  to  be  affiliated,  as  95  per  cent,  of  the  stock 
of  the  corporation  whose  hscal  yeai  ends  Dec.  31st  is  owned  by  the  corpora- 
tion whose  fiscal  year  ends  Mar.  31st.  jjUnder  Article  638  LP832]  when- 
ever the  fiscal  year  of  one  of  the  affiliated  corporations  differs  from  the 
fiscal  of  the  parent  or  principal  corporation  the  Commissioner  should  be 
fully  advised  by  the  taxpayer  in  order  that  provision  may  be  made  for 
assessing  the  tax  in  respect  to  the  period  prior  to  the  beginning  of  the  fiscal 
year  of  the  parent  or  principal  company.  The  question  therefore  arises  as 
to  the  return  for  the  three-month  period  of  the  corporation  whose  fiscal 
year  ends  Dec.  31st  and  it  appeared  to  us  that  if  your  ruling  would  be  to 
the  effect,  that  the  return  should  be  made  on  the  basis  of  the  fiscal  year  of 
the  parent  corporation,  such  corporation  being  the  corporation  holding  95 
per  cent  of  the  stock  of  the  second  corporation,  that  there  should  be  a return 
made  for  the  corporation  whose  year  ended  Dec.  31  for  the  period  between 
Dec  31  1917  and  Mar.  31,  1918,  and  then  a consolidated  return  made  for 
the  year  Mar’  31,  1918,  to  Mar.  31,  1919.  UTlie  corporation  whose  taxable 
year  ends  Dec.  31st  and  whose  stock  is  held  by  corporation  having  its  tax- 
able year  end  Mar.  31st  is  a Public  Service  Corporation.  I assume  from 
letter  of  Acting  Commissioner  J.  H.  Callan  to  The  Corporation  Trust  Co., 
dated  April  1/,  1919,  and  found  in  Corporation  Income  Tax  Service  at 
paragraph  1839,  that  it  would  make  no  difference  whether  one  or  both 
corporations  were  Public  Service  Corporations  and  they  would  not  be  taken 
out  of  the  class  of  affiliated  corporations  because  of  that  fact  m tentative 
return  was  filed  covering  corporation  whose  fiscal  year  ended  Dec.  ols 
with  a statement  that  it  was  understood  that  a consolidated  return  would 
probably  be  required,  and  that  an  adjustment  would  be  made  for  the  first 
ffiree  months  of  1918.  There  was  also  a tentative  return  filed  for  the  cor- 
poration whose  fiscal  year  ended  Mar.  31,  1918.  IjOn  the  foregoing  state 
of  facts  will  you,  therefore,  wire  us— first:  should  there  be  a consolidated 
return  filed;  second:  shall  the  corporation  whose  taxable  year  ends  Dec.  31st 
file  an  Income  Tax  report  for  the  period  between  Dec.  31,  1917,  and  Mar. 
31  1918;  third:  should  the  taxpayer  file  a statement  giving  the  reasons  for 
filing  the  return  for  the  period  between  Dec.  31st  and  Mar.  81st,  fourth,  in 
computing  the  normal  tax  on  income  for  the  three-month  period  should  the 
exemption  be  $500,  one-fourth  of  the  $2,000  allowed,  under  Section  236; 
fifth:  if  the  company  whose  stock  is  owned  by  the  principal  company  is  a 
Public  Service  Corporation  would  a consolidated  return  be  required 
[read  at  |[1839]. 

(Answer  to  above  Inquiry.) 

1834  Your  letter  sixth.  Consolidated  return  including  parent  and  fully 
owned  public  service  subsidiary  corporation  should  be  filed  for  fiscal 

vear  parent  ended  March  31.  1918.  Tax  is  computed  in  first  instance  on 
basis  of  twelve  month  period  ended  March  31,  1918,  with  full  deductions 
under  revenue  act  of  nineteen  eighteen  and  then  proraffid.  With  return  file 
complete  statement  facts.  (Letter  of  inquiry  from  The  Qeveland  Trust 
Company,  Cleveland,  Ohio,  and  the  answer  thereto,  signed  by  Acting  Com- 
missioner J.  H.  Callan,  and  dated  May  20,  1919.) 

1835  Law  1[353.  What  Corporations  Are  Deemed  to  be  Affiliated.— ^b) 

For  the  purpose  of  this  section  two  or  more  domestic 

corporations  shall  be  deemed  to  be  affiliated” 

328  TAX 


INC. 


CONSOLIDATED  RETURNS. 


1836  Law^[354.  “(1)  corporation  owns  directly  or  controls 

through  closely  affiliated  interests  or  by  a nominee  or 
nominees  substantially  all  the  stock  of  the  other  or  others,  or” 

1837  LawpSS.  “(2)  if  substantially  all  the  stock  of  two  or  more  cor- 

porations is  owned  or  controlled  by  the  same  interests.” 

1838  Corporations  will  be  deemed  to  be  affiliated  (a)  when  one  domestic 
corporation  owns  directly  or  controls  through  closely  affiliated  in- 
terests or  by  a nominee  or  nominees  substantially  all  the  stock  of  the 
other  or  others,  or  (b)  when  substantially  all  the  stock  of  two  or 
more  domestic  corporations  is  owned  or  controlled  by  the  same  interests, 
t he  words  “substantially  all  the  stock”  cannot  be  interpreted  as  meaning 
any  particular  percentage,  but  must  be  construed  according  to  the  facts  of 
the  particular  case.  The  owning  or  controlling  of  95  per  cent  or  more  of 
the  outstanding  voting  capital  stock  (not  including  stock  in  the  treasury) 
at  the  beginning  of  and  during  the  taxable  year  will  be  deemed  to  constitute 
an  affiliation  within  the  meaning  of  the  statute.  Consolidated  returns  may, 
however,  be  required  even  though  the  stock  ownership  is  less  than  95  per 
cent.  When  the  stock  ownership  is  less  than  95  per  cent,  but  in  excess  of 
50  per  cent,  a full  disclosure  of  affiliations  should  be  made,  showing  all  perti- 
nent facts,  including  the  stock  owned  in  each  subsidiary  or  affiliated  cor- 
poration and  the  percentage  of  such  stock  owned  to  the  total  stock  out- 
standing. Such  statements  should  preferably  be  made  in  advance  of  filing 
the  return  with  a request  for  instructions  as  to  whether  a consolidated  return 
should  be  made.  In  any  event  such  a statement  should  be  filed  as  a part  of 
the  return.  The  words  “the  same  interests”  shall  be  deemed  to  mean  the^ 
same  individual  or  partnership  or  the  same  individuals  or  partnerships,  but  •- 
when  the  stock  of  two  or  more  corporations  is  owned  by  two  or  more  indi-  | 
V iduals  or  by  two  or  more  partnerships  a consolidated  return  is  not  required  j 
unless  the  percentage  of  stock  held  by  each  individual  or  each  partnership  | 
is  substantially  the  same  in  each  of  the  affiliated  corporations.  (Art.  633, f 
Reg.  45,  Rev.,  April  17,  1919.) 

1839  Consolidated  Returns:  Public  Service  Corporations,  Including 
Railroads,  Not  Excepted. — Receipt  is  acknowledged  of  your  letter, 

dated  April  8,  1919,  in  which  you  state: 

“In  connection  with  the  Revenue  Act  of  1917,  Title  II,  the 
Bureau  of  Internal  Revenue  made  provision  for  consolidated  re- 
turns for  War  Excess  Profits  Tax  purposes. 

“Treasury  Decision  2662,  issued  March  6,  1918,  provided  in  ‘B’  that 
railroads,  gas,  electric,  water  and  other  public  service  corporations, 
when  operated  independently  and  not  physically  connected  or  merged 
- — particularly  when  situated  in  different  jurisdictions  and  subject  to 
regulation  by  Public  Service  Commission — will  not  be  required  or  per- 
mitted, without  special  permission  obtained  in  advance,  to  make  a con- 
solidated return. 

“The  Revenue  Act  of  1918,  Section  240,  makes  statutory  provision 
for  consolidated  returns,  both  for  Income  and  for  War  Profits  and 
Excess  Profits  Tax  purposes,  setting  forth  quite  definitely  just  what 
shall  be  considered  to  be  affiliated  corporations.  The  amplifying  Regu- 
lations of  the  Department  as  contained  in  Regulations  No.  45,  Part 
II-A,  contain  nothing  indicating  that  the  rule  relating  to  public  service 
corporations  laid  down  by  the  Department  in  connection  with  the 

329  TAX 


INC. 


CONSOLIDATED  RETURNS. 

Revenue  Act  of  1917  will  be  held  to  apply  to  the  Revenue  Act  of  1918, 
Section  240. 

“We  shall  appreciate  word  from  the  Department  as  to  whether  or 
not  public  service  corporations  which  otherwise  would  be  deemed  to  be 
affiliated  corporations  are  to  be  taken  out  of  that  class  because  of  the 
fact  that  they  are  public  service  corporations  and  otherwise  meet  the 
conditions  outlined  in  Treasury  Decision  2662.” 

1840  In  reply  you  are  advised  that  subdivision  (b)  of  Treasury  Decision 
2662  issued  March  6,  1918,  in  connection  with  the  Revenue  Act  of 

October  3,  1917,  does  not  apply  to  the  Revenue  Act  of  1918.  In  other  words, 
public  service  corporations  v/hich  otherwise  would  be  deemed  to  be  affiliated 
corporations  are  not  to  be  taken  out  of  that  class  because  of  the  fact  that 
they  are  public  service  corporations  and  otherwise  meet  the  conditions  out- 
lined in  Treasuiy  Decision  2662.  (Letter  to  The  Corporation  Trust  Com- 
pany, signed  by  Acting  Commissioner  J.  H.  Callan,  and  dated  April  17, 
1919.) 

1841  Consolidated  Returns  Not  Permitted;  Stock  of  Two  Corporations 
Owned  “by  the  Same  Interests,”  the  Percentage  of  Holding  in 

the  Two  Companies  Differing. — [An  example  of  a ruling  in  a 
specific  case.]  Receipt  is  acknowledged  of  your  letter  dated  March 

31,  1919,  to  which  you  attach  a letter  from . pt  appears  that  there 

are  two  corporations,  one  owning  and  operating  properties  in  the  Hawaiian 
Islands  and  the  other  owning  and  leasing  various  pieces  of  property  in 
California.  The  stock  of  the  California  corporation  is  held  by  the  members 
of  one  family,  four  male  members  of  the  family  each  owning  five-twenty- 
fourths  and  a sister  one-sixth  of  the  entire  stock.  The  Hawaiian  coi*pora- 
tion  is  held  by  the  same  family  principally,  with  the  exception  that  one- 
sixth  of  the  stock  is  held  by  each  of  the  four  male  menibers  afore-men- 
tioned, one-sixth  by  the  sister  afore-mentioned,  and  one-sixth  by  the  hus- 
mand  of  a deceased  sister  to  the  other  stockholders.  IfThe  affairs  and  opera- 
tions of  the  two  corporations  have  in  the  past  been,  and  are  now  being, 
actively  conducted  by  and  in  the  control  of  the  male  members  of  the  family. 
The  two  corporations,  it  is  stated,  are  in  purpose  and  effect  only  one  enter- 
prise. Pn  accordance  with  regulations  No.  45,  where  substantially  all  of 
the  stock  of  two  or  more  corporations  is  held  by  the  same  interests,  such 
holdings  must  be  in  substantially  the  same  proportions  in  order  to  require 
a consolidated  return.  It  is  therefore  held  that  these  corporations  should 
file  separate  returns.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  April  11,  1919.) 

1842  Change  in  Ownership  During  Taxable  Year.— When  one  corpora- 
tion owns  substantially  all  the  stock  of  another  corporation  at  the 

beginning  of  any  taxable  year,  but  during  the  taxable  year  sells  all 
or  a majority  of  such  stock  to  outside  interests  not  affiliated  with  it, 
or  when  one  corporation  during  any  taxable  year  acquires  substantially  all 
the  capital  stock  of  another  corporation  with  which  it  was  not  previously 
affiliated,  a full  disclosure  of  the  circumstances  of  such  changes  in  owner- 
ship shall  be  submitted  to  the  Commissioner.^  In  accordance  with  the  pe- 
culiar circumstances  in  each  case  the  Commissioner  may  require  separate  or 
consolidated  returns  to  be  filed,  to  the  end  that  the  tax  may  be  equitably 
assessed.  (Art.  634,  Reg.  45,  Rev.,  April  17,  1919.) 

1843  Law  11356.  Credit  for  Certain  Taxes  Paid  by  a Foreign  Corpora- 

tion, a Majority  of  the  Voting  Stock  of  Which  is 
Owned  by  a Domestic  Corporation.— “(c)  for  the  purposes  of  section  238 

INC.  330  TAX 


COmOtmATEB  llTOEHi. 


[p295]  k domestic  corporation  which  owns  a majority  of  the  voting  stock 
of  a foreign  corporation  shall  be  deemed  to  have  paid  the  same  proportion 
of  any  income,  war-profits  and  excess-profits  taxes  paid  (but  not  including 
taxes  accrued)  by  such  foreign  corporation  during  the  taxable  year  to  any 
foreign  country  or  to  any  possession  of  the  United  States  upon  income  de- 
rived from  sources  without  the  United  States,  which  the  amount  of  any 
dividends  (not  deductible  under  section  234  [|[1325])  received  by  such  do- 
mestic corporation  from  such  foreign  corporation  during  the  taxable  year 
bears  to  the  total  taxable  income  of  such  foreign  corporation  upon  or  wdth 
respect  to  which  such  taxes  were  paid:” 

1844  Law  jf357.  “Provided,  That  in  no  such  case  shall  the  amount  of 

the  credit  for  such  taxes  exceed  the  amount  of  such 
dividends  (not  deductible  under  section  234  [p325])  received  by  such 
domestic  corporation  during  the  taxable  year.” 

1845  Domestic  Corporation  Affiliated  With  Foreign  Corporation. — A 
domestic  corporation  which  owns  a majority  of  the  stock  of  a foreign 

corporation  shall  not  be  permitted  or  required  to  include  the  net 
income  or  invested  capital  of  such  foreign  corporation  in  a consoli- 
dated return,  but  for  the  purpose  of  section  238  of  the  statute  a domestic 
corporation  which  owns  a majority  of  the  voting  stock  of  a foreign  corpora- 
tion shall  be  entitled  to  credit  its  income,  war  profits  and  excess  profits 
taxes  wdth  any  income,  war  profits  or  excess  profits  taxes  paid  (but  not 
including  taxes  accrued)  by  such  foreign  corporation  during  the  taxable 
year  to  any  foreign  country  or  to  any  possession  of  the  United  States  upon 
income  derived  from  sources  without  the  United  States  in  an  amount  equal 
to  the  proportion  which  the  amount  of  any  dividends  (not  deductible  under 
section  234)  [p325]  received  by  such  domestic  corporation  from  such 
foreign  corporation  during  the  taxable  year  bears  to  the  total  taxable  income 
of  such  foreign  corporation  upon  or  with  respect  to  which  such  taxes  were 
paid.  But  in  no  such  case  shall  the  amount  of  the  credit  for  such  taxes 
exceed  the  amount  of  such  dividends  (not  deductible  under  section  234) 
received  by  such  domestic  corporation  during  the  taxable  year.  A domestic 
corporation  seeking  such  credit  must  comply  with  those  provisions  of  sub- 
division (a)  of  article  383  [p293]  which  are  applicable  to  credits  for  taxes 
already  paid,  except  that  in  accordance  with  article  611  [^1301]  the  form  to 
be  used  is  form  1118  instead  of  form  1116  (Art.  636,  Reg.  45,  Rev.,  April 
17,  1919.) 

1840  Consolidated  Returns:  Two  Domestic  Corporations,  the  One  Own- 
ing a Foreign  Corporation,  and  the  Other  Owned  by  That  Foreign 
Corporation. — Receipt  is  acknowledged  of  your  letter,  dated  April 
11,  1919,  in  which  you  state:  “A  client  of  mine,  a New  Jersey  Cor- 
poration owns  all  of  the  outstanding  stock  in  a foreign  corporation, 
which  in  turn  owns  all  of  the  outstanding  stock  in  a New  York  corporation. 
Although  under  Article  636  [111845]  of  Regulations  No.  45  relating  to  the 
Ijicome  Tax  a domestic  corporation  is  not  required  or  permitted  to  file  a 
consolidated  return  with  a foreign  corporation,  it  seems  to  me  that  the  New 
Jersey  and  New  York  corporations  above-mentioned  are  affiliated  as  that 
term  is  defined  in  Article  633  [jfl838],  and  that,  on  that  account  the  New 
Jersey  corporation  should  file  a consolidated  return  for  both,  under  the  pro- 
visions of  Section  240  of  the  Revenue  Act.  HKindly  advise  me  at  your 
earliest  convenience  whether  in  the  opinion  of  your  office  I atn  correct  in  this 
interpretation  of  the  law.” 


INC.  331 


TAX 


EXTENSIONS  OF  TIME. 


In  reply  you  are  advised  that  in  accordance  with  Section  240  of  the 
Revenue  Act  of  1918  it  will  be  necessary  for  the  New  Jersey  corporation 
and  the  New  York  corporation  above-mentioned  to  file  a consolidated  re- 
turn, excluding  the  foreign  corporation.  (Letter  to  a subscriber,  signed  by 
Acting  Deputy  Commissioner  P.  S.  Talbert,  and  dated  April  23,  1919.) 


1847  Law  |f447.  Extension  of  Time  for  Filing  Returns  May  Be  Granted 

by  the  Collector.— -Sec.  3176,  Revised  Statutes  [second 
paragraph].  ‘Tf  the  failure  to  file  a return  or  list  is  due  to  sickness  or 
absence,  the  collector  may  allow  such  further  time,  not  exceeding  thirty 
days,  for  making  and  filing  the  return  or  list  as  he  deems  proper.'' 

1848  Law  ^[255.  Extension  of  Time  for  Filing  Returns  May  Be  Granted 

by  the  Commissioner. — “The  Commissioner  may  grant 
a reasonable  extension  of  time  for  filing  returns  whenever  in  his  judgment 
good  cause  exists  and  shall  keep  a record  of  every  such  extension  and  the 
reason  therefor.  Except  in  the  case  of  taxpayers  who  are  abroad,  no  such 
extension  shall  be  for  more  than  six  months." 

1849  Extension  of  Time  by  Collector,  and  Penalties  for  Failure  to  File 
Final  Returns  Where  Tentative  Returns  Have  Been  Filed. — 

Section  1309  of  the  Revenue  Act  of  1918  (approved  February  24, 
1919)  provides  in  part  as  follows  [j[2227]  : “That  the  Commissioner,  with 
the  approval  of  the  Secretary,  is  hereby  authorized  to  make  all  needful 
rules  and  regulations  for  the  enforcement  of  the  provisions  of  this  Act." 
18.50  In  pursuance  of  the  foregoing  provision  of  law.  Article  443  of  Regu- 
lations 45  is  hereby  amended  to  read  as  follov/s:  It  is  important 
that  the  taxpayer  render  before  the  return  due  date  a return  as  complete 
and  final  as  it  is  possible  for  him  to  prepare.  However,  in  cases  of  sickness 
or  absence  collectors  are  authorized  to  grant  an  extension  of  not  exceeding 
thirty  days  where,  in  their  judgment,  such  further  time  is  actually  required 
for  the  making  of  an  accurate  return.  (See  Article  1002  [for  payment  of 
tax  when  no  proper  return,  |fl888].)  The  application  for  such  extension 
must  be  made  prior  to  the  expiration  of  the  period  for  which  the  extension 
is  desired.  The  absence  or  sickness  of  one  or  more  officers  of  a corpora- 
tion at  the  time  the  return  is  required  to  be  filed  will  not  be  accepted  as  a 
reasonable  cause  for  failure  to  file  the  return  within  the  prescribed  time, 
unless  it  is  satisfactorily  shown  that  there  were  no  other  principal  officers 
available  and  sufficiently  informed  as  to  the  affairs  of  the  corporation  to 
make  and  verify  the  return.  As  a condition  of  granting  an  extension  of 
time  for  filing  a return  the  collector  may  require  the  submission  of  a tenta- 
tive return  and  estimate  of  the  tax  on  Form  1040-T  in  the  case  of  indi- 
viduals, or  on  Form  103 1-T  in  the  case  of  coiporations,  and  the  payment 
of  one-fourth  of  the  estimated  amount  of  tax.  Where  a taxpayer  has  filed 
a tentative  return  and  has  failed  to  file  a complete  return  within  the  period 
of  the  extension  requested  by  him  the  complete  return  when  filed  is  subject 
to  penalties  prescribed  for  delinquency.  Where  a tentative  return  has  been 
filed  and  no  time  has  been  fixed  within  which  a complete  return  must  be 
filed,  the  collector  may  at  any  time  send  notice  to  the  taxpayer  to  file  a 
complete  return  within  a period  of  time  therein  specified  by  him,  and  a 
taxpayer  who  fails  to  comply  with  such  request  will  incur  the  penalties 
prescribed  by  statute  for  delinquency  in  filing  a return.  (Art.  443,  Reg.  45, 
Rev.,  as  amended  by  T.  D.  2935,  October  16,  1919.) 

INC.  332  TAX 


EXTENSIONS  OF  TIME. 


1851  Extension  of  Time  by  Commissioner. — If  before  the  end  of  an 

extension  of  30  days  granted  by  the  Collector  an  accurate  return 
can  not  be  made,  an  appeal  for  a further  extension  must  be  made  to  the 
Commissioner  with  a full  recital  of  the  causes  for  the  delay.  The  Commis- 
sioner will  not  grant  an  additional  extension  without  a clear  showing  that 
a complete  return  can  not  be  made  at  the  end  of  the  30  day  period.  The 
Commissioner  will  grant  no  such  extension  beyond  the  original  due  date  of 
the  third  installment  of  the  tax.  Either  a complete  or  a tentative  return,  as 
complete  as  possible  and  giving  a ground  for  assessment  of  the  tax,  must  be 
submitted  on  or  before  the  due  date  as  extended,  and  the  tax  shown  to  be 
due  must  be  paid  with  the  submission  of  the  return.  If  a complete  return 
can  not  be  made  at  that  time,  the  facts  must  be  submitted  to  the  Commis- 
sioner for  such  further  action  as  he  deems  warranted.  In  exceptional  cir- 
cumstances the  taxpayer  may  apply  originally  to  the  Commissioner  for  an 
extension  of  time.  (Art.  444,  Reg.  45,  Rev.,  April  17,  1919.) 

1852  Extension  of  Time  in  the  Case  of  Persons  Abroad  and  the  Pay- 
ment of  the  Tax  in  Such  Cases. — In  view  of  the  disturbed  condi- 
tions abroad  and  the  consequent  interference  with  the  usual  channels  of 
communication,  an  extension  of  time  for  filing  returns  of  income  for  1918 
and  subsequent  years  and  for  paying  the  tax  is  hereby  granted  in  the  case 
of  nonresident  alien  individuals  and  nonresident  foreign  corporations,  or 
their  proper  representatives  in  the  United  States,  and  of  American  citizens 
residing  or  traveling  abroad,  including  persons  in  military  or  naval  service 
on  duty  outside  the  United  States,  for  such  period  as  may  be  necessary,  not 
exceeding  ninety  days  after  proclamation  by  the  President  of  the  end  of  the 
war  with  Germany.  The  installments  of  tax  which  are  actually  due  must 
be  paid  at  the  time  of  filing  the  return  and  the  other  installments  shall  be 
paid  as  they  fall  due.  In  all  such  cases  an  affidavit  must  be  attached  to  the 
return,  stating  the  causes  of  the  delay  in  filing  it,  in  order  that  the  Com- 
missioner may  determine  that  the  failure  to  file  the  return  in  time  was  due 
to  a reasonable  cause  and  not  to  wilful  neglect,  and  that  the  return  was  filed 
without  any  unnecessary  delay.  If  the  showing  justifies  the  conclusion  that 
the  failure  to  file  the  return  in  time  was  excusable,  no  penalty  will  be  im- 
posed. This  extension  is  granted  as  a matter  of  general  expediency  to  all 
persons  abroad  owing  income,  war-profits,  and  excess-profits  taxes  to  the 
Federal  Government  and  is  not  granted  upon  the  request  of  any  particular 
taxpayer.  Accordingly,  in  the  case  of  taxpayers  who  take  advantage  of  this 
general  extension  of  time  for  the  filing  of  returns  and  the  payment  of  tax 
no  interest  will  be  collected  from  such  taxpayers,  but  where  a request  is 
made  by  a taxpayer  and  an  extension  is  granted  for  other  reasons  by  the 
Commissioner  interest  will  be  collected  at  the  rate  of  one-half  of  one  per 
cent  per  month  from  the  time  the  tax  would  have  been  due  if  no  exten- 
tion  had  been  granted.  (Art.  445,  Reg.  45,  Rev.,  as  amended  by  T.  D. 
2844,  May  17,  1919.) 

1853  Extension  of  Time  for  Filing  Returns  by  Corporations  Whose 
Business  is  Transacted  and  Whose  Books  Are  Kept  Abroad. — 

Replying  your  telegram  April  14,  advise  that  Article  443  [now  Art. 
445],  Regulations  45,  relative  extensions,  applicable  in  case  of  domes- 
tic corporation  whose  records  kept  and  business  transacted  abroad.  (Tele- 
gram to  H.  C.  Hopson,  New  York,  N.  Y.,  signed  by  Acting  Commissioner 
J.  H.  Callan,  and  dated  April  19,  1919.) 

INC.  333 


TAX 


RETURNS  WHEN  ACCOUNTING  PERIOD  CHANGED. 

1854  Extension  of  Time  in  the  Case  of  Enemies. — An  extension  of  time 
is  hereby  granted  for  such  period  as  may  be  necessary,  not  exceeding 
90  days  after  proclamation  by  the  President  of  the  end  of  the  war  with 
Germany,  for  filing  returns  of  income  for  1918  and  subsequent  years  and 
for  paying  the  tax  by  or  for  nonresident  enemies  or  allies  of  enemies,  as 
defined  by  section  2 of  the  Trading  with  the  Enemy  Act  of  October  6,  1917, 
not  holding  licenses  granted  under  the  provisions  of  that  act.  The  whole 
tax  shown  to  be  due  must  be  paid  at  the  time  of  filing  the  return.  This  ex- 
tension, however,  does  not  authorize  any  delay  in  filing  returns  of  informa- 
tion. This  extension  is  also  subject  to  the  condition  that  all  persons  who 
on  October  6,  1917,  had  or  since  have  had  or  may  hereafter  have  control 
of  any  money  or  other  property  for  any  such  enemy  or  ally  of  enemy,  or  who 
on  October  6,  1917,  were  or  since  have  been  or  may  hereafter  be  indebted 
to  any  such  enemy  or  ally  of  enemy,  shall  hold  and  deliver  all  said  money 
and  property  in  all  respects  subject  to  the  Trading  with  the  Enemy  Act 
and  to  the  orders  of  the  President  and  of  the  alien  property  custodian 
thereunder,  and  shall  in  due  course  file  returns  of  income  in  respect  of  all 
such  money  and  property  for  such  period  as  may  elapse  or  have  elapsed 
prior  to  the  actual  delivery  of  such  money  and  property  to  the  alien  property 
custodian.  As  to  withholding  at  the  source,  see  article  375  [P699].  (Art. 
446,  Reg.  45,  Rev.,  April  17,  1919.) 


1855  Law  lj247.  Returns  When  Accounting  Period  is  Changed,  Fiscal  to 

Calendar  Year  Basis. — “Sec.  226.  That  if  a taxpayer, 
with  the  approval  of  the  Commissioner,  changes  the  basis  of  computing  net 
income  from  fiscal  year  to  calendar  year  a separate  return  shall  be  made  for 
the  period  between  the  close  of  the  last  fiscal  year  for  which  return  was 
made  and  the  following  December  thirty-first.” 

1856  Law  ^248.  Calendar  to  Fiscal  Year  Basis. — “If  the  change  is  from 

calendar  year  to  fiscal  year,  a separate  return  shall  be 
made  for  the  period  between  the  close  of  the  last  calendar  year  for  which 
return  was  made  and  the  date  designated  as  the  close  of  the  fiscal  year.” 

1857  Law|[249.  One  Fiscal  Year  to  Another  Fiscal  Year  Basis. — “If 

the  change  is  from  one  fiscal  year  to  another  fiscal  year 
a separate  return  shall  be  made  for  the  period  between  the  close  of  the 
former  fiscal  year  and  the  date  designated  as  the  close  of  the  new  fiscal 
year.” 

1858  Law  ][250.  First  Return  When  on  Fiscal  year  Basis. — “If  a tax- 

payer making  his  first  return  for  income  tax  keeps  his 
accounts  on  the  basis  of  a fiscal  year  he  shall  make  a separate  return  for 
the  period  between  the  beginning  of  the  calendar  year  in  which  such  fiscal 
year  ends  and  the  end  of  such  fiscal  year.” 

1859  Law  11251.  Computation  of  Income  and  Tax  When  Accounting 

Period  is  Changed. — “In  all  of  the  above  cases  the 
net  income  shall  be  computed  on  the  basis  of  such  period  for  which  separate 
return  is  made,  and  the  tax  shall  be  paid  thereon  at  the  rate  for  the  calendar 
year  in  which  such  period  is  included ;” 

1860  Lawlf252.  Apportioning  the  Specific  Personal  Exemption  When 

Accounting  Period  is  Changed. — “and  the  credits  pro- 
vided in  subdivisions  (c)  [lfl518]  and  (d)  [1[1524]  of  section  216  shall  be 

INC.  334  TAX 


PENALTIES— RETURNS. 


reduced  respectively  to  amounts  which  bear  the  same  ratio  to  the  full 
credits  provided  in  such  subdivisions  as  i^he  number  of  months  in  such 
period  bears  to  twelve  months.” 

isfii  Law  348.  Apportioning  the  Specific  Credit  of  $2,000  in  the  Case 
of  Corporations  When  Accounting  Period  is  Changed. 
— “When  return  [in  the  case  of  corporations]  is  made  under  section  226 
[P855]  the  credit  provided  in  subdivision  (c)  [^1531]  of  section  236  shall 
be  reduced  to  an  amount  w’hich  bears  the  same  ratio  to  the  full  credit  therein 
provided  as  the  number  of  months  in  the  period  for  which  such  return  is 
made  bears  to  twelve  months.” 

1862  Returns  When  Accounting  Period  Changed. — No  return  can  be 
made  for  a period  of  more  than  12  months.  A separate  return  for  a 

fractional  part  of  a year  is,  therefore,  required  wherever  there  is  a 
change,  with  the  approval  of  the  Commissioner,  in  the  basis  of  com- 
puting net  income  from  one  taxable  year  to  another  taxable  year  or  wher- 
ever a taxpayer  making  his  first  return  of  income  does  so  on  the  basis  of 
a fiscal  year.  The  periods  to  be  covered  by  such  separate  returns  in  the 
several  cases  are  stated  in  the  statute.  The  requirements  with  respect  to 
the  filing  of  a separate  return  and  the  payment  of  tax  for  a part  of  a year  are 
the  same  as  for  the  filing  of  a return  and  the  payment  of  tax  for  a full 
taxable  year  closing  at  the  same  time.  See  sections  227  and  250  of  the 
statute  and  articles  441-448  [for  returns  for  fidl  taxable  year,  beginning  at 
P814]  and  1001  [for  payment  of  tax,  p007].  The  tax  on  net  income  com- 
puted on  the  basis  of  the  period  for  which  a separate  return  is  made  shall 
be  paid  thereon  at  the  rate  for  the  calendar  year  in  which  such  period  is 
included,  and  the  credits  for  personal  exemption  and  dependents  shall  be 
such  proportion  of  the  full  credits  as  the  numTer  of  months  in  such  period 
bears  to  12  months.  See  section  216  and  article  305  [for  date  determining 
personal  exemption,  ^1526].  See  further  section  212  and  articles  25  [for 
accounting  period,  p99]  and  26  [for  change  in  accounting  period,  POI], 
and  as  to  corporations  see  sections  232  and  239  and  articles  531  [accounting 
periods,  ^772]  and  626  [for  returns  for  fractional  part  of  year,  p863]. 
(Art.  431,  Reg.  45,  Rev.,  April  17,  1919.) 

1863  Returns  for  Fractional  Part  of  Year. — In  the  case  of  a corporation 
making  its  first  return  of  income  on  the  basis  of  a fiscal  year  and  in 

the  case  of  a corporation  changing  its  accounting  period,  whether 
from  calendar  year  to  fiscal  year,  from  fiscal  year  to  calendar  year,  or  from 
one  fiscal  year  to  another  fiscal  year,  a separate  return  for  a fractional  part 
of  a year  is  required.  See  section  226  of  the  statute  and  article  431  [P862 
above].  In  such  a case  the  credit  of  $2,000  against  net  income  allowed  a 
domestic  corporation  shall  be  reduced  to  such  proportion  of  the  full  credit 
as  the  number  of  months  in  the  period  for  which  the  return  is  made  bears 
to  twelve  months.  See  sections  236  and  305  and  articls  591  [for  cred- 
its allowed,  |fl533]  and  761  [for  apportionment  of  the  $3,000  specific  ex- 
emption from  excess  profits  tax. — War  Tax  Service].  (Art.  626,  Reg.  45, 
Rev.,  April  17,  1919.) 


1864  Law1|258.  Understatement  in  Returns  and  Increases  by  the  Col- 

lector.— “Sec.  228.  That  if  the  collector  or  deputy 
collector  has  reason  to  believe  that  the  amount  of  any  income  returned  is 
understated,  he  shall  give  due  notice  to  the  taxpayer  making  the  return  to 

335  TAX 


INC. 


PENALTIES— RETURNS. 


show  cause  why  the  amount  of  the  return  should  not  be  increased,  and  upon 
proof  of  the  amount  understated,  may  increase  the  same  accordingly.” 

1865  Law]f259.  Taxpayer  May  Appeal  Collector’s  Decision,  to  the 

Commissioner. — “Such  taxpayer  may  furnish  sworn 
testimony  to  prove  any  relevant  facts  and  if  dissatisfied  with  the  decision 
of  the  collector  may  appeal  to  the  Commissioner  for  his  decision,  under  such 
rules  of  procedure  as  niay  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary.” 

1866  Understatement  of  Income. — If  a collector  suspects  that  the 
amount  of  any  income  is  understated  in  a return,  he  may  on  his  own 

initiative  take  up  the  matter  with  the  taxpayer  and  upon  becoming 
satisfied  that  the  amount  was  understated  may  increase  it  accord- 
ingly, subject  to  the  right  of  the  taxpayer  to  appeal  to  the  Commissioner. 
The  Commissioner,  however,  without  the  intervention  of  the  collector  may 
exercise  original  jurisdiction  in  cases  of  understatements  or  other  errors  in 
returns,  in  which  event  sections  250  [beginning  at  P880]  and  1305  [^[1876] 
of  the  statute  and  section  3176  [beginning  at  1|1889]  of  the  Revised  Stat- 
utes, as  amended  by  section  1317  of  the  statute,  are  applicable  instead  of 
section  228  [j|1864  above].  See  articles  1002,  [paymient  of  tax  when  no 
proper  return,  ijl888],  1005  [penalty  for  understated  return,  1[1887],  and 
1711  [Commissioner  has  benefit  of  all  existing  internal  revenue  laws  as 
aids  to  collection  of  the  tax,  p999] . Section  3172  of  the  Revised  Statutes, 
as  amended  by  section  1317  of  the  Revenue  Act  of  1918,  provides  [P867]  : 
See  also  section  3173  of  the  Revised  Statutes  as  amended  by  section 
1317  of  the  Revenue  Act  of  1918  [does  not  relate  specifically  to  income 
tax,  but  see  T[1981].  (Art.  451,  Reg.  45,  Rev.,  April  17,  1919.) 

1867  Law|f442.  Collectors  to  Inquire  After  and  Concerning  Persons 

Liable  to  Make  Income  Tax  Returns. — “Sec.  3172. 
Every  collector  shall,  from  time  to  time,  cause  his  deputies  to  proceed 
through  every  part  of  his  district  and  inquire  after  and  concernins:  all  per- 
sons therein  who  are  liable  to  pay  any  internal-revenue  tax.  and  all  persons 
owning  or  having  the  care  and  management  of  any  objects  liable  to  pav  any 
tax,  and  to  make  a list  of  such  persons  and  enumerate  said  objects.” 

1868  Income-Tax  Agents  and  Inspectors. — Revenue  agents  in  charge 
of  revenue  agents’  divisions  and  income-tax  revenue  agents  and 

inspectors  are  hereby  instructed  as  follows: 

1869  1.  Income-tax  agents  and  inspectors  appointed  under  the  provisions 
of  the  act  of  October  3,  1913,  and  paid  from  the  appropriation  for 

collecting  the  income  tax  will  be  assigned  to  duty  under  the  super- 
vision of  agents  in  charge  of  revenue  agents’  divisions. 

1870  2.  Person  appointed  either  as  income-tax  agents  or  income-tax 
inspectors,  when  the  appointment  is  sent  from  this  office,  will  be 

instructed  by  letter  to  report  to  one  of  the  division  revenue  agents 
for  duty,  and  until  otherwise  ordered  may  report  either  in  person  or  by 
letter,  and  if  by  letter  await  the  instructions  of  the  agent  m charge  of  the 
division  to  which  they  are  assigned. 

1871  3.  Officers  of  this  class  are  expected  to  perform  the  duties  of  their 
offices  where  their  services  are  required,  but  for  the  present,  and 

until  they  become  somewhat  familiar  with  the  duties  of  their  places, 
they  will  be  assigned  to  the  revenue  agent  in  charge  of  the  division  embrac- 
ing their  legal  residence. 


INC. 


336  TAX 


PENALTIES— RETURNS. 


4,  Income-tax  agents  and  inspectors  will  be  expected  to  confine 
their  operations  to  income-tax  work  so  long  as  there  is  income-tax 

work  to  be  performed,  and  division  agents  are  admonished  not  to 
employ  officers  of  this  class  for  the  general  or  ordinary  v>^ork  of  the  bureau 
except  when  their  services  are  not  required  on  income-tax  work. 

5.  The  duties  of  officers  of  this  class  are  to  ascertain  and  report 
the  names  of  persons  who  in  their  opinion  are  liable  to  the  income 

tax  and  who  have  failed  to  make  return  as  required  by  law,  to  inquire 
into  income-tax  returns  where  there  is  any  suspicion  that  the  return  made 
is  erroneous,  to  examine  the  books  and  accounts  of  persons  who  have  made 
returns,  for  the  purpose  of  ascertaining  and  reporting  as  to  whether  the  law 
has  been  complied  with,  when  so  ordered  by  the  agent  in  charge  of  the 
division  to  which  they  are  assigned;  to  inquire  into  the  manner  in  which 
income-tax  employees  are  discharging  their  official  duties  and  to  report  those 
who  have  failed  in  this  respect.  For  the  purpose  of  securing  such  informa- 
tion as  they  may  desire  they  may  visit  the  office  of  any  State,  county,  or 
municipal  officer,  and  for  the  general  purpose  of  their  employment  * may 
confer  with  any  collector  or  deputy  collector  of  internal  revenue  within  the 
territory  in  which  they  are  authorized  to  operate. 

1874  (S.  The  reports  of  these  officers  should  be  made  to  the  agent  in  charge 
^ of  the  division  to  which  they  are  assigned,  who  in  turn  will  report 

to  the  Commissioner  of  Internal  Revenue  and  the  collector  of  the  proper 
district.  ^ 

1875  7.  In  the  discharge  of  the  official  duties  officers  of  this  class,  as 
well  as  all  officers  of  the  Internal-Revenue  Bureau,  in  making’  in- 
quiries and  investigations  are  expected  to  exercise  sound  discretion,  treat 
all  persons  with  due  courtesy,  and,  while  acting  firmly  and  courageously  to 
avoid  all  contention  or  controversy  that  would  give  just  ground  for  com- 
plaint. (T.  D.  1932,  Jan.  13,  1914.) 


1876  Law|f430.  Return  May  Be  Required  of  Any  Person  Whether 
. . Liable  to  Tax  or  Not. — ''Whenever  in  the  judgment 
of  the  Commissioner  necessary  he  may  require  any  person,  by  notice  served 
upon  him  to  make  a return  or  such  statement  as  he  deems  sufficient  to 
show  whether  or  not  such  person  is  liable  to  tax.” 


^877  Law|[431.  Examination  of  Persons,  Books  and  Papers.— "The 
Commissioner,  for  the  purpose  of  ascertaining  the  cor- 
rectness of  any  return  or  for  the  purpose  of  making  a return  where  none 
has  been  made,  IS  hereby  authorized,  by  any  revenue  agent  or  inspector 
designated  by  him  for  that  purpose,  to  examine  any  books,  papers  records 
or  memoranda  bearing  upon  the  matters  required  to  be  included  in  the  re- 
turn, and  may  require  the  attendance  of  the  person  rendering  the  return  or 
of  any  officer  or  employee  of  such  person,  or  the  attendance  of  any  other 
person  having  knowledge  in  the  premises,  and  may  take  his  testimony  wTth 
reference  to  the  matter  required  by  law  to  be  included  in  such  return  with 
power  to  administer  oaths  such  person  or  persons.” 


i«78  Law1T454.  Jurisdiction  of  District  Courts  in  Connection  with  At- 
tendance,  Testimony  or  Production  of  Books.— “Sec 
1.518.  1 hat  if  any  person  is  summoned  under  this  Act  to  appear,  to  testify’ 
or  to  produce  books,  papers  or  other  data,  the  district  court  of  the  United 
States  for  the  district  in  which  such  person  resides  shall  have  iurisdiction 
hv  appropriate  process  to  compel  such  attendance,  testimony,  or  production 
of  books,  papers,  or  other  data.”  ^ 


INC.  337 


TAX 


PENALTIES— RETURNS. 


1879  Law  ^455.  ‘‘The  district  courts  of  the  United  States  at  the  in- 

stance of  the  United  States  are  hereby  invested  with  such 
jurisdiction  to  make  and  issue,  both  in  actions  at  law  and  suits  in  equity, 
writs  and  orders  of  injunction  and  of  ne  exeat  republica  orders  appointing 
receivers,  and  such  other  orders  and  process,  and  to  render  such  judgments 
and  decrees,  granting  in  proper  cases  both  legal  and  equitable  relief  to 
gether,  as  may  be  necessary  or  appropriate  for  the  enforcment  of  *e  Pro- 
visions of  tliis  Act.  The  remedies  hereby  provided  are  in  addition  to  and 
not  exclusive  of  any  and  all  other  remedies  of  _ the  United  States  in  such 
courts  or  otherwise  to  enforce  such  provisions.” 

1880  Law  11371.  Recomputation  of  Installments  After  an  Examination 

of  the  Return  by  the  Commissioner. — (b)  As  soon 
as  practicable  after  the  return  is  filed,  the  Commissioner  shall  examine  it. 
If  k then  appears  that  the  correct  amount  of  the  tax  is  greater  or  less  than 
that  shown  in  the  return,  the  installments  shall  be  recomputed. 

1881  Law  11372.  Crediting  or  Refund  of  Excess  Payment.—  the 

amount  already  paid  exceeds  that  which  should  have  been 
paid  on  the  basis  of  the  installments  as  recomputed,  the  excess  so  paid  shall 
be  credited  against  the  subsequent  installments;  and  if  the  amount  already 
paid  exceeds  the  correct  amount  of  the  tax,  the  excess  shall  be  credited  or 
refunded  to  the  taxpayer  in  accordance  with  the  provisions  of  section  2.S2 

[112121].” 

1882  Law  11373.  Payments  of  Amounts  Due  Because  of  Underpayments 

Originally.— “If  the  amount  already  paid  is  less  than 
that  which  should  have  been  paid,  the  difference  shall,  to  the  extent  not 
covered  by  any  credits  then  due  to  the  taxpayer  under  section  252  L112121J, 
be  paid  upon  notice  and  demand  by  the  collector. 

1883  Upon  recomputation  of  the  tax,  if  the  amount  already  paid  exceeds 
the  correct  amount  of  the  installment  or  of  the  whole  tax,  ihe  excess 

shall  be  credited  against  subsequent  installments  or  other  similar  taxes  then 
due  from  the  taxpayer  or,  if  there  is  no  such  installment  or  tax,  shall  be 
refunded  to  him;  but  if  the  amount  already  paid  is  less  than  the  correct 
amount  of  the  installment  or  tax  then  due,  the  difference  shall  be  P^'d 
notice  and  demand  with  interest.  See  252  ®nd  article  1034_1036 

r for  claims  for  credit  and  refunds  beginning  at  112123] . (Art.  lUUl,  Keg.  , 
Rev.,  April  17,  1919.) 

1884  Lawp74.  No  Penalty  for  Understatement  « Return  be  Made 

in  Good  Faith  and  if  the  Understatement  is  Due  to 
No  Fault  of  the  Taxpayer.— “In  such  case  if  the  return  is  made  in  good 
faith  and  the  understatement  of  the  amount  in  the  return  is  not  due  to  any 
fault  of  the  taxpayer,  there  shall  be  no  penalty  because  of  such  understate- 
ment.” 

1885  Law  11375.  Penalty  if  Understatement  is  Due  to  Negligence, 

Merely. — “If  the  understatement  is  due  to  negligence 
on  the  part  of  the  taxpayer,  but  without  intent  to  defraud  there  shall  be 
added  as  part  of  the  tax  5 per  centum  of  the  total  amount  of  the  deficiency 
plus  interLt  at  the  rate  of  1 per  centum  per  month  on  the  amount  of  the 
deficiency  of  each  installment  from  the  time  the  installment  was  due. 

INC.  338  TAX 


PENALTIES— RETURNS. 


1886  p76.  Penalty  if  Understatement  is  False  or  Fraudulent  With 

Intent  to  Evade  the  Tax. — ‘Tf  the  understatement  is 
false  or  fraudulent  with  intent  to  evade  the  tax,  then,  in  lieu  of  the  penalty 
provided  by  section  3176  of  the  Revised  Statutes,  as  amended,  for  false  or 
returns  willfully  made  [50  per  cent  of  the  amount  of  the  tax, 
but  m addition  to  other  penalties  provided  by  law  for  false  or 
fraudulent  returns  there  shall  be  added  as  part  of  the  tax  SO  per  centum 
of  the  amount  of  the  deficiency/' 

1887  Penalty  for  Understated  Return.-(a)  If  an  understatement  of 
the  amount  of  the  tax  in  a return  of  income  is  due  to  negligence  on 

the  part  of  the  taxpayer,  but  without  intent  to  defraud,  a penalty  of  5 ner 
cent  of  the  amount  of  the  deficiency  is  added;  but  (b)  if  the  understate- 
ment  of  the  tax  is  false  with  intent  to  evade  the  tax,  a penalty  of  50  per  cent 
o the  amount  of  the  deficiency  is  added,  (c)  In  case  a false  or  fraudulent 
return  is  wiHfully  made,  other  than  as  specified  in  (b)  above,  a penalty  of 
50  per  cent  of  the  amount  of  the  tax  is  added.  See  articles  1002 
[for  payment  of  tax  when  no  return,  f]888]  and  1003  [for  interest  on 
to  thp't  payments,  f2014].  In  general,  negligence  is  attributable 
to  the  taxpayer  if  he  computes  the  tax  in  disregard  of  the  instructions 
on  the  return  form  or  otherwise  incorrectly,  unless  he  can  show  that  his 
error  was  due  to  an  honest  misunderstanding  of  the  facts  Or  the  law 
of  which  an  average  reasonable  man  might  be  capable.  See  also  section 
253  of  the  statute  and  article  1041  [for  specific  penalty  for  failure  to 

^'^  Revt  Apriri/^lOrO^)"  (Art.  1005,  Reg. 

1888  Payment  of  Tax  When  No  Proper  Return. — Section  3176  of  the 

A . / Statutes,  as  amended  by  Section  1317  of  the  Revenue 

Act^of  1918,  provides  [[[1889  below].  (Art.  1002,  Reg.  45,  Rev.,  April  17, 

1889  Law1f443.  Penalty  for  Failure  to  Make  Return  or  for  False  or 

Fraudulent  Return.— Sec.  3176,  Revised  Statutes  “If 
any  pel  son,  corporation,  company,  or  association  fails  to  make  and  file 
a return  or  list  at  the  time  prescribed  by  law  or  by  regulation  made 

urett''r''etmro?  Hst,”"'’  otherwise,  a false  or  fraud- 

1880  Law  [[444.  “the  collector  or  deputy  collector  shall  make  the  re- 
• r ,•  , from  his  own  knowledg-e  and  from  such 

islT^LawVIs^^/®"  obtain  through  testimony  or  otherwise.” 

aw[J445.  In  any  such  case  the  Commissioner  may,  from  his 

obtain  tbrn„<rt,  knowledge  and  from  such  information  as  he  can 

btain  thioiigh  testimony  or  otherwise,  make  a return  or  amend  any 
by  a collector  or  deputy  collector.”  ^ 

Law  [[446.  “Any  return  or  list  so  made  and  subscribed  by  the 
j 1 ^o^^issioner,  or  by  a collector  or  deputy  collector  and 

for^an''4al  iurpos/s™'®''®""’’’  sufficient 

i«o»  Law [[447.  [Extension  of  time,  see  [[1847.1 

Law  [[448.  “The  Commissioner  of  Internal  Revenue  shall  de- 
„ t u-  u . termine  and  assess  all  taxes,  other  than  stamp  taxes 
section'^’^’'^^  leturns  or  lists  are  so  made  under  the  provisions^of  this 


INC. 


3a39 


TAX 


PENALTIES— RETURNS. 

1894  LawTf449.  “In  case  of  any  failure  to  make  and  file  a return  or 

list  within  the  time  prescribed  by  law,  or  prescribed 
by  the  Commissioner  of  Internal  Revenue  or  the  collector  in  pursuance 
of  law,  the  Commissioner  of  Internal  Revenue  shall  add  to  the  tax 
25  per  centum  of  its  amount,” 

1895  Law][450.  “except  that  when  a return  is  filed  after  such  time 

and  it  is  shown  that  the  failure  to  file  it  was  due  to  a 
reasonable  cause  and  not  to  willful  neglect,  no  such  addition  shall  be 

made  to  the  tax.”  . 

1896  Law^I451.  “In  case  a false  or  fraudulent  return  or  list  is  wilfully 

made,  the  Commissioner  of  Internal  Revenue  shall 
add  to  the  tax  50  per  centum  of  its  amount.”  [50%  of  the  amount  of 
the  deficiency  only,  added  in  case  of  income  and  war  excess-profits  tax 
returns,  p886.] 

1897  LawTf452.  “The  amount  so  added  to  any  tax  shall  be  collected 

at  the  same  time  and  in  the  same  manner  and  as  part 

of  the  tax” 

1898  Law  11453.  “unless  the  tax  has  been  paid  before  the  discovery 

of  the  neglect,  falsity,  or  fraud,  in  which  case  the 
amount  so  added  shall  be  collected  in  the  same  manner  as  the  tax.” 

1899  Law  11377.  Payment  of  the  Tax  in  Installments  Does  Not  Apply 

to  Tax  Due  on  Returns  Made  by  the  Collector  or  by 
the  Commissioner. — “(c)  If  the  return  is  made  pursuant  to  section  3176 
[P889]  of  the  Revised  Statutes  as  amended,  the  amount  of  tax  deter- 
mined to  be  due  under  such  return  shall  be  paid  upon  notice  and  demand 
by  the  collector.” 

1900  Accordingly,  if  a return  is  not  made  on  time  or  is  false,  and  the 
collector  or  Commissioner  makes  a return,  the  amount  of  tax 

determined  to  be  due  under  such  substitute  return  shall  be  paid  in  full 
upon  notice  and  demand  by  the  collector.  See  further  articles  443-446 
[for  extensions  of  time  for  filing  returns,  1fl849],  1004  [for  specific  pen- 
alty for  failure  to  make  return,  111901],  and  1005  [for  penalty  for  un- 
derstated return.  If 1887].  (Art.  1002,  Reg.  45,  Rev.,  April  17,  1919.) 

1901  Penalty  for  Failure  to  File  Return. — In  case  of  failure  to  make 
a return  on  time,  a penalty  of  25  per  cent  of  the  amount  of  the 

tax  is  added  to  it,  unless  the  return  is  later  filed  and  the  failure  to  file  it 
is  satisfactorily  shown  to  be  due  to  a reasonable  cause.  Two  classes  of 
delinquents  are  liable  to  the  penalty:  (a)  those  who  do  not  file  returns 
and  for  whom  returns  are  made  by  the  collector  or  Commissioner ; and 
(b)  those  who  file  tardy  returns  and  are  unable^  to  show  reasonable 
cause  for  the  delay.  Taxpayers  wishing  to  avoid  the  penalty  must 
make  an  affirmative  showing  of  the  facts  alleged  as  a reasonable 'cause 
for  failure  to  make  a return  on  time  in  the  form  of  an  affidavit  under 
oath,  which  should  be  attached  to  the  return.  If  such  an  explanation 
is  furnished  with  the  return  or  upon  the  collector’s  demand,  the  collec- 
tor, unless  otherwise  directed  by  the  Commissioner,  will  forw’ard  the 
affidavit  with  the  return,  and  if  the  Commissioner  determines  that  the 
delinquency  was  due  to  a rea.sonable  cause  the  25  per  cent  penalty  will 
not  be  assessed.  “Reasonable  cause”  is  such  a condition  of  fact  that 
had  the  taxpayer  in  default  exercised  ordinary  business  caie  and  pru- 
dence it  would  liave  been  impracticable  or  impossible  for  him  to  file  a 

340  TAX 


INC 


PENALTIES— RETURNS. 


return  in  the  prescribed  time.  See  also  section  253  of  the  statute  and 
article  1041  [for  specific  penalty  for  failure  to  make  return  1F1903.1 
(Art.  1004,  Reg.  45,  Rev.,  April  17,  1919.) 

1902  Lawj[388.  Specific  Penalties.— ^‘Sec.  253.  That  any  individual, 
corporation,  or  partnership  required  under  this  title 
to  pay  or  collect  any  tax, 
to  make  a return  or 
^ to  supply  information, 

who  fails 

to  pay  or  collect  such  tax, 

to  make  such  return,  or 

to  supply  such  information 

at  the  time  or  times  required  under  this  title, 

shall  be  liable  to  a penalty  of  not  more  than  $1,000. 

Any  individual,  corporation,  or  partnership,  or  any  officer  or 
employee  of  any  corporation  or  member  or  employee  of  a 
partnership, 

who  willfully  refuses 
to  pay  or  collect  such  tax, 
to  make  such  return,  or 
to  supply  such  information 

at  the  time  or  times  required  under  this  title,  or 

who  willfully  attempts  in  any  manner 
to  defeat  or  evade  the  tax  imposed  by  this  title, 

shall  be  guilty  of  a misdemeanor  and 

shall  be  fined  not  more  than  $10,000  or  imprisoned  for  not  more 
than  one  year,  or  both,  together  with  the  costs  of  prosecu- 
tion.” 

Specific  Penalties.— A penalty  of  not  more  than  $1,000  attaches 
for  failure  punctually  to  make  a required  return,  whether  of  in- 
come, withholding  or  information,  or  to  pay  or  collect  a required 
tax.  If  the  failure  is  willful,  however,  or  an  attempt  is  made  to 
defeat  or  evade  the  tax,  the  offender  is  liable  to  imprisonment  and  to  a 
fine  of  not  more  than  $10,000  and  costs.  See  also  the  Act  of  July  5, 
1884.  In  addition  to  these  specific  penalties  ad  valorem  penalties  are 
imposed  in  various  cases.  An  ad  valorem  penalty  is  assessed  and  col- 
lected as  a part  of  the  tax,  while  a specific  penalty  is  recoverable  only 
by  suit.  See  section  250  of  the  statute  and  articles  1004  fad  valorem 
penalty  for  failure  to  file  return.  iriOOl],  1005  [ad  valorem  penalty  for 
false  return,  |fl896],  and  1006  [ad  valorem  penalty  for  nonpayment  of 
tax,  |[2015].  (Art.  1041,  Reg.  45,  Rev.,  April  17,  1919.) 

1904  The  Specific  Penalty  Will  Not  Be  Asserted  Under  Certain  Cir- 
cumstances.—Liability  to  specific  penalty  attaches  upon  all  delin- 
quent returns  and  is  recoverable  by  suit.  By  Section  3214  R.  S.  the 
Commissioner  of  Internal  Revenue  may  or  may  not  institute  suit.  It 

INC.  341 


TAX 


PENALTIES— RETURNS. 


has  been  decided  not  to  institute  suit  nor  to  assert  specific  penalty  in 
certain  cases.  The  assertion  of  specific  penalty  does  not  depend  upon 
the  fact  of  whether  or  not  the  [25%]  addition  to  tax  has  been  assessed. 
In  some  cases  where  the  [25]%  addition  to  tax  must  be  assessed  be- 
cause the  return  was  filed  after  notice  from  the  collector,  the  specific 
penalty  will  not  be  asserted.  It  will  not  be  asserted,  regardless^  of 
whether  the  [25]%  addition  to  tax  has  been  assessed,  in  cases  falling 
under  any  of  the  following  designations: 

1905  1.  Extension  granted.  Where  a return  is  filed  within  the  thirty- 
day  period  of  extension  granted  by  the  collector^  or  within  a 

further  period  of  extension  granted  by  the  Commissioner  of  In- 
ternal Revenue,  as  provided  by  Section  14  (c)  of  the  Act  of  September 
8,  1916. 

1906  2.  Return  on  time.  Specific  penalty  will  not  be  asserted  upon 
an  amended  return  provided  the  original  return  was  filed  within 

the  prescribed  time. 

1007  3.  Mailed  in  time.  Where  an  affidavit  is  filed  satisfactorily  es- 

tablishing that  the  return  was  placed  in  the  mails  in  ample  time 
to  reach  the  Collector’s  office  in  ordinary  course  of  mails  before  the 
close  of  business  on  the  final  day  for  filing.  ^ ^ 

1908  4,  Tentative  return.  Where  an  informal  return  was  filed  within 
the  time  prescribed.  The  return  of  a parent  company  including 

therein  the  income  of  a subsidiary  company  will  be  accepted  as  ^ 
tentative  return  of  the  subsidiary  company,  if  the  fact  is  stated  that  the 
tentative  return  includes  the  income  of  the  subsidiary. 

1909  5.  Filed  in  wrong  district.  Where  the  return  was  filed  in  some 
other  collection  district  within  the  prescribed  time. 

1910  6.  Net  income  under  $3,000.  Where  it  develops  that  the  net. 
income  of  an  individual  for  1913,  1914,  1915  or  1916  was  less  than 

$3,000,  or  under  the  Act  of  October  3,  1917,  for  1917,  etc.,  less  than 
$1,000  or  $2,000. 

1011  7.  Erroneous  information.  Where  the  delinquency  is  alleged  to 

be  due  to  erroneous  or  misleading  information  given  by  officials 
or  employees  of  the  Internal  Revenue  Service  and  there  is  no  evidence 
in  conflict  therwith. 

1912  8.  Organization  incomplete.  Where  it  is  established  that  the 
organization  of  a corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company,  was  not  completed  until  after  the  ex- 
piration of  the  period  for  which  the  return  should  have  been  filed. 

1913  9,  Death.  Where  by  reason  of  the  death  of  an  individual  his 
return  for  the  year  or  portion  of  the  year  prior  to  his  death  is 

not  filed  within  the  time  prescribed.  The  death  of*  a delinquent 
abates  liability  to  specific  penalty.  An  administrator  or  executor  is 
charged  with  the  duty  of  rendering  a return  for  the  decedent,  and  if  he  is 
appointed  in  ample  time  to  make  the  return  prior  to  March  [15]  and  fails 
to  do  so,  he  should  be  charged  as  delinquent  and  the  specific  penalty 
should  be  asserted  against  him.  The  administrator  or  executor  will 
not  be  relieved  from  specific  penalty  unless  the  return  is  made  within  a 
reasonable  time  after  his  appointment. 

1914  10.  Severe  illness  or  unavoidable  absence.  Where  it  is  clearly 
established  that  the  delinquency  in  the  filing  of  a return  of  an 

individual  or  of  a corporation  within  the  time  prescribed  was  due 
to  severe  illness  of  the  individual  or  of  an  officer  of  a corporation  whose 


INC. 


342  TAX 


PENALTIES— RETURNS. 


duty  it  was  to  prepare  or  sign  the  return,  or  to  unavoidable  absence 
from  place  of  business  or  place  of  abode. 

11.  Absence  from  the  United  States.  Where  it  appears  that  the 
filing  of  a return  within  the  time  prescribed  was  rendered  impos- 
sible by  reason  of  absence  from  the  United  States.  Delinquency 
beyond  the  period  of  extension  which  may  be  granted  by  the  Commis- 
sioner of  Internal  Revenue  will  not  be  excused  under  this  heading. 

1916  12.  Military  or  naval  service  of  United  States.  Where  delin- 

quency of  an  individual  was  occasioned  by  service  in  the  military 
or  naval  forces  of  the  United  States. 

13.  Not  organized  for  profit.  Comprehends  numerous  small  cor- 
porations not  organized  primarily  for  profit,  such  as  local  tele- 
phone companies,  co-operative  purchasing  societies,  etc.,  concerning 
whose  liability  under  the  law  to  make  a return  there  may  have  been  a 
reasonable  doubt. 

1918  14.  Inactive  corporations.  Those  which  transacted  no  business 
and  had  no  income  during  the  return  year. 

1919  15.  Fiscal  year.  Corporations  which  have  established  a fiscal 
year  in  the  manner  prescribed  by  law  which  file  a return  on  or 

before  the  [15th]  day  of  the  third  month  following  the  close  of  the  fiscal 
year. 

1920  16.  Assigned.  Where  corporations  have  made  an  assignment  on 
account  of  insolvency  and  do  not  intend  again  to  engage  in 

business. 

1921  17.  Insolvent.  Where  the  assets  of  a corporation  are  insuffi- 
cient for  the  payment  of  its  debts  and  the  corporation  has  ceased 

to  do  business. 

1922  18.  Charter  forfeited.  Where,  prior  to  the  date  when  the  return 
was  due,  the  charter  of  a corporation  is  forfeited  on  account  of 

noncompliance  with  state  laws.  It  must  be  clear,  however,  that  busi- 
ness in  the  name  of  the  corporation  was  suspended  at  the  time  of  such 
forfeiture.  If  business  was  continued  under  the  same  name,  the  con- 
cern will  be  held  to  be  an  association  and  the  same  liabilities  will  attach 
as  if  the  charter  had  not  been  forfeited. 

1923  19.  Defunct.  Where  corporations  are  out  of  business,  have  no 
assets,  maintain  no  organization,  and  the  purpose  for  which  or- 
ganized has  been  abandoned. 

1924  20.  Dissolved.  Where  all  the  assets  of  a corporation  have  been 
distributed. 

1925  21.  Sale.  Where  corporations  have  disposed  of  all  their  assets 
and  business  is  not  longer  carried  on  under  their  charters. 

1926  22.  Consolidated,  merged  or  succeeded.  Where  corporations 
have  terminated  their  existence  as  represented  by  these  terms 

and  it  appears  that  no  assets  or  property  remain  in  the  name  of  the 
retiring  corporation. 

1927  23.^  No  assets.  Includes  all  corporations  having  no  assets  from 
which  to  submit  an  offer  in  compromise.  (L.  Mimeograph  Letter 

No.  1675  to  Collectors,  November  3,  1917;  continued  at  lfl937.) 


1928  Compromise  of  Tax  Cases. — The  Commissioner,  with  the  advice 
and  consent  of  the  Secretary  of  the  Treasury,  may  compromise 
any  civil  or  criminal  case  arising  under  the  internal  revenue  laws  in- 
stead of  commencing  suit  thereon,  and  with  the  advice  and  consent  of 


INC. 


343  TAX 


PENALTIES— RETURNS. 


the  Secretary  and  the  recommendation  of  the  Attorney-General  may 
compromise  any  such  case  after  suit  thereon  has  been  commenced  by 
the  United  States.  Accordingly,  the  power  to  compromise  extends  to 
(a)  both  civil  and  criminal  cases;  (b)  cases  whether  before  or  after  suit; 
and  (c)  both  taxes  and  penalties.  Refunds  can  not  be  made  of  accepted 
offers  in  compromise  in  cases  where  it  is  subsequently  ascertained  that 
no  violation  of  law  was  involved.  See  further  sections  3229  and  3469, 
and  sections  5292  and  5293  (as  amended  by  the  Act  of  February  27, 
1877),  of  the  Revised  Statutes.  (Art.  1011,  Reg.  45,  Rev.,  April  17, 
1919.) 

1929  Sir:  I have  had  under  careful  consideration  for  some  time  a re- 
quest from  your  predecessor  for  an  opinion  as  to  the  power  of 
the  Commissioner  of  Internal  Revenue,  with  the  advice  and  consent  of 
the  Secretary  of  the  Treasury,  to  compromise  claims  for  certain  penal- 
ties arising  under  the  income-tax  laws.  The  specific  claims  mentioned 
circ  i 

(1)  Claims  for  amounts  50  per  cent  in  addition  to  amounts  of  income 
and  excess-profit  taxes  assessed  under  authority  of  section  3176  of  Re- 
vised Statutes,  as  amended  by  section  16  of  the  act  of  September  8, 
1916  and  of  section  212  of  the  act  of  October  3,  1917,  in  cases  of  failure 
to  make  and  file  returns  or  lists  within  the  time  prescribed  by  law  or  by 

the  collector;  . . r- 

(2)  Claims  for  amounts  100  per  cent  in  addition  to  amounts  of  in- 
come and  excess-profit  taxes  assessed  under  authority  of  said  sections 
in  cases  of  false  or  fraudulent  returns  or  lists  wilfully  made ; and 

(3)  Claims  for  sums  of  5 per  cent  on  amounts  of  income  and  excess- 
profit  taxes  not  paid  when  due  and  interest  at  the  rate  of  1 per  cent  per 
month  on  said  taxes,  the  collection  of  which  is  authorized  by  sections  9 
(a)  and  14  (a)  of  the  act  of  September  8,  1916,  and  section  212  of  the 
act  of  October  3,  1917. 

1930  The  exact  question  submitted  is  whether,  under  the  authority  of 
section  3229  of  Revised  Statutes,  the  Commissioner  of  Internal 

Revenue  is  authorized  to  compromise  these  penalties  in  cases  in  which 
there  is  no  doubt  as  to  the  legal  liability  of  the  taxpayer  or  as  to  the 
collectibility  of  the  claim,  but  in  which,  in  the  opinion  of  the  Secretary 
of  the  Treasury  and  that  of  the  Commissioner,  considerations  of  justice, 
equity,  and  public  policy  warrant  a reduction  of  the  amounts  to  be  col- 
Rcled’on  the  ground  that  the  statutory  amounts  are  in  the  nature  of 
penalties  for  delinquencies,  and  that,  though  such  amounts  are  tech- 
nically due  and  are  collectible,  the  collection  of  them  inflicts  punish- 
ment which  is  unduly  severe  in  view  of  the  culpability. 

1931  Section  3229  of  the  Revised  Statutes  is  as  follows : 

“The  Commissioner  of  Internal  Revenue,  with  the  advice  and 
consent  of  the  Secretary  of  the  Treasury,  may  compromise  any  civil 
or  criminal  case  arising  under  the  internahrevenue  laws  instead  of  com- 
mencing suit  thereon;  and,  with  the  advice  and  consent  of  the  said 
Secretary  and  the  recommendation  of  the  Attorney-General,  he  may 
compromise  any  such  case  after  a suit  thereon  has  been  commenced. 
Whenever  a compromise  is  made  in  any  case  there  shall  be  placed 
on  file  in  the  office  of  the  commissioner  the  opinion  of  the  Solicitor  of 
Internal  Revenue,  or  of  the  officer  acting  as  such,  with  his  reasons 
therefor,  with  a statement  of  the  amount  of  tax  assessed,  the  amount  of 
additional  tax  or  penalty  imposed  by  law  in  consequence  of  the  neglect 

344  TAX 


INC. 


PENALTIES—RETURNS. 


or  delinquency  of  the  person  against  whom  the  tax  is  assessed,  and  the 
amount  actually  paid  in  accordance  with  the  terms  of  the  compromise/’ 

1932  It  will  be  observed  that  the  power  to  compromise  is  given  in  very 
broad  and  general  terms.  Congress  has  not  seen  fit  to  specify  the 

considerations  which  shall  control  the  commissioner  in  determining 
whether  a case  ought  or  ought  not  to  be  compromised  instead  of  com- 
mencing suit,  nor  to  place  any  limitation  upon  this  exercise  of  power, 
except  that  his  action  shall  be  with  the  advice  and  consent  of  the  Secre- 
tary of  the  Treasury.  After  suit  is  commenced  the  power  is  to  be 
exercised  only  with  the  advice  and  consent  of  the  Secretary  of  the 
Treasury  and  the  recommendations  of  the  Attorney  General. 

1933  The  act  of  Congress  which,  somewhat  condensed  and  shortened, 
was  carried  into  the  Revised  Statutes  as  section  3229  was  section 

102  of  the  act  of  June  20,  1868  (15  Stat.  125,  166).  That  act  conferred 
the  power  to  compromise  in  all  cases  arising  under  the  internal-revenue 
laws  where,  instead  of  commencing  or  proceeding  with  a suit,  ‘fit  may 
appear  to  the  Commissioner  of  Internal  Revenue  to  be  for  the  interest 
of  the  United  States  to  compromise  the  same.”  The  language  just 
quoted  was  omitted  from  section  3229.  It  will  be  seen,  therefore,  that 
the  original  act,  authorized  a compromise  whenever,  in  the  opinion  of 
the  Commissioner  of  Internal  Revenue  it  was  “for  the  interest  of  the 
United  States.”  These  words  were  by  way  of  limitation  upon  his 
power.  Their  omission  from  section  3229,  therefore,  can  not  be  said  to 
render  the  power  more  restricted  than  it  was  under  the  original  act. 
Certainly,  then,  section  3229  can  not  be  given  a narrower  meaning  than 
to  say  that  the  power  is  conferred  to  make  any  compromise  which  in 
the  opinion  of  the  commissioner,  acting  with  the  advice  and  consent 
of  the  Secretary  of  the  Treasury,  and,  in  the  event  suit  has  been  com- 
menced, upon  the  recommendation  of  the  Attorney  General,  will  be  for 
the  interest  of  the  United  States.  The  fact  that  the  act  applies  to  both 
civil  and  criminal  cases,  and  the  further  fact  that  when  a compromise 
is  made  there  shall  be  placed  on  file  the  opinion  of  the  Solicitor  of 
Internal  Revenue  stating  the  reasons  for  the  compromise,  the  amount 
of  tax  assessed,  the  amount  of  additional  tax  or  penalty  imposed,  and 
the  amount  actually  paid,  make  it  plain  that  whatever  power  to  com- 
promise is  given  extends  to  penalties,  such  as  those  mentioned  in  the 
request  for  this  opinion. 

1934  Opinions  of  my  predecessors  touching  the  nature  and  extent  of 
the  power  of  the  Commissioner  to  make  compromises  are  more  or 

less  conflicting  and  it  will  not,  I think,  serve  any  useful  purpose  to 
review  and  attempt  to  reconcile  them.  I have  given  them,  as  well  as  all 
decisions  of  the  courts  bearing  in  any  way  on  the  question,  careful  con- 
sideration and  will  content  myself  with  stating  my  conclusions. 

1935  Your  request  does  not  relate  to  compromises  of  taxes,  but  only 
to  penalties  and  interest  imposed  on  account  of  delinquencies  of 

the  taxpayer.  I shall  accordingly  confine  my  opinion  to  penalties  and 
interest. 

1936  It  seems  clear  that  Congress  has  left  it  to  the  judgment  and  dis- 
cretion of  the  Commissioner  to  determine  when  it  is  to  the  in- 
terest of  the  United  States  to  compromise  such  claims  instead  of  com- 
mencing or  prosecuting  suits  therefor,  and  that  the  only  limitation 
placed  upon  the  exercise  of  this  judgment  and  discretion  is  that  his  ac- 
tion shall  be  with  the  advice  and  consent  of  the  cabinet  officers  men- 
tioned in  the  statute.  And  I am  of  the  opinion  that,  subject  to  this 

INC.  345 


TAX 


PENALTIES— RETURNS. 


limitation,  he  has  the  power  to  compromise  the  penalties  and  interest 
mentioned  in  the  request  for  this  opinion  whenever,  in  his  judgment, 
such  compromises  are  for  the  interest  of  the  United  States.  Congress 
has  not  said  that  such  compromises  may  be  made  only  when'  in  the 
judgment  of  the  commissioner  more  money  can  thereby  be  realized  than 
can  be  realized  by  commencing  and  prosecuting  a suit.  It  can  not  be 
said,  therefore,  as  a matter  of  law,  that  the  power  to  compromise  is 
limited  to  cases  in  which  either  the  liability  for  the  penalty  or  the  col- 
lectibility of  the  claim  is  doubtful.  In  these  matters  I think  the  judg- 
ment of  the  commissioner  as  to  what  is  for  the  interest  of  the  United 
States  is  made  conclusive.  What  considerations  shall  control  are  fixed 
by  no  rule  of  law,  but  depend  upon  his  own  discretion  and  sound  judg- 
ment exercised  in  good  faith.  It  may  be  that  with  respect  to  the  amount 
of  tax  to  be  collected,  or  the  amount  of  penalty  resulting  from  willful 
fraud,  the  commissioner  may  find  a case  in  which  he  will  feel  justified 
in  accepting  less  than  can  be  legally  collected,  whereas  in  cases  of  pen- 
alties resulting  from  accident,  negligence,  or  technical  omission,  he  may 
honestly  believe  that  the  interests  of  the  United  States  will  be  best 
served  by  accepting  less  than  the  full  penalty.  In  such  cases,  I am  of 
opinion  that  he  has  the  right  to  compromise  upon  any  ground  which,  in 
his  judgment,  renders  the  compromise  for  the  interest  of  the  United 
States.  (Opinion  by  Attorney-General  A.  Mitchell  Palmer,  to  the  Secre- 
tary of  the  Treasury  and  dated  June  3,  1919.) 

1937  In  cases  not  included  in  any  of  the  above  classes  [P905  to  p927], 
the  specific  penalty  will  be  asserted,  and  if  the  delinquency  was 

not  due  to  an  intention  to  delay  the  administration  of  the  law  the  mini- 
mum amount  which  will  be  accepted  in  compromise  is  as  follows: 

$5.00  in  the  case  of  an  individual  or  withholding  agent. 

$10.00  in  the  case  of  a corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company. 

1938  These  amounts  will  be  considered  insufficient  and  will  not  be 
' accepted  in  any  case  where  it  appears  that  a taxpayer  was  in- 
tentionally violating  the  provisions  of  law,  and  purposely  delaying 
the  filing  of  the  returns.  In  all  cases  where  revenue  agents  or  other 
examining  officers  discover  that  any  individual  has  an  appreciable  tax- 
able income  and  the  examining  officer  is  of  the  opinion  that  the  indi- 
vidual knew  or  should  have  known  that  he  was  required  to  make  a 
return,  he  should  make  a recommendation  as  to  the  minimum  amount 
which  should  be  accepted  as  an  offer  in  compromise,  and  where  the 
intent  to  evade  tax  is  plain  he  should  recommend  prosecution.  Special 
attention  should  be  called  to  cases  of  individuals  having  a taxable  in- 
come who  have  failed  to  file  returns  for  a number  of  years. 

1939  In  the  case  of  delinquent  returns  filed  pursuant  to  the  provisions 
of  Section  2 of  the  Act  of  October  3,  1913,  specific  penalty  will 

not  be  asserted  if  the  case  comes  under  any  of  the  above  designations 
[P905  to  111927],  nor  against  taxpayers  or  withholding  agents  specific- 
ally relieved  from  specific  penalty  by  the  proviso  contained  in  Section 
18  of  the  Income  Tax  Law  of  September  8,  1916,  as  amended  by  Section 
1209  of  the  Act  of  October  3,  1917  [P720],  which  reads  as  follows:  . 
“PROVIDED,  That  where  any  tax  heretofore  due  and  payable  has 
been  duly  paid  by  the  taxpayer,  it  shall  not  be  re-collected  from  any 
withholding  agent  required  to  retain  it  at  its  source,  nor  shall  any 
penalty  be  imposed  or  collected  in  such  cases  from  the  taxpayer, 

346  TAX 


INC. 


PENALTIES— RETURNS. 


• or  such  withholding  agent  whose  duty  it  was  to  retain  it,  for  failure 
to  return  or  pay  the  same  unless  such  failure  was  fraudulent  and 
for  the  purpose  of  evading  payment.” 

1940  Furthermore,  specific  penalty  will  not  be  asserted  against  tax- 
payers delinquent  in  filing  returns  for  1913,  nor  against  cor- 
porations, joint-stock  companies  or  associations  or  insurance  companies 
delinquent  in  filing  returns  for  prior  years,  unless  it  appears  beyond  a 
reasonable  doubt  that  there  was  an  intent  on  the  part  of  the  delinquent 
to  violate  the  provisions  of  law.  The  specific  penalty  cannot  in  any 
case  be  asserted  after  five  years  from  date  of  delinquency,  and  no  rec- 
ommendation with  respect  to  penalty  in  such  cases  need  be  made.  The 
minimum  amounts  mentioned  above  will  be  accepted  in  compromise 
of  liability  to  specific  penalty  for  each  of  the  years  1914  and  1915,  as 
well  as  for  1916,  except  where  there  was  an  apparent  intent  to  violate 
the  taxing  act,  in  which  case  the  offer  must  be  increased  in  a substan- 
tial amount. 

1941  In  the  case  of  every  delinquent  return,  the  collector  should  secure 
a statement  [Read  at  p948]  from  the  delinquent  of  the  cause  of 

delinquency,  which  should  be  attached  to  and  made  a part  of  the  return, 
together  with  delinquent  card.  If  the  delinquent  is  not  relieved  from 
specific  penalty  by  clearly  falling  within  one  of  the  classes  enumerated 
in  this  Mimeograph  Letter  [p905  to  p927],  or  if  he  fails,  upon  request, 
to  file  a statement  of  the  reason  for  delinquency,  the  specific  penalty 
should  be  promptly  asserted  and  the  delinquent  advised  of  his  privi- 
lege to  submit  an  offer  in  compromise.  If  the  collector  is  of  the  opinion 
that  the  delinquent  should  be  relieved  from  the  specific  penalty  under 
the  provisions  of  this  Mimeograph  Letter,  he  should  note  on  the  de- 
linquent card  “Relieved  under  Mim.  No.  1675.” 

1942  In  all  cases  of  delinquency  discovered  by  revenue  agents  and 
other  examining  officers,  if  the  delinquency  falls  within  a period 

for  which  the  penalty  can  be  asserted,  such  officers  should  secure  from 
the  delinquent  a sworn  statement  setting  forth  the  reason  for  delin- 
quency. This  statement  should  be  attached  to  the  return  forwarded 
to  the  collector.  The  examining  officer  should  state  in  his  report  the 
alleged  reason  for  delinquency  and  if  he  is  of  the  opinion  that  the 
minimum  amount  should  not  be  accepted  as  an  offer  in  compromise  of 
liability  to  specific  penalty,  he  should  make  a recommendation  as  to 
the  minimum  amount  which  should  be  accepted.  Consideration  will 
be  given  such  recommendation  by  this  office  in  accepting  an  offer  in 
compromise.  In  forwarding  offers  in  compromise  on  Form  656  col- 
lectors should  call  attention  to  revenue  agent’s  reports,  if  any,  in  which 
the  non-acceptance  of  the  minimum  amount  as  an  offer  in  compromise 
is  recommended.  The  statement  or  affidavit  attached  to  the  return  set- 
ting forth  the  reason  for  delinquency  is  not  in  lieu  of  the  affidavit 
required  to  be  attached  to  Form  656. 

1943  Mimeograph  Letters  Nos.  1347,  1390,  1465,  1477,  1530  and  CT- 
Mim.  No.  54  and  CT-Mim.  No.  56  are  hereby  superseded.  (L. 

Mimeograph  Letter  to  Collectors  No.  1675,  November  3,  1917.) 

1944  Offers  in  Compromise  by  the  Taxpayer. — [A  letter,  similar  in 
content  to  the  following,  suitably  modified  if  the  delinquent  was 

a corporation,  has  been  used  in  the  past  by  Collectors  in  charging  tax- 
payers with  delinquency  and  in  notifying  them  of  their  privilege  to 
submit  offers  in  compromise.] 


INC.  347  TAX 


PENALTIES— RETURNS. 


1945  Sir*  Your  return  of  net  income  was  not  received  in  this  office 

until thereby  involving  you  in  liability  to  a specific 

penalty  of  not  * * * more  than  $1,000  under  the  Act  of , 

in  addition  to  the  [25]%  additional  tax  which  will  be  assessed  and 

collected.  , , 

1946  The  provisions  of  the  Act  are  mandatory,  and  no  excuse  or  ex- 
planation can  be  accepted,  except  a showing  that  a complete  or 

tentative  return  was  in  fact  mailed  in  time  to  have  reached  this  office, 
or  a Deputy  Collector,  in  the  ordinary  course  of  business  on  or  before 

1947’  However,  before  instituting  proceedings  in  Court  for  the  imposi- 
tion of  the  specific  penalty,  I am  directed  to  call  your  attention  to 
the  provisions  of  Section  3229  [P931],  Revised  Statutes,  which  reads  in 

part  as  follows : . 1 , j • j 

“The  Commissioner  of  Internal  Revenue  with  the  advice  and  con- 
sent of  the  Secretary  of  the  Treasury,  may  compromise  any  civil 
or  criminal  case  arising  under  the  internal  revenue  laws  instead 

of  commencing  suit  thereon,’’  1 .1  • 

1948  Should  you  desire  to  take  advantage  of  your  privilege  under  this 
section  and  to  submit  an  offer  in  compromise,  the  amount  offered 

should  be  forwarded  promptly  to  this  office  in  the  form  of  cash,  postal 
money  order,  or  certified  check  which  can  be  cashed  without  cost,  pay- 
able to  my  order,  accompanied  by  an  affidavit  substantially  in  the  fol- 
lowing form: 

“To  the  Commissioner  of  Internal  Revenue : 

“I  hereby  solemnly  swear  (or  affirm)  that  my  delinquency  in 

filing  return  of  net  income  as  required  by  the  Act  of ; — , was 

not  due  to  any  intent  to  violate  the  law  or  evade  taxation,  but 
was  due  to  (here  insert,  concisely  and  clearly,  the  reason  for 
dds-V  ) 

“Desiring  to  compromise  my  liability  I hereby  tender  the  sum 
of  $1 , which  I request  be  accepted  in  compromise  of  the 

specific  penalty  only.”  1,  ^ .u 

1949  To  be  signed  and  sworn  to  before  a deputy  collector,  notary,  or 

other  officer  authorized  to  administer  oaths.  . , i, 

1950  This  affidavit  will  then  be  forwarded  by  me,  together  with  the 
sum  offered,  to  the  Commissioner  for  consideration,  and  you 

will  be  notified  by  him  of  his  acceptance  or  rejection  of  your  proposal. 

In  the  latter  event,  you  may  increase  your  offer,  if  you  so  desire. 

Hs  * * * * 

Respectfully, 


Collector  of  Internal  Revenue. 


1951  Compromises  for  the  Taxable  Year  1918  Under  the  Revenue  Act 
of  1918.— In  view  of  the  delay  in  the  final  passage  of  the  Rev- 
enue Act  of  1918  and  the  short  period  allowed  for  filing  returns  there- 
under it  has  been  decided  that  if  a return  is  filed  on  or  before  May  1, 
1919  by  an  individual,  partnership  or  corporation  under  the  provisions 
of  such  Act,  the  specific  penalty  of  $1,000  will  not  be  asserted 
1953  Where  returns  of  income  are  filed  after  the  date  mentioned  above 
or  where  returns  of  information  at  the  souice  are  filed  after  IMay 
15  1919,  the  specific  penalty  will  be  asserted  unless  it  can  be  shown 
that  the  delay  was  due  to  a reasonable  cause,  and  offers  in  con- 

INC.  348  TAX 


INSPECTION  OF  RETURNS. 


promise  will  be  accepted  in  the  minimum  amounts  stated  below: 


Delinquent  returns  of  income  by  individuals $5.00 

Delinquent  returns  of  income  by  corporations 10.00 

Delinquent  returns  of  information 5.00 


1953  Of  course  it  must  be  borne  in  mind  that  the  above  does  not  relate 
to  cases  where  there  is  evidence  of  wilful  intent  or  hostility  to- 
ward the  administration  of  the  law.  Such  cases  will  be  taken  care  of 
in  the  same  manner  as  heretofore, 

1954  Cards,  Form  7245A,  prepared  in  the  manner  indicated  in  Mim. 
1480,  dated  February  26,  1917,  should  accompany  every  original 

delinquent  return  filed  after  the  dates  mentioned  above  as  the  last  dates 
for  filing  returns  before  the  specific  penalty  will  be  asserted.  (IT-Mim. 
2077,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  March  13, 
1919.) 


1955  LawpOS.  Returns  to  be  Public  Records. — “Sec.  257.  That  re- 

turns upon  which  the  tax  has  been  determined  by  the 
Commissioner  shall  constitute  public  records 

1956  LawT[404.  Returns  to  be  Open  to  Inspection  Only  on  Order  by 

the  President. — “but  they  shall  be  open  to  inspection 
only  upon  order  of  the  President  and  under  rules  and  regulations  pre- 
scribed by  the  Secretary  and  approved  by  the  President 

1957  Inspection  of  Returns. — The  returns  upon  which  the  tax  has  been 
determined  by  the  Commissioner,  although  public  records,  are 

open  to  inspection  only  to  the  extent  authorized  by  the  President,  except 
as  otherwise  expressly  provided.  Pursuant  to  a similar  provision  of  the 
Act  of  October  3,  1913,  the  President  by  an  executive  order  dated  July 
28,  1914,  directed  that  returns  of  income  should  be  subject  to  inspection 
in  accordance  with  the  following  regulations  prescribed  by  the  Secretary 
of  the  Treasury: 

1958  1.  The  return  of  every  individual,  and  of  every  corporation,  joint  stock 
company  or  association,  and  every  insurance  company,  whether  foreign 
or  domestic,  shall  be  open  to  the  inspection  of  the  proper  officers  and 

employees  of  the  Treasury  Department.  Returns  of  individuals  shall  not  be 
subject  to  inspection  by  any  one  except  the  proper  officers  and  employees  of  the 
Treasury  Department. 

1959  2.  Where  access  to  any  return  of  any  corporation  is  desired  by  an  officer 
or  employee  of  any  other  department  of  the  Government,  an  application 
for  permission  to  inspect  such  return,  setting  out  the  reasons  therefor, 

shall  be  made  in  writing,  signed  by  the  head  of  the  executive  department  or 
other  Government  establishment  in  which  such  officer  or  employee  is  employed, 
and  transmitted  to  the  Secretary  of  the  Treasury.  If  the  return  of  a corporation 
is  desired  to  be  used  in  any  legal  proceedings  other  than  those  to  which  the 
United  States  is  a party,  or  to  be  used  in  any  manner  by  which  any  information 
contained  in  the  return  could  be  made  public,  the  application  for  permission  to 
inspect  such  return  or  to  furnish  a certified  copy  thereof  shall  be  referred  to 
the  Attorney  General,  and  if  recommended  by  him  transmitted  to  the  Secretary 
of  the  Treasury. 

1960  3.  All  returns,  whether  of  persons  or  of  corporations,  joint  stock  com- 
panies or  associations,  or  insurance  companies,  may  be  furnished,  upon 
approval  of  the  Secretary  of  the  Treasury,  for  use,  either  in  the  original 

or  by  certified  copies  thereof,  in  any  legal  proceedings  before  any  United  States 
grand  jury  or  in  the  trial  of  any  cause  to  which  both  the  United  States  and  the 
person  or  corporation  or  association  rendering  the  return  are  parties  either  as 
plaintiff  or  defendant,  and  in  the  prosecution  or  defense  or  trial  of  which  action, 
or  proceedings  before  a grand  jury,  such  return  would  constitute  material  evi- 

349  TAX 


INC. 


INSPECTION  OF  RETURNS. 


dence,  but  in  any  case  arising  in  the  collection  of  the  income  tax,  the  Com- 
missioner of  Internal  Revenue  may  furnish  for  use  to  the  proper  officer  either 
the  original  or  certified  copies  of  returns  without  the  approval  of  the  Secretary 
of  the  Treasury.  In  all  cases  where  the  use  of  the  original  return  is  necessay^, 
it  shall  be  placed  in  evidence  by  the  Commissioner  of  Internal  Revenue  or  by 
some  officer  of  the  Bureau  of  Internal  Revenue  designated  by  him  for  that 
purpose  and  after  such  original  return  has  been  placed  in  evidence  it  shall 
be  returned  to  the  files  in  the  office  of  the  Commissioner  of  Internal  Revenue 

at  Washington,  D.  C.  , . r . 

1961  4 The  Secretary  of  the  Treasury,  at  his  discretion,  upon  application  to 

him  made,  setting  forth  what  constitutes  a proper  showing  of  cause,  may 
permit  inspection  of  the  return  of  any  corporation,  by  any  bona  fide  stock- 
holder in  such  corporation.  The  person  desiring  to  inspect  such  return  shall 
make  application  in  writing,  to  the  Secretary  of  the  Treasury,  setting  forth  the 
reasons  why  he  should  be  permitted  to  make  such  inspection,  and  shall  aRach 
to  his  application  a certificate,  signed  by  the  president,  or  other  principal  officer 
of  such  corporation,  countersigned  by  the  secretary,  under  the  corporate  seal  of 
the  company,  that  he  is  a bona  fide  stockholder  in^  said  company.  (Where 
this  certificate  cannot  be  secured,  other  evidence  will  be  considered  by  the 
Secretary  of  the  Treasury  to  determine  the  fact  whether  or  not  the  applicant 
is  a bona  fide  stockholder  and,  therefore,  entitled  to  inspect  the  return  made  by 
such  company.)  Upon  receipt  of  such  application  the  corporation  whose  return 
it  is  desired  to  inspect  shall  be  notified  of  the  facts  and  shall  be  given  oppor- 
tunity to  state  whether  any  legitimate  reason  exists  for  refusing  permission  to 
inspect  its  returns  of  annual  net  income  by  the  stockholder  applying  for  per- 
mission to  make  such  inspection.  The  privilege  of  inspecting  the  return  of  any 
corporation  is  personal  to  the  stockholders,  and  the  permission  granted  by  the 
Secretary  to  a stockholder  to  make  such  inspection  cannot  be  delegated  to  any 

other  person.  . . . ..t,  • 

1963  5.  The  returns  of  the  following  corporations  shall  be  open  to  the  inspec- 

tion of  any  person  upon  written  application  to  the  Secretary  of  the 
Treasury,  which  application  shall  set  forth  briefly  and  succinctly  all  facts 
necessary  to  enable  the  Secretary  to  act  upon  the  request: 

(a)  The  returns  of  all  companies  whose  stock  is  listed  upon  any  duly  organ- 

ized and  recognized  stock  exchange  within  the  United  States,  for  the  purpose  of 
having  its  shares  dealt  in  by  the  public  generally.  ^ re  j . .u 

(b)  All  corporations  whose  stock  is  advertised  in  the  press  or  offered  to  the 
public  by  the  corporation  itself  for  sale.  In  case  of  doubt  as  to  whether  any 
company  falls  within  the  classification  above,  the  person  desiring  to  see  such 
return  should  make  application,  supported  by  advertisements,  prospectus,  or  such 
other  evidence  as  he  may  deem  proper  to  establish  the  fact  that  the  stock  oi 
such  corporation  is  offered  for  general  public  sale. 

1963  Returns  can  be  inspected  only  in  the  office  of  the  Commissioner  of  Inter- 
nal Revenue  in  Washington,  D.  C.  In  no  case  shall  any  collector,  or  any 
other  Internal  Revenue  officer  outside  of  the  Treasury  Department  in 

Washington,  permit  to  be  inspected  any  return  or  furnish  any  informaBon  what- 
soever relative  to  any  return  or  any  information  secured  by  him  in  his  official 
capacity  relating  to  such  return,  except  in  answer  to  a proper  subpoena,  in  a 
case  to  which  the  United  States  is  a party. 

1964  6 Returns  of  individuals  shall  not  be  open  to  the  inspection  of  any  person 
other  than  the  proper  officers  and  employees  of  the  Treasury  Depart- 
ment or  person  rendering  the  same,  and  are  under  no  conditions  to  be 

made  public,  except  where  such  publicity  shall  result  through  the  use  of  such 
returns  in  any  legal  proceedings  in  which  the  United  States  is  a paity.  ^ 

1965  7 Upon  request  of  the  Governor  of  a State  imposing  a general  income 
tax,  the  proper  officer  of  such  State,  to  be  designated  by  name  and 
official  position  by  the  Governor  of  such  State  in  his  application  to  the 

Secretary  of  the  Treasury,  may  have  access  to  the  returns  or  to  abstracts  thereof 
showing  the  name  and  income  of  each  corporation,  joint  stock  company  or  asso- 
ciation or  insurance  company,  at  such  times  and  in  such  manner  as  the  Secretary 
of  the  Treasury  may  prescribe.  Such  application  shall  be  ^^^.de  in  writing, 
addressed  to  the  Secretary  of  the  Treasury  and  shall  show  (first)  that  the  State, 
whose  governor  makes  the  request,  imposes  a general  income  tax;  (second)  the 
name  and  address  of  each  corporation,  etc.,  to  which  access  is  desired;  (third) 
why  permission  to  inspect  the  returns  of  the  corporations,  etc.,  named  in  the  re- 
quest is  desired,  and  (fourth)  what  officer  or  officers  are  designated  to  make 
the  desired  inspection,  giving  their  names  and  official  designations.  Such  request 


350 


TAX 


INC. 


INSPECTION  OF  RETURNS. 

must  be  signed  by  the  governor  of  the  State  and  sealed  with  the  seal  thereof, 
and  shall  be  transmitted  to  the  Secretary  of  the  Treasury  for  his  consideration 
and  action  thereon. 

1966  No  provision  is  made  in  the  law  for  furnishing  a copy  of  any  return  to 
any  person  or  corporation,  and  no  cop}^  of  any  return  will  be  furnished 
to  any  other  than  the  person  or  corporation  making  the  return,  or  their 

duly  constituted  attorney,  except  as  hereinbefore  authorized. 

1967  The  provisions  herein  contained  shall  be  effective  on  and  after  the  1st 
day  of  September^  1914.  (Regulations  referred  to  in  fl957.) 

1968  A person  having  the  privilege  of  inspection  will  not  be  furnished  a 
copy  of  the  return,  but  may  make  a copy  or  take  notes  for  his  own 

or  an  authorized  use.  Beneficiaries  of  an  estate  or  trust  are  not  entitled 
as  such  to  an  inspection  of  returns  of  income  filed  by  the  fiduciary.  A 
receiver  of  a corporation  is  entitled  to  have  access  to  its  returns.  See 
also  sections  326  (a)^  (2)  and  328  (c)  of  the  statute  [for  provisions  au- 
thorizing the  Commissioner  to  supply  to  Congress  certain  detailed  in- 
formation involving  the  excess-profits  tax,  the  secrecy  restrictions  be- 
ing specifically  waived.— War  Tax  Service].  (Art.  1091,  Reg.  45  Rev 
April  17,  1919.)  ^ s . V 

1969  Certified  Copies.— At  the  request  of  the  Attorney  General  or  a 
United  States  district  attorney,  certified  copies  of  returns  may  be 

made  by  the  Commissioner  of  Internal  Revenue  and  delivered  to  the 
United  States  district  attorneys  for  their  use  as  evidence  in  the  prose- 
cution or  defense  of  suits  in  which  the  collection  or  legality  of  the  in- 
come tax  assessed  on  the  basis  of  such  returns  is  involved  or  by  special 
permission  of  the  Secretary  of  the  Treasury,  such  certified  copies  of 
returns  may  be  furnished  as  evidence  in  any  suit  to  which  the  United 
States  Government  and  the  corporation,  etc.,  making  the  returns  are 
parties,^  or  as  evidence  before  any  United  States  grand  jury,  and  in 
which  in  the  opinion  of  the  Attorney  General,  such  certified  copies 
would  constitute  material  evidence.  (Art.  227,  ^'647,  Reg.  33,  Rev.,  Jan. 


1970  Law  *[[405.  Returns  to  be  Open  to  Inspection  of  Proper  State 

Officers. — ''Provided,  That  the  proper  officers  of  any 
State  imposing  an  income  tax  may,  upon  the  request  of  the  governor 
thereof,  have  access  to  the  returns  of  any  corporation,  or  to  an  ab- 
stract thereof  showing  the  name  and  income  of  the  corporation,  at  such 
times  and  in  such  manner  as  the  Secretary  may  prescribe:’' 

1971  By  express  exception  in  the  statute  the  proper  officers  of  a State 
imposing  an  income  tax  are  entitled  as  of  right  upon  the  request 

of  its  governor  to  have  access  to  the  returns  of  income  of  any  cor- 
porations or  to  an  abstract  threof  showing  its  name  and  income.  Upon 
written  application  by  the  governor  of  a State  as  prescribed  in  para- 
graph 7 of  article  1091  [^965],  except  that  the  application  may  be  made 
directly  to  the  Commissioner  instead  of  to  the  Secretary,  the  Commis- 
sioner will  set  a convenient  time  for  inspection  of  the  returns  (or  an 
abstract  thereof  as  he  may  determine)  of  corporations  organized  or 
doing  business  in  such  State.  The  authority  to  inspect  returns  granted 
to  officers  of  a State  includes  authority  to  inspect  lists  furnished  to 
supplement  and  become  a part  of  the  returns.  (Art.  1092,  Reg  45  Rev 
April  17,  1919.)  > s-  , 


INC.  351 


TAX 


INSPECTION  OF  RETURNS. 


1973  Law  ^406.  Returns  to  be  Open  to  Inspection  by  Stockholder  of 
Record  Owning  One  Per  Cent  or  More  of  the 
standing  Stock  of  a Corporation.— ‘Provided  further,  That  all  bona  fide 
stockholders  of  record  owning  1 per  centum  or  more  of  the  outstanding 
stock  of  any  corporation  shall,  upon  making  request  of  the  Commis- 
sioner, be  allowed  to  examine  the  annual  income  returns  of  such  cor- 
poration and  of  its  subsidiaries/'  . . 

1973  LawMOy.  “Any  stockholder  who  pursuant  to  the  provisions  ot 
this  section  is  allowed  to  examine  the  return  of  any 
corporation,  and  who  makes  known  in  any  manner  whatever  not  pro- 
vided by  law  the  amount  or  source  of  income,  profits,  losses,  expendi- 
tures, or  any  particular  thereof,  set  forth  or  disclosed 
turn  shall  be  guilty  of  a misdemeanor  and  be  punished  by  a hne  not 
exceeding  $1,000,  or  by  imprisonment  not  exceeding  one  year,  or  both. 


1974  Bv  express  exception  in  the  statute  a bona  fide  stockholder  of 
record  owning  one  per  cent  of  the  outstanding  stock  of  a cor- 
poration is  entitled  as  of  right  to  examine  the  returns  of  income 
of  such  corporation  and  its  subsidiaries.  ^ A stockholders  desiring 
the  privilege  of  inspection  shall  apply  in  writing  to  the^  Commissioner, 
specifying  his  address,  the  name  of  the  corporation,  its  outstanding 
capital  stock,  the  number  of  shares  owned  by  him,  the  date  of  their 
acquisition  and  whether  or  not  he  has  the  beneficial  as  ^ well  as  the 
record  title  to  such  shares,  and  in  other  respects  complying  with  the 
requirements  of  paragraph  4 of  article  1091  [P961]  . A stockholder  who 
has  acquired  his  shares  for  the  purpose  of  inspection  oif  the 
turns  of  the  corporation  is  not  a bona  fide  stockholder.  (Art.  lUVo, 
Reg.  45,  Rev.,  April  17,  1919.) 


1975  A stockholder  who  examines  the  return  of  a corporation  and  re- 
veals without  express  authority  of  law  any  particulars  of  its  in- 
come statement  is  guilty  of  a misdemeanor  and  liable  to  fine  and 
imprisonment.  Section  3167  of  the  Revised  Statutes,  as  amended  by 
section  1317  of  the  Revenue  Act  of  1918,  also  provides  [P976  belowj. 
(Art.  1094,  Reg.  45,  Rev.,  April  17,  1919.) 


1976  Law  ^441.  Specific  Information  Relative  to  Taxpayers*  Affairs, 
Disclosed  by  Returns  or  Otherwise,  Not  to  be  Di- 
vulged.—[Sec.  1317  of  the  Revenue  Act  of  1918  amends  Sec.  3167,  Re- 
vised Statutes,  to  read  as  follows]  : 

“Sec.  3167.  It  shall  be  unlawful  for  any  coUector,  deputy  collector, 
agent,  clerk,  or  other  officer  or  employee  of  the  United  States  to  divulge  or 
to  make  known  in  any  manner  whatever  not  provided  by  law  to  any  person 
the  operations,  style  of  work,  or  apparatus  of  any  manufacturer  or  producer 
visited  by  him  in  the  discharge  of  his  official  duties,  or  the  amount  or  source 
of  income,  profits,  losses,  expenditures,  or  any  particular  thereof,  set  forth 
or  disclosed  in  any  income  return,  or  to  permit  any  income  return  or  copy 
thereof  or  any  book  containing  any  abstract  or  particulars  thereof  to  be 
seen  or  examined  by  any  person  except  as  provided  by  law ; and  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner  whatever  not 
provided  by  law  anv  income  return,  or  any  part  thereof  or  source  of  in- 
come, profits,  losses!!  or  expenditures  appearing  in  any  income  return ; and 
any  offense  against  the  foregoing  provision  shall  be  a misdemeanor  and  be 
punished  by  a fine  not  exceeding  $1,000  or  by  imprisonment  not  exceeding 

INC.  352  TAX 


INSPECTION  OF  RETURNS. 


one  year,  or  both,  at  the  discretion  of  the  court;  and^  if  the  offender  be  an 
officer  or  employee  of  the  United  States  he  shall  be  dismissed  from  office  or 
discharged  from  employment.” 

1977  The  attention  of  collectors  of  internal  revenue,  internal-revenue 
agents,  and  other  officers  concerned  is  invited  to  sections  3167  of  the 

United  States  Revised  Statutes,  which  prohibits  the  disclosure  of  informa- 
tion contained  in  income  and  other  returns  of  internal-revenue  taxpayers. 

1978  All  internal-revenue  officers  will  preserve  an  inviolably  confiden- 
tial all  income  tax  returns,  as  the  slightest  infraction  of  law  upon 

this  subject  will  be  severely  punished.  (T.  D.  1962,  March  20,  1914.) 

1979  Disclosure  of  Return — Penalty. — The  disclosure  by  a collector, 
deputy  collector,  agent,  clerk,  or  other  officer  or  employee  of  the 

United  States,  to  any  person  not  legally  authorized  to  receive  the  same, 
of  any  information  whatever  contained  in  or  set  forth  by  any  return 
of  annual  net  income  made  pursuant  to  this  act,  is  by  the  act,  made  a mis- 
demeanor, and  is  punishable  by  a fine  not  exceeding  $1,000,  or  by  imprison- 
ment not  exceeding  one  year,  or  both,  in  the  discretion  of  the  court,  and  if 
the  offender  is  an  officer  or  employee  of  the  United  States  he  shall  be  dis- 
missed and  be  incapable  thereafter  of  holding  any  office  under  the  United 
States  Government.  (Art.  229,  ^651,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

1980  Your  attention  is  directed  to  the  following  legislation  relating  to 
the  divulging  of  information  contained  in  the  returns  of  taxpayers. 

1981  Section  257  of  the  Revenue  Act  of  1918  provides:  [p955].  Section 
3167  R.  S.,  as  amended  by  Section  1317  of  the  said  Revenue  Act  of 

1918,  provides:  [j[1976].  Section  3152,  R.  S.,  as  amended  by  Act  of 
March  1,  1879,  authorizing  the  employment  of  internal  revenue  agents 
also  provides : ‘‘And  all  provisions  of  section  thirty-one  hundred 
and  sixty-seven,  Qf  Revised  Statutes  shall  apply  to 

internal-revenue  agents  as  fully  as  internal-revenue  officers.”  Section  3173 
(R.  S.,  as  amended  by  said  Section  1317)  of  the  Revenue  Act  of  1918  pro- 
vides that:  “It  shall  be  the  duty  of  any  person,  partnership,  firm  or  asso- 
ciation or  corporation,  made  liable  to  any  duty,  special  duty,  special  tax,  or 
other  tax  imposed  by  law,  when  not  otherwise  provided  for,  (1)  in  case  of 
a special  tax,  on  or  before  the  thirty-first  day  of  July  in  each  year,  and  (2) 
in  other  cases  before  the  day  on  which  the  taxes  accrue  to  make  a list  or 
return  * * . Provided,  That  if  any  person  liable  to  pay  any  duty  or 

tax,  or  owning,  possessing,  or  having  the  care  or  management  of  property, 
goods,  wares,  and  merchandise,  articles  or  objects  liable  to  pay  any  duty, 
tax  or  license,  shall  fail  to  make  and  exhibit  a list  or  return  required  by 
law,  but  shall  consent  to  disclose  the  particulars  of  any  and  all  the  property, 
goods,  wares,  and  merchandise,  articles,  and  objects  liable  to  pay  any  duty 
or  tax,  or  any  business  or  occupation  liable  to  pay  any  duty  or  tax,  or  any 
business  or  occupation  liable  to  pay  any  tax  as  aforesaid,  then,  and  in  that 
case,  it  shall  be  the  duty  of  the  collector  or  deputy  collector  to  make  such 
list  or  return.  * * *”  Section  3176,  R.  S.  as  amended  by  said  Section 

1317,  Revenue  Act  of  1918,  further  provides:  [If  1889]. 

1982  Reading  these  provisions  of  law  together,  it  is  evident  that  any  col- 
lector, rleputy  collector,  agent,  clerk,  or  other  officer  or  employee  of 

the  Bureau  of  Internal  Revenue,  including  internal-revenue  agents,  who  di- 
vulges or  makes  known  in  any  manner  whatsoever  not  provided  by  law  the 

INC.  353 


TAX 


CORRECTION  OF  RETURNS. 

amount  or  source  of  income,  profits,  losses,  expenditures,  or  any  particu- 
lars thereof  set  forth  or  disclosed  in  any  income  return  made  by  any  tax- 
payer, or  by  a collector  or  deputy  collector,  or  by  the  Commissioner  of  Inter- 
nal Revenue,  or  who  permits  any  income  return  or  copy  thereof,  or  any 
book  containing  any  abstract  or  particulars  thereof,  to  be  seen  or  examined 
by  any  person,  except  as  provided  by  lav/,  or  who  prints  or  publishes  m any 
manner  whatever,  not  provided  by  law,  any  income  return  or  any  part 
thereof,  or  source  of  income,  profits,  losses,  or  expenditures  appearing  m 
any  income  return,  is  guilty  of  a misdemeanor  and  subject  to  a fine  not  ex- 
ceeding $1,000  or  to  imprisonment  not  exceeding  one  year,  or  both,  at  the 
discretion  of  the  court,  and  if  he  be  an  officer  or  employee  of  the  United 
States,  to  be  dismissed  from  office  or  discharged  from  employment. 

1983  ’xhe  only  provisions  of  law  authorizing  the  making  known  of  any 

income  return  under  the  Revenue  Act  of  1918  are  those  contained  in 

Section  257  of  said  Act,  above  quoted.  ^ -r.  a ^ ^ 

1984  Similar  provisions  to  those  contained  m Section  257,  Revenue  Act  ot 
1918,  and  Sections  3173  and  3176,  as  amended  by  said  Revenue  Act 

of  1918,  were  also  contained  in  the  Act  of  October  3,  1914,  and  the  Act  of 

September  8,  1916.  i 

1985  You  should  endeavor  in  every  way  possible  to  impress  employees 
under  your  supervision  with  the  seriousness  of  the  offenses  which  are 

intended  to  be  prevented  by  this  legislation.  Any  violations  of  these  pro- 
visions of  the  law  which  become  known  to  any  officer  or  employ^  of  the 
Bureau  must  be  immediately  reported  for  investigation.  (T.  D.  2903  July 
30,  1919.) 

1986  Law  ^408.  Lists  of  Individuals  Making  Income  Tax  Returns  to  be 

Prepared.- — “The  Commissioner  shall^  as  soon  as  prac- 
ticable in  each  year  cause  to  be  prepared  and  made  available  to  public  in- 
spection in  such  manner  as  he  may  determine,  in  the  office  of  the  collector 
in  each  internal-revenue  district  and  in  such  other  places  as  he  niay  deter- 
mine, lists  containing  the  names  and  the  post-office  addresses  of  all  individ- 
uals making  income-tax  returns  in  such  district. 

1987  Law  11409.  Annual  Report  by  the  Commissioner  of  Statistical 

Information.— “Sec.  258.  That  the  Commissioner,  with 
the  approval  of  the  Secretary,  shall  prepare  and  publish  annually  statistics 
reasonably  available  v/ith  respect  to  the  operation  of  the  income,  war-profits 
and  excess-profits-tax  laws,  including  classifications  of  taxpayers  and  of 
income,  the  amounts  allowed  as  deductions,  exemptions,  and  credits,  and 
any  other  facts  deemed  pertinent  and  valuable. 

1988  The  Commissioner  will  publish  annually  a volume  of  statistics  of 
income,  showing,  among  other  things,  the  distribution  of  incomes 

betw’een  corporations  and  individuals  and  by  States,  by  classes  and 
by  occupations.  (Art.  1101,  Reg.  45,  Rev.,  April  17,  1919.) 

1989  Correction  by  the  Taxpayer  of  Erroneons  Return. — All  returns 
should  be  carefully  scrutinized,  and,  if  improperly  prepared,  they 

should  be  returned  to  the  taxpayer  for  correction,  with  instructions  that  if 
a new  return  be  executed,  the  old  one,  showing  the  date  of  the  receipt 
thereon  should  be  forwarded  to  the  Collector  to  avoid  the  possibility  of 
subjecting  the  taxpayer  to  additional  tax  or  penalties  for  failure  to  file  the 
return  within  the  period  required  by  law. 

354  TAX 


INC. 


CORRECTION  OF  RETURNS. 


1990  A record  of  each  return  sent  back  to  the  taxpayer  for  correction 
should  be  made  in  the  office  of  the  Collector,  so  that  if  the  taxpayer 

fails  to  properly  amend  and  forward  same,  the  Collector  may  take  steps  to 
secure  the  return.  (Extract  from  Mimeograph  Letter  No.  1160  to  Collec- 
tors, signed  by  Acting  Commissioner  David  A.  Gates  and  dated  February  9, 
1915.) 

1991  Correction  of  Erroneous  Returns  at  the  Instance  of  the  Collector. 
— Referring  to  the  returns  of  annual  net  income  to  be  filed  by  cor- 
porations for  the  year  [1914],  you  are  requested  to  examine  each  return 
closely  with  a view  to  having  such  returns  as  nearly  correct  as  possible  be- 
fore forwarding  to  this  office.  (Mimeograph  letter  No.  1148  to  Collectors, 
Jan.  16,  1915.) 

1992  Referring  to  your  statement  that  the  representative  of  this  office 
insists  upon  the  officers  of  corporations  signing  amended  returns  with- 
out giving  any  reasonable  time  for  investigation  on  the  part  of  the  officers, 
you  are  informed  that  examining  officers  have  been  instructed  by  this  office 
to  secure  from  corporations  amended  returns  wherever,  as  a result  of  their 
examinations,  it  is  shown  that  the  original  returns  were  not  correct. 

1993  It  is  not  the  desire  of  this  office,  however,  that  examining  officers 
shall  not  give  the  officers  of  corporations  the  fullest  opportunity  to 

make  any  investigation  they  may  desire  prior  to  signing  these  amended  re- 
turns, provided,  of  course,  such  investigation  does  not  cover  an  unreason- 
able length  of  time.  (Extract  from  letter  to  the  Industrial  Association  of 
Cincinnati,  signed  bv  Commissioner  W.  H.  Osborn,  and  dated  February 
2,  1915.) 

1994  Amended  Return  not  Required  When  Audit  or  Investigation  Re- 
veals Necessity  for  a Further  Tax. — Hereafter,  in  cases  where 

an  individual,  a fiduciary,  or  a withholding  agent  has  been  found  subject  to 
a further  tax  as  a result  of  the  audit  of  a return  in  this  office,  or  of  an  inves- 
tigation made  by  a Revenue  Agent  an  amended  return  will  not  be  required. 

1995  In  cases  where  a further  tax  is  to  be  assessed,  either  against  an  in- 
dividual, a fiduciary,  or  a withholding  agent,  collectors  will  be  ad- 
vised by  letter  from  this  office  of  the  amount  of  further  tax  to  be 
assessed,  and  the  reason  for  making  such  assessment  will  be  fully  set  forth. 

1996  With  a view  to  minimizing  the  work  in  the  offices  of  Collectors  a 
carbon  copy  of  the  letter  to  them  will  be  enclosed,  which  should  be 

forwarded  by  the  Collector  to  the  individual,  fiduciary,  or  withhold- 
ing agent,  as  the  case  may  be,  in  lieu  of  writing  a letter  of  explanation. 

1997  The  use  of  Income  Tax  Form  6981  by  Revenue  Agents  will  be  dis- 
continued in  connection  with  reports  on  Personal  Income  Tax  Re- 
turns. (Mimeograph  Letter  No.  1232  to  Collectors,  June  22,  1915.) 

1998  Law  1[429.  The  General  Administrative  Provisions  of  Law  Rela- 

tive to  the  Making  of  Returns,  etc.,  are  Applicable. — 
“Sec.  1305.  That  all  administrative,  special,  or  stamp  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable, 
are  hereby  extended  to  and  made  a part  of  this  Act,  and  every  person 
liable  jto  any  tax  imposed  by  this  Act,  or  for  the  collection  thereof,  shall 
keep  such  records  and  render,  under  oath,  such  statements  and  returns, 
and  shall  comply  with  such  regulations  as  the  Commissioner,  with  the 
approval  of  the  Secretary,  may  from  time  to  time  prescribe.” 

INC.  355 


TAX 


PAYMENT  OF  TAX. 

1999  In  collecting  the  income  and  war  profits  and  excess  profits  taxes 
the  Commissioner  has  the  benefit  of  all  existing  internal  revenue 
laws.  In  aid  of  the  enforcement  of  the  statute  the  Commissioner  may  re- 
quire any  person  to  keep  specified  records,  to  render  returns  and  state- 
ments as  directed,  to  submit  himself  and  his  book  to  examination,  and  to 
comply  with  such  regulations  as  may  be  prescribed.  Section  3165  of  the 
Revised  Statutes,  as  amended  by  section  1317  of  the  Revenue  Act  of 
1918,  provides:  [P790].  See  also  sections  228  [P864],  250  [P880]  and 
1318  [p878]  of  the  statute  and  articles  451  [p866]  and  1002  [p888]. 
(Art.  1711,  Reg.  45,  Rev.,  April  17,  1919.) 


2000  Law  1|361.  The  Tax  is  to  be  Paid  in  Four  Equal  Installments 

Except  When  Withheld  at  the  Source. — “Sec.  250. 
(a)  That  except  as  otherwise  provided  in  this  section  and  sections  221 
and  237  [p585  and  P614,  taxes  collected  at  the  source]  the  tax  shall  be 
paid  in  four  installments,  each  consisting  of  one-fourth  of  the  total 
amount  of  the  tax.” 

2001  Law  ^362.  “The  first  installment  shall  be  paid  at  the  time  fixed 

by  law  for  filing  the  returns,  and” 

2002  Law  1|363.  “the  second  installment  shall  be  paid  on  the  fifteenth 

day  of  the  third  month,” 

2003  Law  ^364.  “the  third  installment  on  the  fifteenth  day  of  the  sixth 

month,  and” 

2004  Law  ^365.  “the  fourth  installment  on  the  fifteenth  day  of  the 

ninth  month,” 

2005  Law  ^366.  “after  the  time  fixed  by  law  for  filing  the  return.” 

2006  Law  1(370.  The  Entire  Tax  May  Be  Paid  on  or  Before  the  Due 

Date  of  the  Return. — “The  tax  may  at  the  option  of  the 
taxpayer  be  paid  in  a single  payment  instead  of  in  installments,  in  which 
case  the  total  amount  shall  be  paid  on  or  before  the  time  fixed  by  law  for 
filing  the  return,  or,  where  an  extension  of  time  for  filing  the  return  has 
been  granted,  on  or  before  the  expiration  of  the  period  of  such  extension.” 

2007  Xhe  tax,  unless  paid  at  the  source,  is  to  be  paid  to  the  collector  in 
four  equal  installments,  the  first  at  the  time  for  filing  the  return  and 

the  others  at  intervals  of  three  months  thereafter,  or  it  may  at  the 
option  of  the  taxpayer  be  paid  in  a single  payment  on  or  before  the 
time  for  filing  the  return  or  such  time  as  extended.  See  section  227  of  the 
statute  and  articles  441-447  [for  time  for  filing  returns  PSIO  and  for  the 
last  due  date  p820].  (Art.  1001,  Reg.  45,  Rev.,  April  17,  1919.) 

2008  Law  1(367.  When  First  Installment  Is  Due  When  Time  for  Filing 

Return  Has  Been  Extended. — “Where  an  extension  of 
time  for  filing  a return  is  granted  the  time  for  payment  of  the  first  install- 
ment shall  be  postponed  until  the  date  of  the  expiration  of  the  period  of  the 
extension,  but  the  time  for  payment  of  the  other  installments  shall  not  be 
postponed  unless  the  Commissioner  so  provides  in  granting  the  extension.” 

2009  An  unconditional  extension  of  time  for  filing  a return  will  post- 
pone the  date  for  payment  of  the  first  installment,  but  will  not 

postpone  the  date  of  payment  of  the  other  installments  unless  so  speci- 
fied in  each  case.  (Art.  1001,  Reg.  45,  Rev.,  April  17,  1919.) 

356  TAX 


INC. 


PAYMENT  OF  TAX. 


2010  Law  1|368.  Interest  Runs  on  Amount  of  Installment  During  Pe- 

riod of  Extension  Availed  of. — “In  any  case  in  which 
the  time  for  the  payment  of  any  installment  is  at  the  request  of  the  tax- 
payer thus  postponed,  there  shall  be  added  as  part  of  such  installment  in- 
terest thereon  at  the  rate  of  of  1 per  centum  per  month  from  the  time  it 
would  have  been  due  if  no  extension  had  been  granted  until  paid.” 

2011  Lawjf379.  Ad  Valorem  Penalty,  Plus  Interest,  for  Delay  in  Pay- 

ment of  Tax. — “(e)  If  any  tax  remains  unpaid  after 
the  date  when  it  is  due,  and  for  ten  days  after  notice  and  demand  by  the 
collector,  then,  except  in  the  case  of  estates  of  insane,  deceased,  or  insolvent 
persons,  there  shall  be  added  as  part  of  the  tax  the  sum  of  5 per  centum 
on  the  amount  due  but  unpaid,  plus  interest  at  the  rate  of  1 per  centum 
per  month  upon  such  amount  from  the  time  it  become  due 

2012  Law  lj380.  Interest  Rate  Lower  as  to  Any  Amount  Subject  to  a 

Bona  Fide  Claim  for  Abatement. — “Provided,  That  as 
to  any  such  amount  which  is  the  subject  of  a bona  fide  claim  for  abatement 
[|f2119]  such  sum  of  5 per  centum  shall  not  be  added  and  the  interest 
from  the  time  the  amount  was  due  until  the  claim  is  decided  shall  be  at 
the  rate  of  3^  of  1 per  centum  per  month.” 

2013  LawU381.  Ipso  Facto  Assessment  of  the  Tax  and  Notice  and 

Demand  for  the  First  Installment. — “In  the  case  of  the 
first  installment  provided  for  in  subdivision  (a)  the  instructions  printed 
on  the  return  shall  be  deemed  sufficient  notice  of  the  date  when  the  tax 
is  due  and  sufficient  demand,  and  the  taxpayer’s  computation  of  the  tax 
on  the  return  shall  be  deemed  sufficient  notice  of  the  amount  due.” 

2014  Interest  on  Tax. — Where  the  time  for  the  payment  of  any  install- 
ment of  the  tax  is  postponed  at  the  request  of  the  taxpayer,  in- 
terest at  the  rate  of  6 per  cent  per  annum  is  added  from  the  original 
due  date.  If  an  understatement  of  the  tax  in  the  return  is  due  to  the 
negligence  of  the  taxpayer,  but  without  intent  to  defraud,  interest  at  the 
rate  of  12  per  cent  per  annum  is  added  to  the  amount  of  the  deficiency 
of  each  installment  from  the  time  the  installment  was  due.  If  any  tax 
remains  due  and  unpaid  for  ten  days  after  notice  and  demand  by  the 
collector,  or  in  the  case  of  the  first  installment  as  computed  by  the 
taxpayer  remains  due  and  unpaid  for  ten  days,  interest  at  the  rate  of 
12  per  cent  per  annum  is  added  from  the  due  date,  except  that  the  inter- 
est on  any  amount  which  is  the  subject  of  a bona  fide  claim  for  abate- 
ment shall  be  at  the  rate  of  6 per  cent  per  annum,  and  except  that  no 
interest  is  added  in  the  case  of  estates  of  insane,  deceased  or  insolvent 
persons.  But  if  any  part  of  a claim  for  abatement  on  the  ground  of  a 
loss  in  inventory  under  section  214  (a)  [1[1467]  or  section  234  (a) 
(14)  [|fl472]  of  the  statute  is  disallowed,  interest  from  the  original  due 
date  at  the  rate  of  12  per  cent  per  annum  will  be  added  to  the  tax  not 
abated;  and  interest  is  to  be  added  in  all  cases  in  which  the  demand 
of  payment  is  made  of  the  taxpayer  personally,  although  he  subse- 
quently dies,  or  becomes  insane  or  insolvent,  so  that  collection  of  the 
tax  is  made  from  his  estate  in  the  hands  of  his  representative.  See 
further  articles  1005  [for  penalty  for  false  return,  ]fl887]  and  1006 
[for  penalty  for  non-payment  of  tax,  T[2015].  (Art.  1003,  Reg.  45,  Rev., 
April  17,  1919.) 

INC.  357  TAX 


PAYMENT  OF  TAX. 

2015  Ad  Valorem  and  Specific  Penalties  for  Nonpayment  of  Tax.— If 

any  tax  or  installment  thereof  remains  due  and  unpaid  for  ten 
days  after  notice  and  demand  by  the  collector  (the  instructions  on  the 
return  serve  as  notice  and  demand  in  the  case  of  the  first  installment 
as  computed  by  the  taxpayer),  a penalty  of  5 per  cent  is  added.  When, 
however,  upon  an  assessment  of  a tax  and  demand  made  for  payment,  a 
bona  fide  claim  for  its  abatement  is  filed  within  10  days  after  such  de- 
mand, no  penalty  is  imposed.  Upon  receipt  of  a notice  of  rejection  of 
the  claim  (or  so  much  thereof  as  is  not  allowed),  the  collector  will 
notify  the  claimant  and  demand  the  payment  of  the  tax.  If  the  tax  is 
not  then  paid  within  10  days,  the  5 per  cent  penalty  will  be  assessed  on 
the  amount  of  tax  not  abated.  If  abatement  of  the  entire  tax  assessed 
is  not  demanded  in  a claim,  and  the  balance  of  the  tax  is  not  paid  within 
the  required  ten  days,  the  5 per  cent  penalty  will  immediately  accrue  on 
such  balance.  See  also  article  1003  [for  interest  on  tax,  1|2014].  The 
estate  of  a deceased  person,  regardless  of  the  date  of  his  death,  or  of  an 
insane  or  insolvent  person,  cannot  be  charged  with  liability  to  the  5 
per  cent  penalty  on  account  of  his  or  the  fiduciary’s  delinquency  in 
making  pavment  of  taxes.  W^here  a warrant  of  distraint  is  served,  $5 
is  added  [112016] . For  other  penalties  see  section  253  of  the  statute  and 
article  1041  [for  specific  penalty,  1(1903].  (Art.  1006,  Reg.  45,  Rev., 
April  17,  1919.) 

2016  Law  1(382.  $5  Penalty  for  Necessitating  a Warrant  of  Distraint. — 

“(f)  In  any  case  in  which  in  order  to  enforce  payment 
of  a tax  it  is  necessary  for  a collector  to  cause  a warrant  of  distraint  to 
be  served,  there  shall  also  be  added  as  part  of  the  tax  the  sum  of  $5.” 

2017  Law  1(369.  If  Any  Installment  Is  Not  Paid  When  Due  the  Entire 

Unpaid  Tax  Becomes  Due. — “If  any  installment  is  not 
paid  wh^  due,  the  whole  amount  of  the  tax  unpaid  shall  become  due 
and  payable  upon  notice  and  demand  by  the  collector. 

2018  Upon  failure  to  pay  an  installment  on  time,  all  of  the  tax  re- 
maining unpaid  becomes  due  and  payable  upon  notice  and  de- 
mand. (Art.  1001,  Reg.  45,  Rev.,  April  17,  1919.) 

2019  Notice  and  Demand  of  Payment. — The  service  of  a notice  and 
demand  by  the  collector  on  Form  17  is  complete  upon  mailing  it, 

and  the  time  within  which  the  tax  must  be  paid  runs  from  the  date  of 
mailing  the  notice  and  not  of  its  receipt  by  the  taxpayer.  [For  notice 
and  demand  on  account  of  the  first  installment,  see  1(2013.]  But  ps-y" 
ment  for  the  tax  must  actually  reach  the  collector  within  the  ten  day 
period,  and  merely  mailing  a remittance  before  the  expiration  of  the 
ten  days  is  not  sufficient.  So,  to  avoid  the  prescribed  penalties,  no  more 
than  ten  days  may  elapse  after  the  mailing  of  the  notice  before  the  pay- 
ment is  in  the  collector’s  hands.  See  section  3184  of  the  Revised  Stat- 
utes [See  1(2020,  below].  By  reason,  however,  of  absence  from  their 
homes  or  places  of  business  in  foreign  countries  or  in  the  military  or 
other  service  of  the  country  and  the  consequent  delay  in  receiving  mail, 
or  bv  reason  of  the  location  of  the  residence  of  an  individual  or  of  the 
office  of  a corporation  to  which  the  notice  was  addressed  at  a distance 
from  the  collector’s  office,  it  is  impossible  for  many  persons  to  receive  a 
notice  and  demand  and  to  make  payment  of  the  tax  so  that  such  ps^y* 

INC.  358  TAX 


PAYMENT  OF  TAX. 


ment  may  be  received  by  the  collector  within  the  ten-day  period  fol- 
lowing the  service  of  notice  and  demand,  and  in  all  such  cases  the  col- 
lector will  enter  on  the  notice  as  the  date  on  which  the  tax  becomes 
due  and  payable  a date  as  nearly  as  possible  ten  days  after  the  time  that 
the  notice  should  be  received  in  the  ordinary  course  of  the  mails  by  the 
taxpayer.  In  such  cases  when  it  appears  that  a remittance  for  the  tax 
was  placed  in  the  mails  within  the  ten-day  period  after  the  date  specified 
in  the  notice,  and  in  cases  where  tardiness  is  occasioned  because  the 
notice  was  not  delivered  in  due  time  by  reason  of  delay  in  the  mail  and 
satisfactory  evidence  of  that  fact  is  furnished,  the  penalty  and  interest 
will  not  be  collected.  (Art.  1007,  Reg.  45,  Rev.,  April  17,  1919.) 

2020  Where  it  is  not  otherwise  provided  the  collector  shall  in  person 
or  by  deputy,  within  ten  days  after  receiving  any  list  of  taxes 

from  the  Commissioner  of  Internal  Revenue,  give  notice  to  each  person 
liable  to  pay  any  taxes  stated  therein,  to  be  left  at  his  dwelling  or  usual 
place  of  business,  or  to  be  sent  by  mail,  stating  the  amount  of.such 
taxes  and  demanding  payment  thereof.  If  such  person  does  not  pay  the 
taxes  within  ten  days  after  the  service  or  the  sending  by  mail  of  such 
notice  it  shall  be  the  duty  of  the  collector  or  his  deputy  to  collect  the 
said  taxes,  with  a penalty  of  5 per  cent  additional  upon  the  amount  of 
taxes  and  interest  at  the  rate  of  1 per  centum  a month.  (Section  3184^ 
Revised  Statutes.) 

2021  Form  17. — Collectors  should  issue  Form  17  for  the  purpose  of 
fixing  definitely  the  date  when  the  5 per  cent  penalty  accrues  and  in- 
terest at  1 per  cent  per  month  begins  to  run,  and  a copy  of  this  notice  should 
be  filed  as  provided  by  act  of  August  17,  1912,  amending  section  3186,  Re- 
vised Statutes.  (Art.  41,  |f252,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2022  It  appears  that  certain  collectors  hold  that  notice  of  assessment 
and  demand.  Form  17,  is  not  necessary  to  create  a liability  to  5 

per  cent,  penalty  and  interest  at  1 per  cent,  per  month  in  the  case  of 
income  tax  remaining  unpaid  after  [ * * * the]  due  date.  This  view 
as  to  the  requirements  of  the  law  is  clearly  wrong  and  contrary  to  the 
instructions  (Art.  197,  Reg.  33)  issued  on  the  subject. 

2023  The  necessity  of  issuing  Form  17  is  twofold — first,  to  determine 
the  date  when  5 per  cent  penalty  accrues  and  interest  at  1 per 

cent  per  month  begins  to  run,  and,  second,  to  complete  the  Government's 
lien  on  property  belonging  to  the  taxpayer. 

2024  In  case  of  non-payment,  * * ^ formal  notice  and  demand  which 

the  law  clearly  contemplates  and  which  the  courts  hold  to  be  necess- 
ary before  the  delinquent  taxpayer  becomes  chargeable  with  penalty  and 
interest  [is  to  be  issued]. 

2025  In  all  cases,  therefore,  where  an  assessed  tax  remains  unpaid  after 
it  becomes  due  a notice  on  Form  17  should  be  at  once  issued,  to  be 

followed,  when  necessary,  by  Form  21  and  69,  in  their  order.  The  fact 
that  a claim  for  abatement  is  pending  or  the  tax  is  in  litigation  does  not 
relieve  the  collector  from  issuing  the  notices,  demands,  ec.,  required  by 
law. 

2026  A misunderstanding  on  the  part  of  certain  collectors  as  to  these 
requirements  has  occasioned  a considerable  loss  to  the  Govern- 

INC  359  TAX 


PAYMENT  OF  TAX. 

ment  of  penalty  and  interest,  especially  where  claims  for  abatement  were 
pending.  (T.  D.  1995,  June  12,  1914.) 

2027  Notice  of  Assessment  (Form  17)  may  lawfully  be  given  by  mail, 
and  when  so  given  is  presumed  to  have  been  received.  The  burden 

rests  on  the  taxpayer  to  prove  the  contrary  in  order  to  avoid  penalty. 
(U.  S.  V.  General  Inspection  & Loading  Company,  204  F.  657.) 

2028  [Comment:  The  following  word  was  given  to  The  Corporation 
Trust  Company  orally,  regarding  the  practice  of  the  Department  rel- 
ative to  the  proof  “to  the  contrary.”  The  taxpayer  is  required  only  to  prove 
to  the  satisfaction  of  the  Commissioner  that  he  did  not  receive  notice  of  as- 
sessment, Under  such  conditions,  it  has  been  the  practice  of  the  Bureau 
of  Internal  Revenue  to  waive  the  penalties  and  give  the  taxpayer  an 
opportunity  to  pay  his  taxes.  Of  course,  the  Collector  would  be  called  on 
to  produce  his  records  to  prove  his  assertion,  that  notice  had  been  sent, 
but  that  would  not  stand  in  the  way  of  the  taxpayer  offering  proof  that 
the  notice  did  not  reach  him.  (July,  1917)]. 

2029  Lawl|378.  Five-Year  Limitation  on  the  Assessment  of  Taxes  and 

on  the  Collection  of  Taxes  by  Suit  Except  in  the  Case 
of  False  or  Fraudulent  Return  With  Intent  to  Evade  the  Tax. — “(d) 
Except  in  the  case  of  false  or  fraudulent  returns  with  intent  to  evade  the 
tax,  the  amount  of  tax  due  under  any  return  shall  be  determined  and  as- 
sessed by  the  Commissioner  within  five  years  after  the  return  was  due  or 
was  made,  and  no  suit  or  proceeding  for  the  collection  of  any  tax  shall  be 
begun  after  the  expiration  of  five  years  after  the  date  when  the  return 
was  due  or  was  made.  In  the  case  of  such  false  or  fraudulent  returns,  the 
amount  of  tax  due  may  be  determined  at  any  time  after  the  return  is  filed, 
and  the  tax  may  be  collected  at  any  time  after  it  becomes  due.” 

2030  Assessment  of  Tax. — When  the  returns  are  received  at  the  col- 
lectors’ offices,  they  are  examined  and  listed  before  being  forwarded 

to  the  Commissioner.  If  it  appears  that  the  tax  is  greater  or  less  than 
shown  in  the  return,  it  is  recomputed.  [Read  at  p880.]  After  checking  the 
figures  the  Commissioner  assesses  the  tax  on  the  basis  of  the  collectors’ 
lists.  The  collectors  then  send  out  bills  for  the  taxes,  either  as  computed 
by  the  taxpayer  or  as  recomputed.  If  the  taxpayer  believes  that  he  has  been 
overassessed,  he  may  file  a claim  for  abatment  or  (after  payment  of  the 
tax)  for  a refund  of  the  excess.  See  section  252  of  the  statute  and  articles 
1031-1038  [for  claims  for  abatement  and  refund,  beginning  at  ^2115].  As 
soon  as  practicable  the  returns  are  carefully  audited  by  accountants  in  the 
office  of  the  Commissioner  at  Washington,  assisted  where  necessary  by  re- 
ports of  the  examination  of  taxpayers’  books  and  records  made  by  revenue 
agents  in  the  field.  If  error  in  a return  is  detected,  the  taxpayer  is  notified 
accordingly  and  an  additional  assessment  is  made  against  him  or  he  is  given 
the  opportunity  to  file  a claim  for  a refund,  as  the  case  may  be.  Any  as- 
sessment must  be  made  within  five  years  after  the  return  was  due  or  was 
made,  except  in  the  case  of  false  returns  with  intent  to  evade  the  tax.  See 
sections  228  [for  taxpayer  may  furnish  sworn  testimony,  P865],  1305  [for 
inspection  of  taxpayer’s  records,  ^[1877]  and  1318  [for  jurisdiction  of  U.  S. 
District  Courts,  ^[1878]  of  the  statute  and  articles  451  [for  false  returns, 
Tfl866]  and  1711  [for  application  of  existing  statutes  as  aids  for  collection 
of  tax,  P999].  (Art.  1012,  Reg.  45,  Rev.,  April  17,  1919.) 

INC.  360  TAX 


PAYMENT  OF  TAX. 


2031  Five-year  Limitation  on  Assessment  and  Suit  Applies  Only  to 
Taxes  Due  Under  Revenue  Act  o£  1918. — Read  at  ^[2182. 

2032  Law  t[461.  Continuing  Effect  of  Prior  Laws  for  the  Assessment 

and  Collection  of  Taxes,  and  the  Imposition  and  Col- 
lection of  Penalties,  that  have  Accrued  Thereunder. — “Sec.  1400.  (a) 

That  the  following  parts  of  Acts  are  hereby  repealed,  subject  to  the 
limitations  provided  in  sub-division  (b)  : 

(1)  The  following  titles  of  the  Revenue  Act  of  1916: 

Title  I (called  “Income  Tax”)  ; 

^ 5^  jjc  ^ ^ 

(2)  The  following  parts  of  the  Act  entitled  “An  Act  to  provide  in- 
creased revenue  to  defray  the  expenses  of  the  increased  appropriations 
for  the  Army  and  Navy  and  the  extensions  of  fortifications,  and  for 
other  purposes,”  approved  March  3,  1917 : 

* * sjs 

Section  402  (called  “Returns  of  Dividends”). 

(3)  The  following  titles  of  the  Revenue  Act  of  1917 : 

Title  I (called  “War  Income  Tax”)  ; 

* Hs  * * Hs  SK 

Title  X (called  “Administrative  Provisions”)  ; 

Title  XII  (called  “Income-Tax  Amendments”). 

2033  Law  ^462.  “(b)  Such  parts  of  Acts  shall  remain  in  force  for  the 

assessment  and  collection  of  all  taxes  which  have  ac- 
crued thereunder,  and  for  the  imposition  and  collection  of  all  penalties 
or  forfeitures  which  have  accrued  and  may  accrue  in  relation  to  any 
such  taxes,  and  except  that  the  unexpended  balance  of  any  appropria- 
tion heretofore  made  and  now  available  for  the  administration  of  any 
such  part  of  an  Act  shall  be  available  for  the  administration  of  this  Act 
or  the  corresponding  provision  thereof : Provided,  That,  except  as  other- 
wise provided  in  this  Act,  no  taxes  shall  be  collected  under  Title  I of 
the  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917,  or 
Title  I or  II  of  the  Revenue  Act  of  1917,  in  respect  to  any  period  after 
December  31,  1917 : 

♦ * * * sK  Ht 

2034  Law  ^463.  “In  the  case  of  any  tax  imposed  by  any  part  of  an 

Act  herein  repealed,  if  there  is  a tax  imposed  by  this 
Act  in  lieu  thereof,  the  provision  imposing  such  tax  shall  remain  in 
force  until  the  corresponding  tax  under  this  Act  takes  effect  under  the 
provisions  of  this  Act.” 

2035  The  “Three- Year  Limitation  on  Assessments”  and  the  “No  Lim- 
itation on  Collection  of  the  Tax  by  Suit”  Provisions  of  Prior 

Laws.—  [Sec.  9 (a)  of  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the 
Revenue  Act  of  1917  providing  for  the  assessment  of  income  taxes  on  individuals 
reads,  in  part,  as  follows: 

“except  in  cases  of  refusal  or  neglect  to  make  such  return  and  in  cases  of  errone- 
ous, false,  or  fraudulent  returns,  in  which  cases  the  Commissioner  of  Internal 
Revenue  shall,  upon  the  discovery  thereof,  at  any  time  within  three  years  after 
said  return  is  due,  or  has  been  made,  make  a return  upon  information  obtained  as 
provided  for  in  this  title  or  by  existing  law,  or  require  the  necessary  corrections 
to  be  made,  and  the  assessment  made  by  the  Commissioner  of  Internal  Revenue 
thereon  shall  be  paid  by  such  person  or  persons  immediately  upon  notification  of 
the  amount  of  such  assessment:” 

INC.  361  TAX 


PAYMENT  OF  TAX. 


2036  [Sec  14  (a)  of  Title  I of  the  Revenue  Act  of  1916  as  amended  by  the 
Revenue  Act  of  1917  providing  for  the  assessment  of  income  taxes  on 

corporations  reads,  in  part,  as  follows:  in  rases  of 

“except  in  cases  of  refusal  or  neglect  to  make  such  return,  and  m cases  ot 

erroneous  false  or  fraudulent  returns,  in  which  cases  the  Commissioner  of 

Internal  Revenue  shall,  upon  the  discovery  thereof,  at  any  time 

years  after  said  return  is  due,  make  a return  upon  information 

vided  for  in  this  title  or  by  existing  law;  and  the  assessment  made  by  the  Com 

missioner  of  Internal  Revenue  thereon  shall  be  paid  by  such 

stock  company  or  association,  or  insurance  company  immediately  upon  notifica- 
tion of  the  amount  of  such  assessment.’  J 

2037  Procedure  in  Cases  of  Delinquency.— In  cases  ^'■„"®frn\‘'\he 

make  return  and  in  case  of  erroneous,  false,  or  fraudulent  returns  the 

Commissioner  of  Internal  Revenue  shall,  upon  the  discovery  thereof,  at  any 

time  within  three  years  after  said  return  is  Uw  oT^reqSirf  the 

of  income  upon  information  obtained  as  Provided  for  by  'aw,  or  squire  ^ 
nere^sarv  corrections  to  be  made,  and  the  assessment  made  by  the  Commissioner 
of  Internal  Revenue  thereon  shall  be  paid  by  such 

upon  notification  of  the  amount  of  such  assessment.  I*  fherefor  bv  the 

a^^^pssment  remains  unpaid  for  10  days  after  notice  and  demand  theretor  Py  tne 
collector  there  shall  be  added  the  sum  of  5%  on  the  amount  of  tax  unpaid  and 
interest  at  the  rate  of  1%  per  month  upon  such  tax  from  the  time  the  same 
became  dL!  except  from  th^  estates  of  insane,  deceased,  or  insolvent  persons. 

2038  ‘^In  !ases  wheretn  corporations  have  neglected  or  refused  to  "^^be  jTe turns, 

time  within  three  years  after  such  return  is  due,  make  a return  upon  the  informa- 
tiSi  Obtained  if  the  manner  provided  in  the  act  and  the  Ux  so  discovered  to 
be  due  together  with  the  additional  tax  prescribed,^  221 

amount  thireof  shall  be  paid  immediately  upon  notice  and  demand.  (Art.  22  , 

^[638,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2039  The  statute  (Sec.  9 (a).  Act  Sept.  8,  1916)  f ^ 

ment  to  be  made  within  three  years  from  the  time 

The  limitation  is  upon  the  discovery  of  delinquency  or  error,  wiAm  three  years. 

^.^^“fs^rtrortr  In'^aSie'nTef  r^rl  ‘“or^’^tV^^wfir-f  b^^uired  except 

ii-pS^fonmftal^.^  ‘^ri! 

2041  Section  14  authorizes  the  Commissioner  of  Internal  Revenue 

2041  ^ecttoJJ^m^^  ^3ke  returns,  or  in  cases  of  erroneous,  false  or 

JSd“"ns^lrriue“rmtkrrtlLns^^^^^^^^^ 

October  3 1913  contain  similar  provisions.  Under  this  provision,  it  appea  s 

Otherwise,  any  additional  tax  found  due  for  a period  antedating  the  three-year 
HrnRaTiom  (Art.  233,  ^[658,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2042  No  Three-Year  Limitation  to  Right  of  Government  to  Collect 

Suit --In  numerous  cases  the  courts  have  held  that  there  is  no  limitation 
iinon  the  right  of  the  Government  to  sue  for  and  recover  unpaid  taxes.  It  is 
not  essential  that  assessment  be  made;  or,  if  made,  that  it  be  ^ 

'f,aA  Tf  liabilitv  to  original  or  additional  tax  exists  or  has  been  dis- 

cS“ered  tramouif  theTeo?  recovered  by  suit,  regar<l'ess  of  the  fact 

that  no  assessment  of  the  amount  has  been  Ree^Vs 

of  its  discovery  or  the  period  for  which  the  tax  is  due.  (Art.  233,  T[659,  Keg.  33, 

Rev.,  Jan.  2,  1918.)  ' 


INC 


362  TAX 


PAYMENT  OF  TAX. 


2043  The  appended  decision  [Corporation  Tax  Act  of  August  5,  1909]  of  the 
United  States  District  Court  for  the  Western  District  of  Michigan,  in 
the  case  of  the  United  States,  plaintiff,  v.  Grand  Rapids  and  Indiana  Railway 
Company,  defendant,  is  published  for  the  information  of  internal-revenue  officers 
and  others  concerned.  (T.  D.  2166,  March  4,  1915.)  [239  Fed.  153.] 

1.  The  Three-Years’  Limitation. 

The  three  years’  limitation  in  section  38,  act  of  August  5,  1909,  fifth  sub- 
division, is  not  a limitation  upon  the  right  of  the  Government  to  sue  for  unpaid 
taxes,  but  at  most  is  a limitation  upon  the  right  of  the  collecting  officers  to 
make  assessment  and  to  enforce  payment  by  the  customary  statutory  pro- 
ceedings. 

2.  Suit  for  Taxes. 

A suit  for  taxes  will  lie  without  an  assessment. 


In  the  District  Court  of  the  United  States  for  the  Western  District  of  Michigan, 

Southern  Division. 

The  United  States,  plaintiff,  v.  Grand  Rapids  & Indiana  Railway  Co.,  defendant. 

Demurrer. 

2044  A careful  study  and  analysis  of  the  statute  here  involved  and  an  examina- 
tion and  consideration  of  the  applicable  and  controlling  authorities  lead 

to  the  following  conclusions; 

2045  (1)  The  three-year  clause  of  the  fifth  subdivision  of  section  38  of  the 
1909  excise  law  is  not  a limitation  upon  the  right  of  the  Government  to 

sue  for  unpaid  taxes,  but,  at  most,  is  a limitation  upon  the  right  of  the  collecting 
officers  to  make  assessment  and  to  enforce  payment  by  the  summary  statutory 
proceedings. 

2046  (2)  in  the  collection  of  the  taxes  imposed  by  the  statute  the  Government 
is  not  confined  to  the  summary  proceedings  therein  provided,  but  may 

resort  to  a plenary  suit;  and 

2047  (3)  Where  a tax  of  a fixed  percentage  (like  the  one  here  sought  to  be 
recovered)  is  imposed  by  the  statute  on  a subject  or  object  which  is  so 

definitely  described  in  the  statute  that  its  amount  o'r  value  on  which  the  fixed  per 
centum  is  to  be  calculated  can  be  ascertained  and  determined,  on  evidence,  by  a 
court,  a suit  for  the  tax  will  lie  without  an  assessment.  United  States  v.  Tilden 
(28  Fed.  Cas.,  161;  No.  16,519);  United  States  v.  Hazard  (26  Fed.  Cas.,  251;  No. 
15,337);  Dollar  Savings  Bank  v.  United  States  (19  Wall.,  227);  United  States  v. 
Chamberlain  (219  U.  S.,  250-264);  King  v.  United  States  (99  U.  S.  229);  United 
States  V.  Reading  R.  R.  (123  U.  S.,  113);  United  States  v.  Cobb  (11  Fed.,  76); 
United  States  v.  M.  H.  and  O.  R.  Co.  [W.  D.  Mich.],  (17  Fed.,  719;  22  Cyc.,  1670, 
and  cases  there  cited);  Eliot  National  Bank  v.  Gill  (210  Fed.,  923,  affirmed  by 
the  Circuit  Court  of  Appeals  of  First  Circuit,  December  21,  1914  [218  Fed.  600].). 

2048  The  demurrer  will  be  overruled  and  the  defendant  will  be  given  fifteen 
days  within  which  to  plead  to  the  declaration. 

C.  W.  SESSIONS,  District  Judge. 

February  25,  1915.  (T.  D.  2166,  March  4,  1915.) 

2049  [Comment:  After  the  demurrer  was  overruled  the  case  went  on  trial, 
resulting  in  judgment  in  favor  of  the  United  States.] 

2050  The  appended  decision  [captions  only  as  shown  below]  of  the  United 
States  Circuit  Court  of  Appeals  for  the  Sixth  Circuit,  in  the  case  of  the 

United  States  v.  Nashville,  Chattanooga  & St.  Louis  Railway,  is  published  for 
A ^ '^^16^^191^8  ) internal-revenue  officers  and  others  concerned.  (T.  D.  2697, 

2051  1.  False  or  Incorrect  Returns.— The  word  “false,”  as  used  in  the  fifth 
subdivision  of  section  38,  of  the  act  of  August  5,  1909,  providing  that 

in  case  of  any  return  made  with  false  or  fraudulent  intent  the  Commissioner 
of  Internal  Revenue  shall  add  100  per  centum  of  the  tax,  means  “untrue”  or 
“incorrect,”  and  does  not  necessarily  mean  intentionally  or  fraudulently  false. 

2052  2.  Common-Law  Action  of  Debt  for  Taxes. — A common-law  action  of 
debt  lies  in  favor  of  the  Government  whenever  by  accident,  mistake,  or 

fraud,  taxes  have  not  been  paid;  thus  the  Government  may  recover  a personal 
judgment  for  a tax  whenever  there  exists  a duty  to  pay,  provided  another  remedy 
has  not  been  made  exclusive  by  clear  and  specific  declaration. 

2053  3.  Reassessment  as  Prerequisite  to  Suit.— Act  of  August  5,  1909,  section 
38,  does  not  make  the  remedy  by  way  of  a reassessment  by  the  Com- 
missioner of  Internal  Revenue  exclusive  of  all  other  remedies  for  collection  of 
excise  tax  imposed  on  corporations,  and  suit  may  be  brought  under  Revised 

INC.  363 


TAX 


PAYMENT  OF  TAX. 


Statutes,  section  3213,  providing  that  taxes  may  be  sued  for  and  recovered  m 
the  name  of  the  United  States,  in  any  proper  form  of  action,  before  any  circuit 
or  district  court  of  the  United  States  for  the  district  within  which  liability  to 
such  tax  is  incurred,  or  where  the  party  from  whom  such  tax  is  due  resides 
at  the  time  of  the  commencement  of  the  action,  without  any  such  reassessment. 
2054  4.  Operating  Expenses  and  Depreciations. — Though  what  is  a necessary 

expense  of  operation  and  what  is  a reasonable  allowance  for  property 
depreciation  are  ultimately  questions  of  fact,  so  far  as  they  involve  legal  questions 
they  are  absolutely  judicial  questions,  and  the  declaration  in  a suit  to  recover 
excise  tax  imposed  on  corporations  by  the  act  of  August  5,  1909,  which  fails 
to  show  the  making  of  a new  assessment  by  the  Commissioner  of  Internal 
Revenue,  is  therefore  not  demurrable.  ^ . 

205  5.  Declaration  in  Suit  to  Recover  Tax — Evidence.— Evidence  sustaining 

allegations  of  incorrectness  in  returns  by  corporation  subject  to  excise 
tax  imposed  by  act  of  August  5,  1909,  need  not  be  set  out  in  the  declaration 
in  a suit  to  recover  such  tax;  declaration  here  sufficiently  averred  erroneous 
or  untrue  return  of  operating  expenses  and  deductions  for  depreciation. 

2056  6.  Declaration  in  Suit  to  Recover  Tax — Bill  of  Particulars.— Where  decla- 
ration in  action  to  recover  of  a corporation  the  excise  tax  imposed  by  act 

of  August  5,  1909,  expressly  avers  that  alleged  deductions  were  not  reasonable 
allowances  for  depreciation  within  the  meaning  of  such  act,  if  more  definite  or 
detailed  information  is  needed  to  enable  defendant  to  plead  or  prepare  for 
trial,  remedy  is  by  bill  of  particulars. 

2057  7.  Judgment  Reversed. — Judgment  of  the  district  court  is  reversed.  (249 

Fed.  678.)  (T.  D.  2697,  April  16,  1918.) 

2058  In  a case  [^[2043]  recently  decided  in  the  United  States  District  Court 
for  the  Western  District  of  Michigan,  the  court  held  that  the  three-year 

clause  of  the  special  excise  corporation-tax  law  is  not  a limitation  upon  the  right 
of  the  Government  to  sue  for  unpaid  taxes,  but,  at  most,  is  a limitation  of  the 
right  of  the  collecting  officers  to  make  assessments  and  to  enforce  payment  by 
the  ordinary  summary  statutory  proceedings.  It  was  also  held  that,  in  a case 
wherein  the  tax  was  measured  by  a fixed  percentage,  as  is  the  case  in  the 
special  excise  and  income  taxes,  and  the  amount  of  the  tax  is  capable  of 
definite  ascertainment,  a suit  for  tax  will  lie  without  assessment. 

2059  It  follows,  therefore,  that  when  an  additional  tax  is  found  to  be  for  a 
period  antedating  the  three-year  limit,  an  assessment  is  not  a necessary 

condition  precedent  to  the  collection  of  the  tax,  as  the  amount  of  the  tax  may 
be  collected  by  suit. 

2060  In  the  examination  of  books  of  corporations  for  the  purpose  of  verifying 
their  returns  of  annual  net  income  for  years  antedating  the  three-year 

limit,  examining  officers  have  discovered  additional  tax  liability  in  many  cases 
and  have  encountered  some  difficulty  in  securing  either  amended  returns  or 
waivers  in  order  that  assessments  of  this  additional  tax  may  be  formally  made. 
(Mimeograph  letter  No.  1192  to  Collectors,  March  24,  1915;  continued  at  ^2062.) 

2061  The  Three-Year  Statutory  Limitation  May  Be  Waived. — While  the  Gov- 
ernment is  fully  authorized  to  recover  such  taxes  by  suit,  it  is  desirable, 

in  order  to  obviate  needless  expense  and  annoyance  to  the  taxpayer  and  the 
Government,  that  the  collection  be  made  as  a result  of  a formal  assessment. 
In  order  that  this  may  be  done,  corporations  owing  additional  taxes  for  any 
period  antedating  the  three-year  limitation  should  file  amended  returns,  together 
with  a statement  formally  waiving  the  three-year  statutory  limitation  and  con- 
senting to  assessment.  In  executing  such  amended  returns  or  waivers,  the 
corporations  forfeit  none  of  their  rights  under  the  law,  and  no  penalty  is 
incurred  which  might  not  be  otherwise  enforced  by  suit.  (Art.  233,  1[660,  Reg. 
33,  Rev.,  Jan.  2,  1918.) 

2062  While  the  Government  is  fully  authorized,  as  hereinbefore  indicated,  to 
recover  such  taxes  by  suit,  this  office  prefers  that  the  collection  should 

be  made  in  the  ordinary  statutory  method,  that  is,  as  a result  of  a formal 
assessment.  In  order  that  this  may  be  done,  corporations  should  be  requested 
to  make  amended  returns,  or  to  execute  waivers  in  such  form  as  will  waive 
the  three-year  statutory  limitation  as  to  the  time  within  which  assessments  may 
be  made,  and  the  corporations  should  be  informed  that,  in  executing  this  waiver, 
they  forfeit  none  of  their  rights  under  the  law  or  assume  liability  to  penalty 
that  might  not  be  enforced  against  them  in  the  absence  of  such  waiver.  The 
corporations  should  also  be  given  to  understand  that  the  execution  of  the  waiver 

INC.  364  TAX 


f 

f 

f 


f 

f 


PAYMENT  OF  TAX. 


is  in  fact,  to  their  advantage,  in  that  it  has  the  effect  to  eliminate  the  necessity 
on  the  part  of  the  Government,  to  recover  taxes  by  suit.  If,  however,  the  Lr- 
th  addition^  tax  liability  is  discovered  will  formally  accept 

the  findings  of  the  examining  officer  and  agree  to  voluntarily  pay  to  the  Col- 

substantially  in 

' ^ cm-poration  organized  under  the  laws  of  the  State 

■ ; hereby  consents  to  an  assessment  of  any  and  all  taxes 

imposed  by  section  38  of  the  Act  of  Congress  approved  August  5,  1909  and 
shown  or  found  to  be  due  on  a basis  of  its  net  income  received  from  all 

sources  during  the  year and  any  and  all  penalties  attached  to  or 

on  account  or  said  taxes,_  and  said  corporation  hereby  waives  any  statutory 

iTsesseT  penalties  should  have  been 

(Signed)  

(Corporate  Seal.)  (Corporation.) 

2064  It  is  believed  that  if  corporations  against  which  additional  tax  has  been 

til  d scovered  for  years  antedating  the  three-year  limit  are  fully  advised  that 
the  making  of  amended  returns  or  the  execution  of  waivers  does  not  in  anv 
way  imperil  any  right  which  they  have  under  the  law  or  involve  them  in  anv 
walvefs"  will  be  had  in  securing  such  amended  returns  or 

2065  Examining  officers  should  in  all  cases  clearly  present  this  matter  to  the 

in  nrde^Ta”/?  ^"'^"ded  returnT  or  waFvers 

°/der  that  formal  assessments  may  be  made  and  suit  to  recover  tax  with  the’ 

CoUectors"  Mardi  letter  No.’  1192,  to 

2066  When  Waiver  is  Given  the  Ad  Valorem  Penalty  Does  Not  Accrue  — 

waiver  ITgifi^p^ir'l^ra^^eS^ 

S^lin^g  retul"'  flrC?!;  ^2!!!?  Reg°  ‘3“’  iT 

additional  Uabni’t'r-®"]^  against  which 

nf  ° JS  discovered  will  formally  accept  the  findings 

the  Collecto"  " rintoOna^  Re y°>«n‘arily  pay  fhe  additional  tax  to 
retorns  or  waiVers  win  nOr  h and  does  so  pay  the  additional  tax,  amended 
returns  or  waivers  will  not  be  required.  (Art.  234,  1[661,  Reg.  33,  Rev.,  Jan.  2, 

2068  Law  11439.  Duty  of  Collector  to  Report  Violations  of  Law.— [Sec. 

1317  of  the  Revenue  Act  of  1918  amends  Sec.  3164,  Revised  Stat- 
wO  follows]  : “Sec.  3164.  It  shall  be  the  duty  of  every  col- 

aw  of°tVe"n  "Od  knowledge  of  any  willful  violation  of  any 

law  of  the  United  States  relating  to  the  revenue,  within  thirty  days  after 

of  tho^  r"!°  P°®session  of  such  knowledge,  to  file  with  the  district  attorney 
crlt  r'l"  penalty,  or  forfeiture  may  be  incurred,  a 

m!  ^ ^ circumstances  of  the  case  within  his  knowl- 

edge, together  with  the  names  of  the  witnesses,  setting  forth  the  pro- 
visions of  law  believed  to  be  so  violated  on  which  reliance  may  be  had  for 
condemnation  or  conviction.” 

20f>9  Violations  of  Law  to  Be  Reported  by  Internal  Revenue  Officers 

^c^d^n^b^^  discovering  in  the  course  of  his  duty  information 

leading  him  to  suspect  a possible  violation  of  any  law  with  the  enforcement 
of  which  he  is  not  directly  concerned  should  immediately  report  the  matter 
to  the  Commissioner,  who  is  authorized  to  communicate  with  the  orooer 
department  involved.  (Art.  1094,  Reg.^45,  Rev.,  April  17,  1919.) 

INC.  365  TAX 


PAYMENT  OF  TAX. 


ao70  Collection  of  Tax  by  Suit.-Taxes,  fines,  penalties  and  forfeitures 
may  be  sued  for  and  recovered  m the  name  of  the  United  States 
in  the  district  courts  of  the  United  States.  Suits 
taxes  may  be  brought  at  any  time  within  five  years  after  the 
due  or  was  made,  whether  the  taxes  have  been  assessed,  or  are  assess 
able  or  not  In  the  case  of  false  or  fraudulent  returns  wUh  intent  to 
evade  the  tax  no  statute  of  limitations  runs  against  ^e 

Section  3164  of  the  Revised  Statutes,  as  amended  by  section  1317  of  the 
Revenue  Act  of  1918,  provides  [P068  above]: 

FTnwever  no  suit  for  the  recovery  of  unpaid  taxes  or  of  any  hne,  Penalty 
or  forfeiture  shall  be  commenced  until  the  collector  shall  have  submitted 
to  the  Commissioner  a full  report  of  all  material  facts  and  circumstances 
in  the  case  and  shall  have  received  from  him  express  authority  to 
See  sections  3212-3216  of  the  Revised  Statutes,  and 

(revised!  and  Regulations  No.  12  (revised).  (Art.  1008,  Reg.  45,  Rev., 
April  17,  1919.) 

2071  Collection  of  Tax  by  Distraint.-If  any  person  liable  ^ any 
taxes  neglects  or  refuses  to  pay  them  within  ten  ^ays  after  notice 
and  demand  it  shall  be  lawful  for  the  collector  or  his  deputy  to  collect 
such  taxes  with  5 per  cent  additional  and  interest  at  12  per  cent  per  annum 
hv  distrainTand  sale  of  the  goods,  chattels  or  effects,  including  stocks, 
securities  and  evidences  of  debt,  of  the  person  delinquent.  When  goods, 
cra  te  s or  effects  sufficient  to  satisfy  the  taxes  imposed  upon  any  person 
Sf  not  found  by  the  collector  or  deputy  collector,  he  is  authorized  to 
collect  such  taxes  by  seizure  and  sale  of  real  estate.  See  ("s 

fas  amended  by  the  Act  of  March  4,  ^ a a u 

amended  by  the  Act  of  March  1,  1879),  3198-3202,  3203  (as  amended  by 
tte  Act  of  March  1,  1879),  3204-3207,  3208  (as  amended  by  the  Act  of 
T\/r  u 1 1R7Q^  and  3209  of  the  Revised  Statutes  and  Regulations  No.  12 

1919.) 

r.S  •!>«  «»<!”'”'  ■■f 

* • Tffis  remedy  does  not  supersede  distraint,  but  is  cumulative, 

or  interest.  This  demand  it  becomes  a lien  m 

5"  rX  U„r/sSS  torn  S.  . . wten  the  .»e., men.  list  w„ 
Ite  cl  feeloJ  wn  >n  property  and  risho  to  property  belonjing 

““  L.w,333.  Sr-fnotSuSroiTR^^^^^^^^^ 

INC.  366  TAX 


PAYMENT  OF  TAX. 


quickly  to  depart  from  the  United  States  or  to  remove  his  property  there- 
from, or  to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act 
tending  to  prejudice  or  to  render  wholly  or  partly  ineffectual  proceedings 
to  collect  the  tax  for  the  taxable  year  then  last  past  or  the  taxable  year 
then  current  unless  such  proceedings  be  brought  without  delay,  the  Com- 
missioner shall  declare  the  taxable  period  for  such  taxpayer  terminated  at 
the  end  of  the  calendar  month  then  last  past  and  shall  cause  notice  of  such 
finding  and  declaration  to  be  given  the  taxpayer,  together  with  a demand 
for  immediate  payment  of  the  tax  for  the  taxable  period  so  declared  ter- 
minated and  of  the  tax  for  the  preceding  taxable  year  or  so  much  of  said 
tax  as  is  unpaid,  whether  or  not  the  time  otherwise  allowed  by  law  for 
filing  return  and  paying  the  tax  has  expired;  and  such  taxes  shall  there- 
upon become  immediately  due  and  payable.  In  any  action  or  suit  brought 
to  enforce  payment  of  taxes  made  due  and  payable  by  virtue  of  the  pro- 
visions of  this  subdivision  the  finding  of  the  Commissioner,  made  as  herein 
provided,  whether  made  after  notice  to  the  taxpayer  or  not,  shall  be  for 
all  purposes  presumptive  evidence  of  the  taxpayer’s  design.  A taxpayer 
who  is  not  in  default  in  making  any  return  or  paying  income,  war-profits, 
or  excess-profits  tax  under  any  Act  of  Congress  may  furnish  to  the  United 
States,  under  regulations  to  be  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary,  security  approved  by  the  Commissioner  that  he 
will  duly  make  the  return  next  thereafter  required  to  be  filed  and  pay  the 
tax  next  thereafter  required  to  be  paid.  Tlie  Commissioner  may  approve 
and  accept  in  like  manner  security  for  return  and  payment  of  taxes  made 
due  and  payable  by  virtue  of  the  provisions  of  this  subdivision,  provided  the 
taxpayer  has  paid  in  full  all  other  income,  war-profits,  or  excess-profits 
taxes  due  from  him  under  any  Act  of  Congress.  If  security  is  approved 
and  accepted  pursuant  to  the  provisions  of  this  subdivision  and  such  further 
or  other  security  with  respect  to  the  tax  or  taxes  covered  thereby  is  given 
as  the  Commissioner  shall  from  time  to  time  find  necessary  and  require, 
payment  of  such  taxes  shall  not  be  enforced  by  any  proceedings  under  the 
provisions  of  this  subdivision  prior  to  the  expiration  of  the  time  otherwise 
allowed  for  paying  such  respective  taxes.” 

2074  Declaration  of  Termination  of  Taxable  Period. — In  the  case  of  a 
taxable  person  who  designs  by  immediate  departure  from  the  country 
or  otherwise  to  avoid  payment  of  the  tax  for  the  preceding  or  cur- 
rent taxable  year,  the  Commissioner  may  so  find  upon  evidence  satis- 
factory to  him  and  may  declare  the  taxable  period  for  such  person  ter- 
minated at  the  end  of  the  month  last  past,  causing  the  service  upon  him 
of  a notice  and  demand  for  immediate  payment  of  the  tax  declared  due 
and  any  other  tax  unpaid.  In  such  a case  the  taxpayer  is  entitled  to  a 
full  personal  exemption  and  credit  for  dependents.  See  section  216  of  the 
statute  and  article  305  [for  date  of  determining  exemption,  p526].  If 
suit  is  necessary  to  collect  the  tax,  the  Commissioner’s  finding  is  presump- 
tive evidence  of  the  taxpayer’s  design.  A person  who  is  not  in  default  in 
making  returns  or  in  paying  other  taxes  may  procure  the  postponement 
until  the  usual  time  of  the  payment  of  taxes  declared  or  declarable  to  be 
due  pursuant  to  this  article  by  depositing  with  the  Commissioner  United 
States  bonds  of  a principal  amount  double  the  estimated  amount  of  taxes 
due  from  such  person  for  the  taxable  year  or  by  furnishing  such  other 
security  as  may  be  approved  by  the  Commissioner.  See  section  1320  [for 
United  States  bonds  in  lieu  of  sureties,  ^[1500].  (Art.  1013,  Reg.  45^ 
Rev.,  April  17,  1919.) 


INC.  367 


TAX 


PAYMENT  OF  TAX. 


2075  On  account  of  the  unusual  exodus  of  aliens  from  the  United  States 
following  the  armistice  agreement  and  the  treaty  of  peace,  it  be- 
comes necessary  to  outline  uniform  procedure  as  to  the  manner  in  which 
income  tax  should  be  collected  from  aliens  seeking  passage  abroad. 

2076  Section  250(g)  of  the  Revenue  Act  of  1918  provides  in  part  as 
follows : 

“If  the  Commissioner  finds  that  a taxpayer  designs  quickly  to 
depart  from  the  United  States  or  to  remove  his  property  therefrom, 
or  to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act 
tending  to  prejudice  or  to  render  wholly  ineffectual  proceedings  to 
collect  the  tax  for  the  taxable  year  then  last  past  or  the  taxable  year 
then  current  unless  such  proceedings  be  brought  without  delay,  the 
Commissioner  shall  declare  the  taxable  period  for  such  taxpayer  ter- 
minated at  the  end  of  the  calendar  month  then  last  past  and  shall 
cause  notice  of  such  finding  and  declaration  to  be  given  the  taxpayer, 
together  with  a demand  for  immediate  payment  of  the  tax  for  the 
taxable  period  so  declared  terminated  and  of  the  tax  for  the  preceding 
taxable  year  or  so  much  of  said  tax  as  is  unpaid,  whether  or  not  the 
time  otherwise  allowed  by  law  for  filing  return  and  paying  the  tax 
has  expired;  and  such  taxes  shall  thereupon  become  immediately  due 
and  payable.” 

2077  In  order  that  the  provisions  of  the  foregoing  section  may  be 
strictly  enforced  with  the  least  possible  friction  and  discomfort 

to  persons  who  are  returning  to  their  native  land,  the  following  rules 
have  been  outlined : 

2078  1.  Aliens,  whether  resident  or  nonresident  as  to  the  United 
States,  who  desire  to  depart  from  this  country,  should  appear  be- 
fore the  Collector  of  Internal  Revenue  for  the  district  in  which  the  indi- 
vidual last  resided  and  should  satisfy  all  income  tax  obligations  with 
respect  to  income  received  up  to  and  including  the  preceding  month. 

2079  2.  In  computing  the  tax  liability  of  any  person  whose  taxable 
period  is  terminated  .in  accordance  with  Section  250(g),  the  tax- 
payer is  entitled  to  the  same  personal  exemption  and  credit  for  depend- 
ents as  he  would  have  been  entitled  to  had  the  return  been  prepared  for 
the  full  taxable  year.  See  Article  1013,  Regulations  No.  45  [1[2074]. 

2080  3.  If  any  income  tax  has  been  withheld  from  wages  or  other  in- 
come of  an  alien,  credit  therefor  should  be  given  to  the  taxpayer 

when  computing  the  balance  of  income  tax  due  the  United  States  Gov- 
ernment. 

2081  4.  An  alien,  who  is  a resident  for  income  tax  purposes  during  the 
year  1918  but  decides  in  1919  to  return  to  his  native  country,  should 

be  classified  as  a nonresident  alien  for  the  taxable  period  of  1919.  ^ This  is 
not  to  be  construed  as  depriving  an  alien  of  his  status  as  a resident  in 
case  his  absence  is  only  temporary.  A resident  alien  with  children  abroad 
is  not  a head  of  a family.  A resident  alien  with  a wife  residing  abroad 
is  not  entitled  to  the  joint  exemption.  A nonresident  alien  is  entitled  to 
personal  exemption  and  credit  for  dependents  only  in  case  he  is  a subject 
of  a country  which  imposes  no  income  tax,  or  in  imposing  an  income 
tax  allows  similar  credits  to  citizens  of  the  United  States  not  residing  in 
such  country.  For  a list  of  the  countries  see  Article  307  [p572],  which 
will  be  supplemented  by  a list  of  additional  countries  when  the  data  is 
Available. 

2082  5,  An  alien  appearing  before  the  Collector  of  Internal  Revenue 
should  be  questioned  as  to  his  earnings  for  1916,  1917,  1918  and  1919, 

368  TAX 


INC. 


PAYMENT  OF  TAX. 


and  the  Collector,  in  accordance  with  the  information  furnished,  should  ex- 
ecute  Form  lO^C,  which  will  be  issued  at  an  early  date.  The  form  as 
drafted  shows  the  amount  of  tax  due  for  the  taxable  period  in  1919  as  well 
as  the  income  and  anmunt  of  tax  for  prior  years.  On  the  bottom  of  the 
return  is^  printed  a Certificate  of  Compliance.  This  return  should  be 
executed  in  duplicate  by  the  alien,  and  the  Certificate  of  Compliance  should 
be  signed  by  the  Collector  of  Internal  Revenue.  The  alien  should  retain 
^e  duplicate  copy  and  should  present  it  to  the  Internal  Revenue  Agent  in 
Charge  at  the  port  of  embarkation  for  a Sailing  Permit.  Sailing  Permits 
will  only  be  issued  by  Internal  Revenue  Agents  at  the  port  of  embarkation. 

. . Sailing  Permit — United  States  Internal  Revenue. 

I his  IS  to  certify  that 
Name 

City State. ..!.... 

has  complied  with  all  requirements  of  the  Revenue  ’ Act’ of ' i^is’ and  the 
Acts  for  prior  years. 

Signed • 

(Internal  Revenue  Agent.) 

2083  6.  An  American  citizen  applying  for  a Sailing  Permit  should  satisfy 

nf  Agent  in  charge  that  he  has  paid  all  installments 

of  income  tax  due  up  to  the  date  of  departure  and  has  made  arrangements  for 
the  payment  of  future  installments  as  they  become  due.  It  will  not  be  neces- 

j ‘*?e  taxable  period  of  a citizen  of  the  United  States  closed  as 
provided  in  Section  250  (g)  of  the  Revenue  Act  of  1918,  unless  the  Agent 
has  reason  to  believe  that  the  departing  citizen  intends  evasion  of  his  income 
tax  liability  for  1919.  The  Sailing  Permits  will  be  printed  on  special  paper 
so  they  may  not  be  easily  duplicated  and  will  be  readily  distinguished  by 
the  Revenue  Agent  at  the  port  of  departure.  ^ 

2084  7 The  examination  of  aliens  in  the  Collector’s  office  should  be  in 

1 .u  ™an  thoroughly  qualified  as  to  the  tax  liability  of  aliens 

f oriresident,  and  the  exemption  to  which  entitled.  See 
Articles  307  and  311  to  316,  inclusive,  of  Regulations  No.  45,  as  well  as 
|l572f  ^ Revenue  Act  of  1918  [beginning  at  [[518  and  at 

8.  In  accordance  with  an  agreement  with  the  officials  of  steamship 
operate  ships  entering  into  United  States  ports, 
steamship  officials  will  require  persons  applying  for  overstamping  of  tickets 
to  produce  a Sailing  Permit  signed  by  the  proper  Internal  ReveLe  officer 
The  Internal  Reyeniie  Agent  in  Charge  will  assign  a sufficient  number  of  his 
force  to  inspect  the  Permits  at  the  pier  on  days  of  sailing. 

2080  9 In  cases  where  an  alien  has  failed  to  appear  before  the  Collector 
ot  Internal  Revenue  for  his  district  prior  to  seeking  passage  to  a for- 

Wcnal  ' necessary  for  him  to  appear  befofe  the  Collector  of 

Internal  Revenue  for  the  district  in  which  the  port  of  embarkation  is  located 
in  order  to  satisfy  his  income  tax  obligations.  Pending  the  issuance  of 

ahens.  Form  1040C,  havin|  printed  thereon 
the  Certiyate  of  Compliance,  the  Collector  of  Internal  Revenue  will  pre- 
pare, with  necessary  adjustments.  Form  1040A  in  duplicate,  attaching  to  the 
duplicate  a Certificate  of  Compliance.  The  worksheet  of  Form  1040A  may 
be  used  as  a duplicate  to  be  retained  by  the  alien.  ^ 


INC. 


369  TAX 


PAYMENT  OF  TAX. 


Examination  of  Aliens. 

2087  When  examining  aliens  in  the  office  of  Collectors  of  Internal  Revenue, 
they  should  be  questioned  substantially  as  follows:  (a)  By  whom  em- 
ployed, length  of  time,  amount  earned,  amount  of  tax  withheld,  supported  by 
letter  from  employer,  (b)  Married  or  single,  and  if  former,  is  wife  m this 
country,  (c)  If  not  employed  for  any  part  of  the  year,  give  reasons  ana 
how  supported  while  unemployed,  (d)  Information  as  to  nature  of  worn 
performed  should  be  secured  as  correctness  of  amount  of  ^ income  may  be 
determined  by  standard  prices  paid  for  labor,  (e)  Information  as  to  amount 
of  money  sent  abroad  should  also  be  obtained  and,  if  necessary,  be  vended 
through  local  bankers  or  steamship  company. 

2088  A strict  compliance  with  the  plan  as  outlined,  and  the  cooperation 
between  the  Offices  of  the  Collectors  of  Internal  Revenue  and 

Internal  Revenue  x\gents  in  Charge  is  requested.  (If— Mim.  2195,  July 
18,  1919.) 

2089  Law  11434.  Fractional  Part  of  Cent  to  Be  Disregarded  in  Payment 

‘of  Tax.— ‘Sec.  1313.  That  in  the  paym.ent  of  any  tax 
under  this  Act  not  payable  by  stamp  a fractional  part  of  a cent  shall  be  dis- 
regarded unless  it  amounts  to  one-half  cent  or  more,  in  which  case  it  shall  be 
increased  to  1 cent.” 

2090  When  Fractional  Part  of  Cent  May  Be  Disregarded.— In  the  pay- 
ment of  income  or  war  profits  and  excess  profits  taxes,  and  in  each 

step  or  computation  necessary  in  determining  the  amount  of  any  such 
tax,  a fractional  part  of  a cent  may  be  desregarded  unless  it  amounts 
to  one-half  cent  or  more,  in  which  case  it  shall  be  increased  to  1 cent.  (Art. 
1721,  Reg.  45,  Rev.,  April  17,  1919.) 

2091  Law  1|435.  Payment  of  the  Tax  by  Means  of  Treasury  Certificates 

of  Indebtedness  and  Uncertified  Checks. — “Sec.  1314.. 
That  collectors  may  receive,  at  par  with  an  adjustment  for  accrued  interest, 
certificates  of  indebtedness  issued  by  the  United  States  and  uncertified  checks 
in  payment  of  income,  war-profits  and  excess-profits,  te^es  and  any  other 
taxes  payable  other  than  by  stamp,  during  such  time  and  under  such  regu- 
lations as  the  Commissioner,  with  the  approval  of  the  Secretary,  shall  pre- 
scribe; but  if  a check  so  received  is  not  paid  by  the  bank  on  which  it  is 
drawn  the  person  by  whom  such  check  has  been  tendered  shall  remain  liable 
for  the  payment  of  the  tax  and  for  all  legal  penalties  and  additions  the 
same  as  if  such  check  had  not  been  tendered.” 

2092  Payment  of  Tax  by  Certificates  of  Indebtedness. — Collectors  will 
receive  at  par  United  States  Treasury  certificates  of  indebtedness 

[certificatess  mentioned  have  matured]  * * * in  payment  of  taxes  pay- 
able within  sixty  days  before  the  maturity  of  the  certificates.  The 
terms  of  the  acceptance  of  certificates  of  other  issues  will  be  prescribed 
from  time  to  time.  The  amount  at  par  of  the  certificates  of  indebtedness 
presented  by  any  taxpayer  in  payment  of  taxes  must  not  exceed  the  amount 
of  the  taxes  to  be  paid  by  him.  (Art.  1731,  Reg.  45,  Rev.,  April  17,  1919.) 

2093  Procedure  with  Respect  to  Certificates  of  Indebtedness.  ^Such 
certificates  of  indebtedness  may  be  accepted  by  the  collector  prior  to 

the  date  the  tax  is  due  and  in  that  case  should  be  forwarded  by  the  collector 
to  the  federal  reserve  bank  to  be  held  for  his  account  until  the  date  the  tax  is 

370  TAX 


INC. 


PAYMENT  OF  TAX. 


due  and  for  deposit  on  such  date.  All  coupons  maturing  on  or  before  the 
date  the  tax  is  due  must  be  detached  by  the  taxpayer  and  collected  in  ordin- 
ary course,  but  all  other  coupons  must  remain  attached  to  the  certificate  and 
be  forwarded  to  the  federal  reserve  bank.  Any  accrued  interest  to  the 
date  the  tax  is  Jdue,  not  covered  by  coupons  detached  as  above  provided, 
will  be  remitted  to  the  taxpayer  by  the  federal  reserve  bank  by  check,  for 
which  purpose  the  collector  will  furnish  tO\  the  bank  the  name  and  address 
of  the  taxpayer,  the  amount  and  serial  numbers  of  the  certificates  presented 
in  each  case,  the  date  of  issue  of  the  certificates,  and  the  date  the  tax  is  due. 
Collectors  shall  in  no  case  pay  interest  on  sucli  certificates  nor  accept  them 
for  an  amount  other  or  greater  than  their  face  value.  Receipts  given  by  col- 
lectors to  taxpayers  should  show  the  amount  of  certificates  of  each  series 
received  in  payment  of  taxes.  For  the  purpose  of  saving  taxpayers  the  ex- 
pense of  transmitting  such  certificates  as  are  held  in  federal  reserve  cities 
to  the  office  of  the  collector  in  whose  district  the  taxes  are  payable,  tax- 
payers desiring  to  pay  taxes  by  acceptable  certificates  of  indebtedness  should 
communicate  with  the  collector  and  request  from  him  authority  to  deposit 
such  certificates  to  his  credit  with  the  federal  reserve  bank  in  the  city  in 
which  the  certificates  are  held.  (Art.  1732,  Reg.  45,  Rev.,  April  17,  1919.) 

2094  Deposits  of  Treasury  certificates  of  indebtedness  received  in  payment 
of  income  and  profits  taxes  must  be  made  by  collectors,  unless  other- 
wise specifically  instructed  by  the  Secretary  of  the  Treasury,  with  the  Fed- 
eral Reserve  Bank  of  the  district  in  which  the  collector’s  head  office  is  lo- 
cated, or  in  case  such  head  office  is  located  in  the  same  city  with  a branch 
Federal  Reserve  Bank,  with  such  branch  Federal  Reserve  Bank.  Specific  in- 
structions may  be  given  in  certain  instances  for  the  deposit  of  the  certificates 
with  Federal  Reserve  Banks  of  other  districts  and  with  branch  Federal  Re- 
serve Banks,  and  the  term  “Federal  Reserve  Bank,”  where  it  appears  herein, 
includes  such  branches.  Treasury  certificates  accepted  by  the  collectors 
prior  to  the  dates  when  the  certificates,  respectively  mature  should  be  for- 
warded by  the  collector  to  the  Federal  Reserve  Bank,  to  be  held  for  account 
of  the  collector  until  the  date  of  maturity,  and  for  deposit  on  such  date. 
Certificates  of  indebtedness  should  in  all  cases  be  stamped  as  follows  by  the 
Collector,  and  when  so  stamped  forwarded  to  the  Federal  Reserve  Bank  by 
registered  mail,  uninsured: 

“ 191 

This  certificate  has  been  accepted  in  payment  of  income  and  profits 
taxes  and  will  not  be  redeemed  by  the  United  States  except  for  credit  of  the 
undersigned. 

Collector  of  Internal  Revenue  for  the district  of ” 

2095  Collectors  of  internal  revenue  are  not  authorized,  unless  otherwise 
notified  by  the  Secretary  of  the  Treasury,  to  receive  in  payment  of 

income  or  profits  taxes  interim  receipts  issued  by  Federal  Reserve  Banks 
in  lieu  of  definitive  certificates  of  the  series  herein  described. 

2090  Collectors  should  make  in  tabular  form  a schedule  in  duplicate  of 
the  certificates  of  indebtedness  to  be  forwarded  to  the  Federal 
Reserve  Bank,  showing  the  serial  number  of  each  certificate,  the  date  of 
issue  and  maturity,  and  face  value.  Certificates  of  indebtedness  accepted 
prior  to  the  date  of  maturity  must  be  scheduled  separately.  At  the  bottom 
of  each  schedule  there  should  be  written  or  stamped  “Income  and  Profits 

INC.  371  tax’ 


PAYMENT  OF  TAX. 


Taxes,  $ which  amount  must  agree  with  the  total  shown  on 

the  schedule.  One  copy  of  this  schedule  must  accompany  certificates  sent 
to  the  Federal  Reserve  Bank  and  the  other  be  retained  by  the  collector. 
Such  income  and  profits  tax  deposits  must  in  all  cases  be  shown  on  the  face 
of  the  certificate  of  deposit  (National  Bank  Form  15)  separate  and  distinct 
from  the  item  of  miscellaneous  internal-revenue  collections  ( formerly  called 
“Ordinary”),  but  it  is  not  necessary  to  give  the  separation  into  corporation 
income,  individual  income  and  profits  taxes. 

2097  Until  certificates  of  deppsit  are  received  from  the  Federal  Reserve 
Banks,  the  amounts  represented  by  the  certificates  of  indebtedness 

forwarded  must  be  carried  by  collectors  as  cash  on  hand,  and  not  credited 
as  collections,  as  the  dates  of  certificates  of  deposit  determine  the  dates  of 
collections. 

2098  For  the  purpose  of  saving  taxpayers  the  expense  of  transmitting 
such  certificates  as  are  held  in  Federal  Reserve  cities  to  the  office  of 

the  collector  in  whose  district  the  taxes  are  payable,  taxpayers  desiring  to 
pay  income  and  profits  taxes  by  Treasury  certificates  of  indebtedness  ac- 
ceptable in  payment  of  such  taxes,  should  communicate  with  the  collector 
of  the  district  in  which  the  taxes  are  payable  and  request  from  him  au- 
thority to  deposit  such  certificates  with  the  Federal  Reserve  Bank  in  the 
city  in  which  the  certificates  are  held.  Collectors  are  authorized  to  per- 
mit deposits  of  Treasury  certificates  of  indebtedness  in  any  Federal  Re- 
serve Bank  with  the  distinct  understanding  that  the  Federal  Reserve 
Bank  is  to  issue  a certificate  of  deposit  in  the  collector’s  name  covering 
the  amount  of  the  certificates  of  indebtedness  at  par  and  to  state  on  the 
face  of  the  certificate  of  deposit  that  the  amount  represented  thereby  is 
in  payment  of  income  and  profits  taxes.  The  Federal  Reserve  Bank 
should  forward  the  original  certificate  of  deposit  to  the  Treasurer  of  the 
United  States,  with  its  daily  transcript,  and  transmit  to  the  collector 
the  duplicate  and  triplicate,  accompanied  by  a statement  giving  the  name 
of  the  taxpayer  for  whom  the  payment  is  made  in  order  that  the  collector 
may  make  the  necessary  record  and  forward  the  duplicate  to  the  office 
of  the  Commissioner  of  Internal  Revenue. 

2099  This  Treasury  Decision  amends  and  supplements  the  provisions  of 
Articles  1731  [P092]  and  1732  1I[2093]  of  Regulations  45.  (T.  D. 

2907,  August  7,  1919  as  amended  by  T.  D.  2918,  September  12,  1919.) 

2100  Payment  of  Tax  by  Uncertified  Checks. — Collectors  may  accept 

uncertified  checks  in  payment  of  income  and  war  profits  and  excess 
profits  taxes,  provided  such  checks  are  collectible  at  par,  that  is,  for  their 
full  amount,  without  any  deduction  for  exchange  or  other  charges.  The 
collector  will  stamp  on  the  face  of  each  check  before  deposit  the  words, 
“This  check  is  in  payment  of  an  obligation  to  the  United  States  and  rnust  be 
paid  at  par.  No  Protest,”  with  his  name  and  title.  The  day  on  which  the 
collector  receives  the  check  will  be  considered  the  date  of  payment  so  far  as 
the  taxpayer  is  concerned,  unless  the  check  is  returned  dishonored.  If  one 
check  is  remitted  to  cover  two  or  more  persons’  taxes,  the  remittance  must  be 
accompanied  by  a letter  of  transmittal  stating  (a)  the  name  of  the  drawer  of 
the  check  ; fb)  the  amount  of  the  check ; (c)  the  amount  of  any  cash,  money 
order  or  other  instrument  included  in  the  same  remittance;  (d)  the  name  of 
each  person  whose  tax  is  to  be  paid  by  the  remittance;  (e)  the  amount  of 
the  pavment  on  account  of  each  person ; and  (f)  the  kind  of  tax  paid.  (Art. 
1733,  Reg.  45,  Rev.,  April  17,  1919.) 

372  TAX 


INC. 


PAYMENT  OF  TAX. 


2101  Procedure  with  Respect  to  Dishonored  Checks. — If  the  bank  on 
which  any  such  check  is  drawn  should  refuse  to  pay  it  at  par,  the 

check  should  be  returned  through  the  depositary  bank  and  be  treated  in  the 
same  manner  as  a bad  check.  All  expenses  incident  to  the  attempt  to  collect 
such  a check  and  the  return  of  it  through  the  depositary  bank  must  be 
paid  by  the  drawer  of  the  check  to  the  bank  on  which  it  is  drawn,  since  no 
deduction  can  be  made  from  amounts  received  in  payment  of  taxes.  See 
section  3210  of  the  Revised  Statutes.  If  any  taxpayer  whose  check  has  been 
returned  uncollected  by  the  depositary  bank  should  fail  at  once  to  make 
the  check  good,  the  collector  should  proceed  to  collect  the  tax  as  though  no 
check  had  been  given.  A taxpayer  who  tenders  a certified  check  in  payment 
for  taxes  is  also  not  released  from  his  obligation  until  the  check  has  been 
paid.  See  chapter  191  of  the  Act  of  March  2,  1911.  (Art  1734,  Reg.  45, 
Rev.,  April  17,  1919.) 

2102  Law  |[384.  Receipts  for  Taxes. — ^‘Sec.  251.  That  every  collector 

to  whom  any  payment  of  any  tax  is  made  under  the  pro- 
visions of  this  title  shall  upon  request  give  to  the  person  making  such  pay- 
ment a full  written  or  printed  receipt,  stating  the  amount  paid  and  the 
particular  account  for  which  such  payment  was  made;” 

2103  Receipts  for  Tax  Payments.— Upon  request  a collector  will  give  a 
receipt  for  each  tax  payment.  In  the  case  of  payments  made  by 

check  or  money  order  the  cancelled  check  or  the  money  order  receipt 
is  usually  a sufficient  receipt.  In  the  case  of  payments  in  cash,  how- 
ever, the  taxpayer  should  in  every  instance  require  and  the  collector  should 
furnish  a receipt.  (Art.  1021,  Reg.  45,  Rev.,  April  17,  1919.) 

2104  Simulation  of  Income  Tax  Receipts — Decision  of  Court. — The 

appended  opinion  and  charge  of  Judge  Westenhaver  in  the  District 
Court  of  the  United  States,  for  the  Northern  District  of  Ohio,  Eastern 
Division,  in  the  case  of  United  States  v.  Pittaro,  is  published  for  the  infor- 
mafion  of  internal  revenue  officers  and  others  concerned.  [Captions  only.] 

2105  L Receipts  to  taxpayers — Duty  to  issue. 

The  fact  that  Section  251  of  the  act  of  February  24,  1919,  requires 
that  full  written  or  printed  receipts  be  issued  to  taxpayers  only  on  request 
therefor  does  not  limit  the  collector’s  mandatory  duty  to  issue  them  when 
requested  and  does  not  fail  to  make  them  documents  required  to  be  issued 
whenever  requested,  and  the  receipts  are  plainly  documents  required  to  be 
issued  by  such  section. 

2100  2.  Same — Simulation  or  fraudulent  execution. 

Such  receipts  are  documents  required  by  provisions  of  the  internal 
revenue  laws  and  by  regulations  made  in  pursuance  thereof,  within  the  mean- 
ing of  Section  3451,  R.  S.,  making  it  an  offense  to  simulate  or  falsely  or 
fraudulently  execute  or  sign  any  document  required  by  the  internal  revenue 
laws,  or  any  regulation  made  in  pursuance  thereof,  or  to  procure  the  same 

to  be  falsely  or  fraudulently  executed,  or  to  advise,  aid  in,  or  connive  at 

such  execution  thereof. 

2107  3,  Same — Blanks. 

The  offense  may  be  committed  either  where  the  receipt  itself  is  a 
genuine  receipt  of  the  kind  kept  for  that  purpose  in  the  office  of  the  internal 
revenue  collector  but  signed  by  the  defendant  without  authority,  or  where, 
even  if  not  a blank  of  the  kind  required  to  be  kept,  the  blank  itself  is  simu- 
lated or  falsely  or  fraudulently  executed  and  issued  by  a person  who  has  no 
power  or  authority  to  do  so. 

INC. 


373  TAX 


PAYMENT  OF  TAX. 


2108  4.  Same — Income  tax  receipts. 

Where  defendant  was  charged  with  violating  Section  3451,  R.  S., 
in  that  he  falsely,  fraudulently,  etc.,  simulated  and  executed  and  advised, 
aided  in,  and  connived  at  the  execution  of  certain  income  tax  receipts  re- 
quired by  Section  251  of  the  act  of  February  24,  1919,  to  be  given  when 
requested,  what  defendant  told  the  persons  who  paid  the  money  is  not 
material,  nor  is  the  question  whether  or  not  such  persons  were  subject  to  the 
payment  of  an  income  tax,  or  to  assessment  and  levy  of  such  tax.  (T.  D. 
2874,  June  23,  1919.) 

2109  Unofficial  Receipts. — The  department  has  received  from  time  to 
time  complaints  from  taxpayers,  especially  those  paying  corporation 

income  tax,  that  collectors  refuse  to  sign  what  is  known  as  commercial  re- 
ceipts, or  refuse  to  indorse  what  is  generally  known  as  voucher  checks,  many 
of  such  receipts  and  checks  stating  on  the  face  that  by  indorsement  the 
voucher  check  or  receipt  becomes  a receipt  in  full  for  amount  and  purpose 
drawn. 

2110  The  only  official  receipt  for  taxes  that  collectors  may  sign  under  tlie 
law  are  stamps,  where  stamps  are  issued,  or  Form  1,  when  the  tax 

is  not  payable  by  stamp,  which  receipts  are  to  be  issued  to  every  taxpayer  for 
taxes  paid.  However,  the  department  has  no  objection  to  collectors  signing 
commercial  receipts  or  voucher  checks  (subject  in  the  latter  case  to  the  rules 
of  the  depositary),  but  they  should,  in  signing  such  receipts  or  vouchers, 
write  or  stamp  across  the  face  thereof  the  words  “Not  an  official  receipt.” 
The  official  receipt  on  Form  1,  must,  however,  be  furnished;  and  it  is  to  be 
distinctly  understood  that  an  unofficial  receipt  is  not  in  any  manner  binding 
on  the  department,  and  will  not  be  received  by  it  as  evidence  of  payment  of 
the  tax.  (T.  D.  2226,  July  14,  1915.) 

2111  Deputy  Collectors  to  Give  Personal  Receipts  for  Collections  Made 
by  Them. — After  careful  consideration,  this  office  has  reached  the 

conclusion  that,  in  order  thoroughly  to  protect  the  interests  of  both  the 
taxpayers  and  the  Government,  some  evidence  of  payment  should  be  given  at 
the  time  to  taxpayers  who  pay  taxes  directly  to  deputy  collectors,  and  that 
such  a receipt  as  herein  described  is  not  in  violation  of  Section  3188,  which 
prohibits  the  issuance  of  a receipt  in  lieu  of  a stamp. 

2112  You  are  therefore  instructed  to  direct  your  deputies  hereafter  to  give 
to  special  and  other  taxpayers,  at  the  time  of  payment,  a personal 

receipt  for  moneys  collected,  substantially  in  the  following  form : 

“Received  of*  JOHN  DOE  $ to  be  forwarded  to  the  Collector 

to  cover  special  tax  due  as ^ 

2113  In  case  the  payment  is  for  stamp  tax  or  for  amounts  other  than 
special  tax,  the  form  of  receipt  may  be  modified  accordingly.  (T. 

D.  2341,  June  19,  1916.) 

2114  Law  p85.  Receipts  to  Be  Given  for  Payments  Made  by  Withhold- 

ing Agents  on  Account  of  Amounts  Deducted  at  the 
Source. — “and  whenever  any  debtor  pays  taxes  on  account  of  payrnents 
made  or  to  be  made  by  him  to  separate  creditors  the  collector  shall,  if  re- 
quested by  such  debtor,  give  a separate  receipt  for  the  tax  paid  on  account 
of  each  creditor  in  such  form  that  the  debtor  can  conveniently  produce  such 
receipts  separately  to  his  several  creditors  in  satisfaction  of  their  respective 
demands  up  to  the  amounts  stated  in  the  receipts ; and  such  receipt  shall  be 

INC,  374  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


sufficient  evidence  in  favor  of  such  debtor  to  justify  him  in  withholding 
from  his  next  payment  to  his  creditor  the  amount  therein  stated;  but  the 
creditor  may,  upon  giving  to  his  debtor  a full  written  receipt  acknowledging 
the  payment  to  him  of  any  sum  actually  paid  and  accepting  the  amount  of 
tax  paid  as  aforesaid  (specifying  the  same)  as  a further  satisfaction  of  the 
debt  to  that  amount,  require  the  surrender  to  him  of  such  collector's  receipt." 


2115  Authority  for  Abatement,  Credit  and  Refund  of  Taxes. — Author- 
ity for  the  credit,  refund  or  abatement  of  taxes  erroneously  collected 

or  assessed  is  contained  in  section  252  of  the  statute  [|f2121]  and  in 
section  3220  of  the  Revised  Statutes,  as'  amended  by  section  1316  of 
the  Revenue  Act  of  1918,  which  provides  [|f2116  below]  : (Art.  1031, 
Reg.  45,  Rev.,  April  17,  1919.) 

2116  Law  j[436.  Taxes  Erroneously  Assessed  or  Collected,  Penalties 

Collected  Without  Authority,  and  Excessive  Taxes 
May  be  Remitted  or  Refunded  by  the  Commissioner. — ‘'Sec.  1316.  (a) 

That  section  3220  of  the  Revised  Statutes  is  hereby  amended  to  read  as 
follows : 

‘Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to  regula- 
tions prescribed  by  the  Secretary  of  the  Treasury,  is  authorized  to  remit, 
refund,  and  pay  back  all  taxes  erroneously  or  illegally  assessed  or  collected, 
all  penalties  collected  without  authority,  and  all  taxes  that  appear  to  be 
unjustly  assessed  or  excessive  in  amount,  or  in  any  manner  wrongfully  col- 
lected ; also  to  repay  to  any  collector  or  deputy  collector  the  full  amount  of 
such  sums  of  money  as  may  be  recovered  against  him  in  any  court,  for  any 
internal  revenue  taxes  collected  by  him,  with  the  cost  and  expenses  of  suit 
[1[2210]  ; also  all  damages  and  costs  recovered  against  any  assessor,  assistant 
assessor,  collector,  deputy  collector,  agent,  or  inspector,  in  any  suit  brought 
against  him  by  reason  of  anything  done  in  the  due  performance  of  his  official 
duty,  and  shall  make  report  to  Congress  at  the  beginning  of  each  regular 
session  of  Congress  of  all  transactions  under  this  section’." 

2117  Section  3225  of  the  Revised  Statutes,  as  amended  by  section  1316  of 
the  Revenue  Act  of  1918,  however,  provides:  [|f2176].  Authority  for 

the  abatement  of  uncollectible  taxes  due  from  persons  absconded  or  insolvent 
is  contained  in  section  3218  of  the  Revised  Statutes.  These  provisions  apply 
to  the  income  and  war  profits  and  excess  profits  taxes  imposed  by  the  present 
statute  and  also  to  the  excise  tax  under  the  Act  of  1909,  the  income  tax 
under  the  Acts  of  1913  and  1916,  and  the  income  and  excess  profits  taxes 
under  the  Act  of  1917.  (Art.  1031,  Reg.  45,  Rev.,  April  17,  1919.) 

2118  Refund  of  Taxes  Erroneously  Collected  for  Years  Prior  to  1914. — 
Read  at  j[2181. 

2119  Claims  for  Abatement  of  Taxes  Erroneously  Assessed. — Claims 
by  the  taxpayer  for  the  abatement  of  taxes  or  penalties  erroneously 

or  illegally  assessed  or  abateable  under  remedial  acts  shall  be  made  on  form 
47.  They  must  be  sustained  by  the  affidavits  of  the  parties  against  whom  the 
taxes  were  assessed,  or  of  other  parties  cognizant  of  the  facts.  When  a tax 
has  been  assessed  and  turned  over  to  the  collector,  the  presumption  is  that  the 
assessment  is  correct.  The  burden  of  proof  in  rebutting  the  presumption 
and  showing  that  it  was  improperly  or  illegally  assessed,  or  that  relief  should 

INC.  375  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


be  given  under  a remedial  statute,  rests  upon  the  applicant  for  abatement. 
The  affidavits  must  therefore  contain  full  and  explicit  statements  of  all  the 
material  facts  relating  to  the  claim  in  support  of  which  they  are  offered  and 
to  the  proper  consideration  of  which  they  are  essential.  The  legality  of  the 
claim  is  to  be  determined  by  the  Commissioner  upon  the  facts  presented  by 
the  affidavits.  The  filing  of  a claim  for  abatement  does  not  necessarily 
operate  as  a suspension  of  the  collection  of  the  tax  or  make  it  any  less  the 
duty  of  the  collector  to  exercise  due  diligence  to  prevent  the  collection  of  the 
tax  being  jeopardized.  He  should,  if  he  considers  it  necessary,  collect  the 
tax  and  leave  tlie  taxpayer  to  his  remedy  by  a claim  for  refund.  See 
further  Regulations  No.  14  (revised).  A collector  may  himself  present  once 
a month  a blanket  claim  on  form  47  for  the  abatement  of  taxes  coming 
within  certain  classes  of  taxes  erroneously  assessed.  (Art.  1032,  Reg.  45, 
Rev.,  April  17,  1919.) 

2120  Claims  for  Abatement  of  Uncollectible  Taxes. — When  a tax  is 
found  to  be  uncollectible,  the  collector  or  deputy  collector  who  made 

the  demand  for  payment  and  is  conversant  with  the  facts  may  prepare  a 
claim  for  abatement  on  form  53.  See  Regulations  No.  14  (revised).  Al- 
though credits  allowed  on  account  of.  insolvency  or  absconding  release  the 
collector  from  the  obligation  created  by  his  receipt  for  the  amount  cred- 
ited, the  obligation  to  pay  still  remains  upon  the  person  assessed. 
It  is  the  duty  of  the  collector  to  use  the  same  diligence  to  collect  a tax  after 
it  has  been  abated  as  uncollectible  as  before  abatement.  Collectors  should 
therefore  keep  a record  of  all  taxes  thus  credited  and  of  the  persons  from 
whom  they  are  due,  and  should  enforce  payment  whenever  it  is  in  their 
power  to  do  so.  (Art.  1033,  Reg.  45,  Rev.,  April  17,  1919.) 

2121  Law  11386.  Credit  or  Refund,  on  Disclosure  by  Examination  of 

Any  Return,  of  Amount  Paid  in  Excess  of  that  Prop- 
erly Due. — “Sec.  252.  That  if,  upon  examination  of  any  return  of  in- 
come made  pursuant  to  this  Act,  the  Act  of  August  5,  1909,  entitled  ‘An 
Act  to  provide  revenue,  equalize  duties,  and  encourage  the  industries  of  the 
United  States,  and  for  other  purposes,’  the  Act  of  October  3,  1913,  entitled 
‘An  Act  to  reduce  tariff  duties  and  to  provide  revenue  for  the  Government, 
and  for  other  purposes,’  the  Revenue  Act  of  1916,  as  amended,  or  the  Rev- 
enue Act  of  1917,  it  appears  that  an  amount  of  income,  war-profits  or  excess- 
profits  tax  has  been  paid  in  excess  of  that  properly  due,  then,  notwithstand- 
ing the  provisions  of  section  3228  of  the  Revised  Statutes  [1[2180],  the 
amount  of  the  excess  shall  be  credited  against  any  income,  war-profits  or 
excess-profits  taxes,  or  installment  thereof,  then  due  from  the  taxpayer  under 
any  other  return,  and  any  balance  of  such  excess  shall  be  immediately  re- 
funded to  the  taxpayer:” 

2122  Law  11387.  Five-Year  Limitation  for  Making  Claim  for  Credit  or 

Refund. — “Provided,  That  no  such  credit  or  refund 
shall  be  allowed  or  made  after  five  years  from  the  date  when  the  return 
was  due,  unless  before  the  expiration  of  such  five  years  a claim  therefor  is 
filed  by  the  taxpayer.” 

2123  Claims  for  Credit  of  Taxes  Erroneously  Collected. — Any  amount 
of  income,  war  profits  or  excess  profits  tax  paid  in  excess  of  that 

properly  due  shall  be  credited  against  any  such  taxes  due  from  the  taxpayer 

INC.  376  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


under  any  other  return.  To  obtain  such  credit  the  taxpayer  should  proceed 
as  follows: 

2124  ( 1 ) Where  the  credit  demanded  is  equal  to  or  less  than  any  outstand- 
ing assessment  of  tax,  a taxpayer  desiring  to  obtain  such  credit  shall 

file  with  the  collector  for  the  district  in  which  his  original  return  was  filed 
a claim  on  form  47  A,  which  shall  be  sworn  to  and  shall  contain  the  follow- 
ing statements:  (a)  business  engaged  in  by  claimant;  (b)  character  of  as- 
sessment; (c)  amount  of  tax  paid  and  for  what  taxable  year;  (d)  portion 
of  tax  under  (c)  claimed  as  a credit;  (e)  unpaid  assessment  against  which 
credit  is  asked  and  for  what  taxable  year;  and  (f)  all  facts  regarding  the 
overpayment. 

2125  (2)  Where  the  amount  claimed  as  a credit  is  greater  than  the  out- 
standing assessment  of  tax,  a taxpayer  desiring  to  obtain  such  credit 

and  the  refund  to  which  he  is  entitled  shall  file,  in  addition  to  the  claim  for 
credit  required  to  be  made  on  form  47  A for  the  amount  of  the  outstanding 
assessment,  a claim  for  refund  of  the  overpayment  in  excess  of  the  credit. 
See  article  1036  [|f2133].  This  claim  for  refund  may  be  attached  to  the 
claim  for  credit  or  it  may  be  separately  filed  with  the  Commissioner. 
All  the  facts  regarding  the  total  overpayment  should  be  stated  in  the 
claim  for  refund  and  a reference  made  to  such  claim  in  the  claim  for 
credit.  (Art.  1034,  Reg.  45,  Rev.,  April  17,  1919.) 

2126  Action  on  Claims  for  Credit. — Upon  receipt  of  a claim  for  credit 
on  form  47  A the  collector  shall  certify  thereon  the  required  informa- 
tion concerning  all  outstanding  assessments  and  payments  covered  thereby 
and  shall  note  on  his  records  that  a claim  for  credit  has  been  filed.  He  shall 
thereupon  transmit  the  claim  to  the  Commissioner.  Due  notice  will  be  given 
the  collector  and  the  taxpayer  of  the  action  taken  on  the  claim.  A schedule 
of  credit  claims  on  form  7220  A will  be  transmitted  to  the  collector  once  a 
month  and  formal  credit  shall  be  taken  Ty  the  collector  at  that  time.  If  a 
claim  is  allowed  against  additional  taxes  due  for  other  years,  but  such  other 
taxes  have  not  yet  been  assessed,  only  the  amount  of  the  excess  of  such 
taxes  over  the  overpayment  shall  be  assessed,  or  the  excess  of  the  overpay- 
ment over  such  other  taxes  due  shall  be  refunded,  as  the  case  may  be.  A 
taxpayer  desiring  to  convert  a claim  for  refund  previously  filed  into  a claim 
for  credit  may  file  with  the  collector  a claim  on  form  47 A,  referring  in  it  to 
such  claim  for  refund.  Upon  its  receipt  by  the  Commissioner  the  claim  for 
credit  will  be  attached  to  the  claim  for  refund  and  will  be  adjusted  in  the 
same  manner  as  if  the  taxpayer  had  originally  filed  the  claim  for  credit.  The 
effective  date  of  filing  of  the  claim  for  credit  shall  be  the  actual  date  of 
filing  such  claim  with  the  collector.  The  filing  of  a claim  for  credit  against 
a tax  due  under  another  return  shall  be  subject  to  the  same  rules  with  re- 
spect to  the  addition  of  interest  and  penalties  as  if  the  taxpayer  had  filed  a 
claim  for  abatement  of  the  tax  against  which  credit  is  desired.  See  articles 
1003  [for  interest  on  amount  of  tax,  1f2014]  and  1006  [for  ad  valorem  and 
specific  penalties,  ]f2015].  (Art.  1035,  Reg.  45,  Rev.,  April  17,  1919.) 

2127  Claims  Heretofore  Rejected  May  Be  Reopened. — Sir:  This  office 
is  in  receipt  of  your  letter  of  the  26th  ultimo,  asking  for  a ruling  as 

to  whether,  under  section  14,  paragraph  A,  of  the  act  of  September  8,  1916, 
claims  for  refund  which  have  once  been  rejected  by  the  commissioner  because 
of  the  statute  of  limitation  in  existence  at  that  time  may  be  reopened.  The 
portion  of  section  4 referred  to  is  in  the  following  words: 

INC  377  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


Provided,  That  upon  the  examination  of  any  return  of  income  made 
pursuant  to  this  title,  the  act  of  August  5,  1919,  * * * and  the  act  of 
October  3,  1913,  * * if  it  shall  appear  that  amounts  of  tax  have  been 

paid  in  excess  of  those  properly  due,  the  taxpayer  shall  be  permitted  to 
present  a claim  for  refund  thereof  notwithstanding  the  provisions  of  section 
3228. 

2128  This  office  is  of  the  opinion  that  claims  can  now  be  made  for  refund 
under  that  provision  [see  lj2183].  Claims  rejected  can  also  be  re- 
opened if  the  question  involves  an  examination  of  the  return.  The  power 
does  not  extend  to  other  claims  whose  adjustment  does  not  necessitate  an 
examination  of  the  return.  (T.  D.  2396,  Nov.  1,  1916.) 

2129  Claims  for  Credit  or  Refund  on  Account  of  Taxes  Paid  Under  the 
Act  of  Oct.  3,  1913,  on  Stock  Dividends. — In  order  to  complete 

claims  for  the  crediting  or  refunding  of  income  tax  collected  under  the 
Act  of  October  3,  1913,  on  stock  dividends;  that  is,  claims  based  upon 
the  decision  of  the  Supreme  Court  in  the  case  of  Towne  v.  Eisner  |f2313], 
the  following  evidence  is  required. 

An  affidavit  showing: 

1.  The  name  of  the  corporation  which  declared  and  paid  the  stock 
dividend. 

2.  The  date  of  declaration  of  the  stock  dividend  and  date  of  receipt 
by  claimant. 

3.  In  which  year’s  return  of  annual  net  income  did  the  claimant 
include  this  stock  dividend? 

4.  Under  what  item  on  the  return  was  the  value  of  the  stock  divid- 
end included,  and  what  was  the  valuation  placed  upon  the  dividend  in 
the  return? 

5.  Has  the  stock  thus  received  and  returned  as  a dividend  been  sold 
by  the  claimant,  and  if  so,  what  was  the  date  of  sale ; how  much  did 
claimant  receive  from  the  sale;  and  what  part  of  the  total  amount  re- 
ceived from  the  sale  was  included  by  the  claimant  in  its  return  of  annual 
net  income  for  the  year  in  which  the  sale  occurred? 

6.  Did  the  dividend  consist  of  stock  of  the  corporation  distributing 
the  dividend  to  claimant,  or  did  it  consist  of  stock  acquired  by  the  dis- 
tributor in  another  corporation? 

Note. — A stock  dividend  is  a distribution  by  a corporation  to  its 
stockholders  of  capital  stock  of  the  distributing  corporatioi.  A dis- 
tribution of  capital  stock  other  than  that  of  the  distributing  corporation  is 
not  a stock  dividend  but  a dividend  in  property. 

2130  The  receipt  on  Form  No.  1 should  also  be  filed  with  the  claim. 

2131  In  giving  publicity  to  this  requirement  please  inform  taxpayers  that 
there  is  no  possible  advantage  in  the  employment  of  special  attorneys  for 
the  prosecution  of  claims.  Preparations  are  being  made  for  the  prompt 
handling  of  these  cases  and  it  is  believed  that  they  can  be  disposed  of  with 
minimum  delay  and  inconvenience  to  the  taxpayer.  Claims  filed  directly  by 
the  claimants  will  receive  in  every  respect  as  careful  and  expeditious  con- 
sideration as  those  filed  through  special  attorneys.  (IT-Cls.  Mim.  1795, 
Feb.  26,  1918.) 

2132  Refund  of  Taxes  Paid  on  Account  of  Stock  Dividends  Under 
Revenue  Acts  of  1916  and  1917,  in  Event  Such  Taxes  are  Here- 
after Held  to  Have  Been  Erroneously  Assessed. — Receipt  is  acknowl- 

iNC.  378 


TAX 


1-24-20. 


. ABATEMENT  AND  REFUND  CLAIMS. 

edged  of  your  letter  of  October  28,  1918,  in  which  ♦ ♦ ♦ you  ask 
to  be  advised  whether  persons  who  wish  to  take  advantage  of  a possible 
decision  that  the  taxing  of  stock  dividends  as  income  is  unconstitutional 
would  be  required  to  begin  suit  within  two  years  after  the  payment  of  the 
tax  in  order  to  prevent  their  right  to  recover  being  outlawed,  in  accordance 
with  the  provisions  of  Sec.  3227  Revised  Statutes  [P178].  Pn  reply  you 
are  advised  that  Sec.  14  (a)  [pi21]  of  the  Act  of  September  8,  1916 
provides  m part  as  follows  : “Upon  the  examination  of  any  return  of  income 
made  pursuant  to  this  title,  the  Act  of  August  5,  1909— and  the  Act  of 
October  3,  1913— if  it  shall  appear  that  amounts  of  tax  have  been  paid  in 
excess  of  those  properly  due,  the  taxpayer  shall  be  permitted  to  present  a 
claim  for  refund  thereof,  notwithstanding  the  provisions  of  Sec.  3228  [^1801 
Revised  Statutes.”  Pn  accordance  with  that  portion  of  the  Section  above 
quoted,  it  is  held  that  it  is  not  necessary  for  an  individual  to  institute  suit  or 
hie  a claim  within  two  years  after  the  payment  of  income  tax,  in  order  to 
obtain  a refund  of  taxes  which,  by  a later  court  decision  or  ruling  of  the 
Department,  are  held  to  have  been  erroneously  assessed.  (Letter  to 
Hebert  J.  Lyall,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner 
L.  F.  Speer,  and  dated  Nov.  2,  1918.) 

Lower  Court  Decision  on  Stock  Dividends  Under  the  Act  of  Sep- 
tember 8,  1916,  p53.  ^ 

3133  Claims  for  Refund  of  Taxes  Erroneously  Collected.— Claims  by 

•11  i/^^  taxpayer  for  the  refunding  of  taxes  and  penalties  erroneously  or 

illegally  collected  shall  be  made  on  form  46.  In  this  case,  as  in  that  of 
claims  for  abatement,  the  burden  of  proof  rests  upon  the  claimant.  All 
the  facts  relied  upon  in  support  of  the  claim  should  be  clearly  set  forth 
under  oath.  It  should  be  accompanied  by  the  collector’s  receipt  or  the  can- 
celled check  showing  payment  of  the  tax.  In  the  case  of  a taxpayer’s  death, 
certified  copies  of  the  letters  of  administration  or  letters  testamentary,  or 
other  similar  evidence,  should  be  annexed  to  the  claim  to  show  the  authority 
of  the  administrator  or  executor.  The  affidavit  may  be  made  by  an  agent  of 
the  person  assessed,  but  in  such  a case  a power  of  attorney  must  accom- 
pany the  claim.  Warrants  in  payment  of  claims  allowed  will  be  drawn  in 
the  names  of  the  persons  entitled  to  the  money  and  shall  unless  other- 
wise directed  be  sent  by  the  Treasurer  of  the  United  States  directly 
to  the  proper  persons  or  their  duly  authorized  attorneys  or  agents. 
See  further  Regulations  No.  14  (revised).  In  certain  cases  of  overpayment 
by  taxpayers  the  collector  may  repay  the  excess  after  allowance  by  the  Com- 
missioner of  a claim  for  refund,  made  by  the  collector  on  Form  751.  The 
cases  in  which  refund  is  made  through  collectors  are  covered  by  specific 
provisions  not  herein  incorporated.  The  Commissioner  has  no  authority  to 
refund  on  equitable  grounds  penalties  legally  collected.  (Art.  1036  Reg. 
45,  Rev.,  as  amended  by  T.  D.  2871,  June  21,  1919.) 

2134  Claims  for  Refund  May  Be  Filed  with  the  Commissioner  Direct.— 

I have  been  advised  by  the  Claim  Department  of  your  office  that 
Claims  for  Refund  should  be  sent  direct  to  Washington  provided  there 
is  attached  thereto  the  actual  receipt  of  the  collector.  On  the  other 
hand  I note  that  Form  46,  Revised  March,  1918,  has  printed  on  the 
face  of  it : , 

“Important” 

“This  claim  should  be  forwarded  to  the  Collector  of  Internal  Revenue 
INC.  379 


TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


to  whom  the  tax  was  paid  and  must  be  accompanied  by  Collector’s  receipt 
therefor.” 

2135  (Answer.)  Replying  to  your  letter  of  March  22,  1919,  you  are 
advised  that  claims  for  refund  may  be  forwarded  direct  to  the  Com- 
missioner of  Internal  Revenue,  Claims  Division,  Income  Tax.  [Read, 
however,  at  j[2159.]  (Letter  from  H.  C.  Hopson,  New  York,  N.  Y.,  and 
the  reply  thereto,  signed  by  J.  H.  Callan,  Assistant  to  the  Commissioner 
and  dated  March  2Q,  1919.) 

2136  Procedure  Under  Which  Collectors  Are  Authorized  to  Refund 
Excessive  Payments  of  Internal  Revenue  Tax. — [In  connection 

with  the  following  read  the  matter  beginning  at  j[2153.J  Beginning  April  1, 
1918,  there  will  be  advanced  to  each  Collector  of  Internal  Revenue,  at  the  be- 
ginning of  each  quarter  of  the  fiscal  year,  out  of  the  appropriation  for  the 
refundment  of  internal  revenue  taxes,  a sum  estimated  to  be  sufficient  for 
the  repayment  to  taxpayers  of  certain  excessive  collections,  as  follows : 

1.  Collections  exceeding  the  tax  shown  by  the  return  of  the  taxpayer  to 
be  due. 

2.  Collections  exceeding  the  amount  of  tax  shown  by  the  assessment  list 
to  be  due. 

3.  Duplicate  payments  where  : 

(a)  Both  are  made  in  advance  of  assessment; 

(b)  Both  are  made  after  assessment; 

(c)  One  is  made  before,  and  one  after  assessment. 

2137  1.  Procedure  where  a collection  has  exceeded  the  tax  shown  in  the 
taxpayer’s  return  as  due. 

2138  The  Collector  will  enter  on  the  assessment  list  the  full  amount  paid, 
and  in  the  '‘Remarks”  column  of  the  list  will  note  the  amount  of  the 

excess. 

2139  The  complete  data  regarding  the  excessive  collection  is  then  to  be 
entered  on  the  schedule  of  Claims  for  Authority  to  Refund,  Form 

751.  The  “Paid,”  “Due,”  and  “Refundable  Excess”  columns  on  the  Form 
will  be  totaled. 

2140  Form  751  is  to  be  made  in  triplicate  one  copy  to  be  retained  by  the 
Collector,  and  two  to  be  forwarded  securely  attached  to  the  proper 

assessment  list.  A single  Form  751  cannot  be  used  for  items  on  lists  of  the 
separate  classes. 

2141  In  the  Proving  Division  of  the  Bureau  the  amount  shown  on  Form 
751  as  due  will  be  checked  against  the  taxpayer’s  return,  and  the 

amount  shown  on  the  assessment  list  as  paid  will  be  checked  against  the 
similar  item  on  Form  751. 

2142  The  original  Form  751  will  remain  attached  to  the  assessment  list  and 
will  form  an  integral  part  thereof,  so  that  the  Commissioner’s  si^a- 

ture  of  approval  of  the  assessment  list  will  be,  to  the  Collector,  sufficient 
evidence  of  the  Commissioner’s  approval  of  the  claim.  To  effectuate  this, 
there  should  be  typewritten  on  the  first  page  of  Form  110,  below  the  line 
reading,  “Total  Chargeable  to  Collector,”  the  words,  “Amount  Refundable 
on  Form  751.” 

2143  Upon  receipt  of  the  returned  claim,  thus  determined  as  approved  by 
the  Commissioner,  the  Collector  v/ill  immediately  make  refund  to  the 

taxpayer,  clearly  designating  upon  the  draft  the  nature  of  the  refund,  as, 
for  instance,  “Refund  under  Claim  on  Form  751,  March  list,  1919.”  The 


TNC 


380  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


list  to  be  designated  is  the  list  on  which  the  claim  was  approved,  rather  thail 
the  list  on  which  the  assessed  or  overpayment  was  reported. 

2144  2.  Procedure  where  a collection  has  exceeded  the  tax. 

2145  The  procedure  will  be  identical  with  that  outlined  under  subheading 
(1),  above,  except  that  in  the  “Remarks”  column  on  the  assess- 
ment list  the  exact  amount  paid  is  to  be  noted. 

2146  3.  Procedure  where  a tax  has  been  paid  wholly  or  in  part  in  dupli- 
cate. 

2147  (a)  Where  both  payments  are  in  advance,  there  shall  be  entered  on 
Form  751  a notation  showing  both  lines  of  the  advance  payment  list 

or  lists  on  which  payments  appear.  If  the  amounts  of  the  two  payments 
differ,  the  Collector  shall  claim  authority  for  refund  of  the  lesser  payment. 

2148  (b)  Where  the  assessment  has  been  made,  entries  will  be  made  on 
the  assessment  list  to  show  both  dates  of  payment. 

2149  A similar  notation  should  be  made  under  the  item  claimed  Form  751 
as  refundable. 

2150  The  total  amount  collected  is  to  be  reported  on  Forms  325  and  51  B. 

2151  (c)  Where  one  payment  has  been  made  before  and  one  after  the 
entry  of  assessment,  notations  will  be  made  on  Form  751  showing 

the  line  of  the  list  on  which  the  advance  payments  was  reported  and  the 
line  on  which  the  assessment  was  entered. 

2152  Except  as  indicated,  the  balance  of  procedure  under  subheading  (3) 
will  correspond  to  the  procedure  fully  outlined  under  subheading 

(1).  (T.  D.  2688,  April,  1918.) 

2153  Claims  for  Refund  or  Abatement;  Procedure  to  be  Followed  by 
Collectors  with  Respect  to  Claims  for  Refund  or  Abatement — 

Extension  of  Treasury  Decision  2688. — (1)  Claims  for  refund  or 
for  abatement,  pertaining  to  tax  returns  which  have  not  at  the  time  been 
posted  to  an  assessment  list,  will  be  numbered  to  agree  with,  attached  to, 
and  made  a part  of,  the  original  return  so  that  the  total  tax  as  posted  on  the 
assessment  list  will  be  the  admitted  tax  liability  of  the  taxpayer.  If  a tax- 
payer submits  an  amended  return  as  a claim  either  for  refund  or  for  abate- 
ment before  the  original  return  has  been  listed,  such  amended  return  will 
be  numbered  to  agree  with  and  attached  to  the  original  return  in  the  same 
manner.  Similarly,  errors  or  omissions  in  returns  discovered  by  the  col- 
lector prior  to  the  posting  operate  as  an  amendment  to  the  amount  of  tax 
liability  shown  by  the  return. 

2154  In  other  words,  all  amendments  or  changes  either  increasing  or  de- 
creasing the  amount  of  tax  liability  and  whether  originated  by  the 

taxpayer  or  by  the  collector  will  be  reflected  on  the  face  of  the  return  it- 
self and  the  posting  to  the  assessment  list  will  be  of  the  correct  amount.  In 
this  connection  attention  is  called  to  the  provisions  of  Mim.  2124. 

2155  (2)  Amended  returns  showing  a reduced  tax  liability  will  not  be 
acted  upon  by  collectors  if  the  original  return  has  been  previously 

entered  on  the  assessment  list.  All  claims  pertaining  to  returns  which  have 
been  listed  for  assessment  must  be  submitted  on  Form  47,  if  the  tax  has  not 
been  paid. 

2156  (3)  The  following  classes  of  claims  may  be  included  on  Form  751 
(if  for  refund),  or  blanket  Form  47  (if  for  abatement).  Separate 

sheets  properly  designated  of  Forms  751  or  blanket  Forms  47  must  be  pre- 
pared for  returns  on  file  in  the  Commissioner’s  office  and  those  on  file  in  the 
collector’s  office: 

(a)  All  claims  for  refund  or  abatement  pertaining  to  Form 

INC  381  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 


1040-A  income  returns  for  the  calendar  year  1918,  or  subsequent 

years.  i i • 

(b)  Errors  in  computation.  (These  include  only  mistakes  in 

arithmetic.)  ^ 

(c)  Errors  in  specific  exemptions  on  income  returns,  (inese 
include  such  items  as  failure  to  deduct  exemptions  for  dependents ; 
the  $2,000  exemption  for  corporations,  etc.) 

(d)  Payments  in  excess  of  the  total  amount  of  tax  due  as 
shown  by  the  return.  (These  include  such  cases  as  a remittance  of 
$1,500  covering  payment  of  a tax  liability  of  $1,300,  etc.) 

(e)  Amount  previously  paid  on  submission  of  a tentative  in- 
come return  in  excess  of  the  total  tax  liability  shown  by  the  final 
return. 

(f)  Duplicate  payments  or  assessments. 

(g)  All  claims  for  refund  on  account  of  nonrevenue  remittances 
forwarded  to  the  collector  in  error  and  deposited  by  him  (These 
include  such  items  as  state  or  municipal  taxes  sent  to  the  collector 
and  deposited  by  him  as  ‘unidentified,”  etc.) 

2157  (4)  All  claims  for  refund  or  abatement  other  than  those  enumerated 
above  will  be  forwarded  to  the  Commissioner  for  settlement.  How- 
ever, any  claim  may  be  so  forwarded  whenever  the  collector  does  not  feel 
absolutely  certain  of  the  law,  regulations  or  precedent  involved,  or  if  his 
disbursing  bond  is  insufficient  to  enable  him  to  procure  an  advance  on 
accountable  warrant  of  the  requisite  amount  of  funds  from  which  to  make 

payment.  . . . 

2158  (5)  Before  forwarding  claims  to  the  Commissioner  for  settlement 
certification  must  be  made  on  the  claim  of  the  account  number,  the 

amount  of  tax  originally  due,  the  dates  and  amounts  of  all  payments  or 
other  transactions  affecting  such  amount,  and  the  balance  due  as  shown  by 
the  account  on  the  list.  All  claims  of  this  nature  now  on  file  in  the 
collector’s  office  and  hereafter  as  received  should  be  certified  and  forwarded 


2159  (6)  Claims  submitted  by  taxpayers  direct  to  the  Commissioner  will 
in  future  be  referred  to  the  collector  for  this  certificate  as  to  the 

status  of  the  account  on  the  assessment  list.  Until  so  certified  by  tlie  col- 
lector such  claims  will  not  be  settled.  When  certifying  claims  for  refund 
the  collector  will  make  a notation  in  the  “Remarks”  column  of  the  date 
and  amount  of  the  refund  claim  but  no  record  will  be  made  on  the  tax 
journals  unless  a credit  balance  exists  in  the  taxpayer  s account.  In  th^ 
case,  the  amount  of  the  claim  as  certified  will  be  posted  to  the  list  and 
recorded  on  the  journal  in  the  same  manner  as  though  payment  were  made 

by  the  collector.  -r  j i_  i.  i 

2160  (7)  In  all  cases  where  abatement  claims  are  certified  by  the  col- 
lector, notation  will  be  made  on  the  assessment  list  of  the  date  on 

which  the  abatement  claim  was  filed  and  the  amount  thereof,  and  on  the 
daily  journals.  Form  769.  (See  paragraph  49,  Manual  of  Revenue  Ac- 


2161  (8)  Blanket  claims  for  abatement  of  uncollectible  items  Form  53 

may  be  filed  by  the  collector  as  heretofore.  The  same  record  will 
be  made  on  the  tax  journal  and  on  the  assessment  list  as  in  cases  where 
the  taxpayers  submit  such  claims  (the  only  difference  being  that  in  the  first 
instance  the  claim  originates  with  the  taxpayer  instead  of  with  the  col- 
lector. 


INC  382  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 

2162  (9)  xhe  last  two  sentences  of  Article  1036,  Regulations  45  (final  edi- 
tion), are  to  be  replaced  by  the  following  [being  the  last  three 

sentences  of  1[2133]  : 

2163  (10)  All  existing  regulations  in  conflict  with  the  above  are  hereby 
revoked.  (T.  D.  2871,  June  21,  1919.) 

2164  Suits  to  Restrain  Assessment  or  Collection  of  Taxes.— ‘No  suit 

for  the  purpose  of  restraining  the  assessment  or  collection  of  any 
tax  shall  be  maintained  in  any  court.”  (Section  3224,  Revised  Statutes.) 

216o  jg'o  suit  for  the  purpose  of  restraining  the  assessment  or  collection 
of  any  tax  shall  be  maintained  in  any  court.  “Restraining”  is  used 
in  its  broad  popular  sense  of  hindering  or  impeding,  as  well  as  prohibiting 
or  staying,  and  the  provision  is  not  limited  in  its  application  to  suits  for 
injunctive  relief.  The  prohibition  of  such  suits  cannot  be  waived  by  any 
officer  of  the  Government.  (Art.  1037,  Reg.  45,  Rev.,  April  17,  1919.) 

2166  The  appended  decision  of  the  Supreme  Court  of  the  United  States 
in  the  case  of  Dodge  v.  Osborn,  Commissioner  of  Internal  Revenue,  is  pub- 
lished for  the  information  of  internal-revenue  officers  and  others  concerned. 
(T.  D.  2301,  March  3,  1916.) 

Decision. 

(February  21,  1916.) 

240  U.  S.  118. 

Jofin  F.  Dodge  and  Horace  E.  Dodge,  Appellants,  v.  AVilliam  H.  Osborn, 
Commissioner  of  Internal  Revenue. 

Appeal  from  the  Court  of  Appeals  of  the  District  of  Columbia. 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

2167  The  appellants  filed  their  bill  in  the  Supreme  Court  of  the  District 
of  Columbia  against  the  Commissioner  of  Internal  Revenue  to  enjoin 

the  assessment  and  collection  of  the  taxes  imposed  by  the  Income  Tax  sec- 
tion of  the  Tariff  Act  of  October  3,  1913  (38  Stat.  166,  181)  and  especially 
the  surtaxes  therein  provided  for  on  the  ground  that  the  statute  was  void 
for  repugnancy  to  the  Constitution  of  the  United  States.  The  case  is  here 
on  appeal  from  the  judgment  of  the  court  below  affirming  the  action  of  the 
trial  court  in  sustaining  a motion  to  dismiss  the  complaint  for  want  of 
jurisdiction  because  the  complainants  had  an  adequate  remedy  at  law  and 
because  of  the  provision  of  section  3224  Revised  Statute  that  “No  suit  for 
the^  purpose  of  restraining  the  assessment  or  collection  of  any  tax  shall  be 
maintained  in  any  court. 

2168  -y^^e  at  once  put  out  of  view  a contention  that  section  3223  [pi64] 
is  not  applicable  to  taxes  imposed  by  the  Income  Tax  Raw  since  we 

are  clearly  of  the  opinion  that  it  is  within  the  contemplation  of  paragraph  R 
of  the  Act  which  provides: 

[T[1998.]  “That  all  administrative,  special  and  general  provisions  of 
law,  including  the  laws  in  relation  to  the  assessment,  remission,  collection, 
and  refund  of  internal  revenue  taxes  not  heretofore  specifically  repealed 
and  not  inconsistent  with  the  provisions  of  this  section,  are  hereby  extended 
and  made  applicable  to  all  the  provisions  of  this  section  and  to  the  tax  herein 
imposed.” 

2169  And  for  the  same  reason  we  do  not  further  notice  a contention  as 
to  the  inapplicability  of  sections  3220,  3226  and  3227,  to  which  effect 

INC.  383  TAX 


ABATEMENT  AND  REFUND  CLAIMS. 

was  given  by  the  court  below  requiring  ah  appeal  to  the  Commissioner  of 
Internal  Revenue  after  payment  of  a tax  claimed  to  have  been  erroneous  y 
and  illegally  assessed  and  collected  and  upon  his  refusal  to  return  the  sum 
paid  giving  a right  to  sue  for  its  recovery. 

2170  The  question  for  decision  therefore  is  whether  the  sections  of  the 
Revised  Statutes  referred  to  are  controlling  as  to  the  case  in  hand. 
The  plain  purpose  and  scope  of  the  sections  are  thus  stated  m Snyder  v. 
Marks,  109  U.  S.  189,  193-194,  a suit  brought  to  enjoin  the  collection  ot  a 

revenue  tax  on  tobacco : , 

“The  inhibition  of  Section  3224  applies  to  all  assessments  of  taxes,  made 
under  color  of  their  offices,  by  internal  revenue  officers  charged  with  general 
jurisdiction  of  the  subject  of  assessing  taxes  against  tobacco  manufacturers. 
The  remedy  of  a suit  to  recover  back  the  tax  after  it  is  paffi  is  provided 
by  statute,  and  a suit  to  restain  its  collection  is  forbidden  Ihe 
given  is  exclusive,  and  no  other  remedy  can  be  substituted  for  it.  Cheatham 
V.  United  States,  92  U.  S.  85,  88,  and  again  m State  Railroad  lax  Cases, 
92  U.  S.  575,  613,  it  was  said  by  this  court  that  the  system  prescribed 
by  the  United  States  in  regard  to  both  customs  duties  and  internal  revenue 
taxes,  of  stringent  measures,  not  judicial,  to  collect  them,  with  appea  s o 
specified  tribunals,  and  suits  to  recover  back  moneys  illegally  exacted  was  a 
system  of  corrective  justice  intended  to  be  complete,  and  enacted  undei  the 
right  belonging  to  the  government  to  prescribe  the  conditions  on  which  it 
would  subject  itself  to  the  judgment  of  the  courts  in  the  | 

revenues.  In  the  exercise  of  that  right,  it  declares,  by  Sec.  3224,  that  its 
officers  shall  not  be  enjoined  from  collecting  the  tax  claimed  to  have  been 
unjustly  assessed,  when  those  officers,  m the  course  of  general  juiisdiction 
over  the  subject  matter  in  question  have  made  the  assignment  (assessment) 

and  claim  that  it  is  valid.”  .-i 

2171  And  this  doctrine  has  been  repeatedly  applied  until  it  is  no  longer 
open  to  question  that  a suit  may  not  be  brought  to  enjoin  the  assess- 
ment or  collection  of  a tax  because  of  the  alleged  unconstitutionality  of 
the  statute  imposing  it,  Sheldon  v.  Platt,  139  U.  S.  591 ; pttsburgh,  etc.,  Ry. 
V.  Board  of  Public  Works,  172  U.  S.  32;  Pacific  Whaling  Company  v. 

United  States,  187  U.  S.  447,  451,  452.  _ r .•  t...  , 

3173  But  it  is  contended  that  this  doctrine  has  no  application  to  a case 
where  wholly  independent  of  any  claim  of  the  constitutionality  of  the 
tax  sought  to  be  enjoined,  additional  equities  sufficient  to  sustain  jurisdic- 
tion are  alleged,  and  this,  it  is  asserted,  being  such  a case,  falls  within  the 
exception  to  the  general  rule.  But  conceding  for  argument  s sake  only  the 
legal  premise  upon  which  the  contention  rests,  we  think  the  conclusion  that 
this  case  falls  within  such  exception  is  wholly  without  merit,  since  aftei 
an  examination  of  the  complaint  we  are  of  the  opinion  that  no  ground  for 
equitable  jurisdiction  is  alleged.  It  is  true  the  complaint  contains  averments 
that  unless  the  taxes  are  enjoined  many  suits  by  other  peisons  will  be 
brought  for  the  recovery  of  the  taxes  paid  by  them,  and  alsT^that  by  reason 
of  Section  3187  Rev.  Stat.  making  the  tax  a hen  on  plaintiff  s property  the 
assessment  of  the  taxes  would  constitute  a cloud  on  plaintiffs  title.  But 
these  allegations  are  wholly  inadequate  under  the  hypothesis  which  we 
have  assumed  solely  for  tlie  sake  of  the  argument,  to  sustain  jurisdiction 
since  it  is  apparent  on  their  face  they  allege  no  ground  for  equitable  relief 
independent  of  the  mere  complaint  that  the  tax  is  illegal  and  unconstitutional 
and  should  not  be  enforced— allegations  which  if  recognized  as  a basis  for 
equitable  jurisdiction  would  take  every  case  where  a tax  was  assailed  be- 

INC.  384  TAX 


SUITS  FOR  RECOVERY  OF  TAXES. 

cause  of  its  unconstitutionality  out  of  the  provisions  of  the  statute  and 
thus  render  it  nugatory,  while  it  is  obvious  that  the  statute  plainly  forbids  the 
enjoining  of  a tax  unless  by  some  extraordinary  and  entirely  exceptional 
circumstance  its  provisions  are  not  applicable. 

2173  There  is  a contention  that  the  provisions  requiring  an  appeal  to  the 
Cornmissioner  of  Internal  Revenue  after  payment  of  the  taxes  and 

giving  a right  to  sue  in  case  of  his  refusal  to  refund  are  wanting  in  due 
process  and  therefore  there  is  jurisdiction.  But  we  think  it  suffices  to  state 
that  contenion  to  demonstrate  its  entire  want  of  merit. 

2174  Affirmed.  (240  U.  S.  118— T.  D.  2301,  March  3,  1919.) 

2175  No  Suit  to  Enjoin  Collection  of  Penalties  Shall  Be  Maintained  in 
Any  Court.— In  Kohlhamer  vs.  Smietanka,  Collector  (239  Fed. 

408),  it  was  held  that  while  Section  3224  R.  S.  [Paragraph  21^]  which 
prohibits  suits  to  enjoin  the  collection  of  internal  revenue  taxes,  does  not 
specifically  include  “penalties”  as  such,  yet  where  penalties  are  authorized  by 
statute  to  be  added  to  the  tax  and  collected  as  a part  of  the  tax,  the  court 
will  hold  that  the  penalty  is  a part  of  the  tax,  the  assessment  and  collection 
of  which  are  governed  by  Section  3224.  (239  Fed.  408.) 

2176  Law|[437.  Abatement  of  Second  Assessments,  Refund  of  Taxes 
Collected  on  Such  Assessments,  and  the  Recovery  by  Suit  of 

Taxes  So  Paid. — “Sec.  1316.  (b)  Section  3225  of  the  Revised  Statutes 
of  the  United  States  is  hereby  amended  to  read  as  follows : 

Sec.  3225.  When  a second  assessment  is  made  in  case  of  any  list, 
statement,  or  return,  which  in  the  opinion'  of  the  collector  or  deputy  col- 
lector was  false  or  fraudulent,  or  contained  any  understatement  or  under- 
valuation, such  assessment  shall  not  be  remitted,  nor  shall  taxes  collected 
under  such  assessment  be  refunded,  or  paid  back,  or  recovered  by  any 
suit,  unless  it  is  proved  that  such  list,  statement,  or  return  was  not  wil- 
fully false  or  fraudulent  and  did  not  contain  any  wilful  understatement  or 
undervaluation.’  ” 


2177  Suit  for  Recovery  of  Taxes  Wrongfully  Collected. — No  suit  shall 
be  maintained  in  any  court  for  the  recovery  of  any  internal  tax 

alleged  to  have  been  erroneously  or  illegally  assessed  or  collected,  or  of  any 
penalty  claimed  to  have  been  collected  without  authority,  or  of  any  sum 
alleged  to  have  been  excessive  or  in  any  manner  wrongfully  collected,  until 
appeal  [pi33]  shall  have  been  duly  made  to  the  Commissioner  of  Internal 
Revenue,  according  to  the  provisions  of  law  in  that  regard,  and  the  regu- 
lations of  the  Secretary  of  the  Treasury  established  in  pursuance  thereof, 
and  a decision  of  the  Commissioner  has  been  had  therein:  Provided, 
That  if  such  decision  is  delayed  more  than  six  months  from  the  date  of 
such  appeal,  then  the  said  suit  may  be  brought,  without  first  having  a 
decision  of  the  Commissioner  at  any  time  within  the  period  limited  in  the 
next  section.”  (Section  3226,  Revised  Statutes.) 

2178  Limitation  as  to  Suits  for  Recovery  of  Taxes  Wrongfully  Col- 
lected.— No  suit  or  proceeding  for  the  recovery  of  any  internal 

tax  alleged  to  have  been  erroneously  or  illegally  assessed  or  collected,  or  of 
any  penalty  alleged  to  have  been  collected  without  authority,  or  of  any 
sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully  collected, 
shall  be  maintained  in  any  court  unless  the  same  is  brought  within  two 

INC.  385  TAX 


SUITS  FOR  RECOVERY  OF  TAXES. 

years  next  after  the  cause  of  action  accrued;  Provided,  That  actions 
for  such  claims  which  accrued  prior  to  June  six,  ^igiTeen  hundred  and 
seventy-two,  may  be  brought  within  one  year  from  said  date,  and  t 
where'anT  such  daim  was  pending  before  the  Commissioner  as  provided 
in  the  preceding  section,  an  action  thereon  m.ay  be  brought  within 
veafafter  such  decision  and  not  after.  But  no  right  of  action  which  was 
Teadv  barred  by  any  statute  on  the  said  date  shall  be  reyiyed  by  this 
section.”  (Section  3227,  Revised  Statutes.) 

2170  No  suit  shall  be  maintained  in  any  court  for  the  recovery  of  any 
tax  alleged  to  have  been  erroneously  or  illegally  assessed  or  cplected, 
or  of  any  penalty  claimed  to  have  been  collected  without  authority,  unti 
an  appeal  by  a daim  for  credit  or  refund  shall  have  been  duly  inade  to 
the  Commissioner  and  a decision  of  the  Commissioner  has  been  had  therein 
unless  such  decision  is  delayed  more  than  six  months.^  The  cause  of  act  o 
accrues  upon  an  unfavorable  decision  by  the  Commissioner  or  at  the  expira- 
tion of  six  months  after  an  appeal  without  action  thereon  and  no  suit  m^ 
L brought  after  two  years  fVom  the  time  the  cause  of  action  accrued. 
(Art.  1037,  Reg.  45,  Rev.,  April  17,  1919.) 

2180  Limitation  on  Claims  for  Refunding  Other  Than  Those  Based  on 
an  Examination  of  a Return  of  Income.—  All  claims  fof  Jh®  ^ 
funding  of  any  internal  tax  alleged  to  have  been  erroneously  opd'egal  y as- 
sessed or  collected,  or  of  anv  penalty  alleged  to  have  been  collected  without 
authority  or  of  any  sum  alleged  to  have  been  excessive  or  in  any  manner 
wrongfully  collected,  must  be  presented  to  the  Comm^oner  of  Intem^^ 
Revenue  within  two  years  next  after  the  cause  of  action  accrued . ^ro 
S ThVt  claims  which  accrued  prior  to  June  six,  eighteen  hundred 
and  sevLitv-two,  may  be  presented  to  the_  Commissioner  at  any  time  within 
frnin  date  Blit  nothing  in  this  section  shall  be  constiued 

“S  iTrS;?  Of  ?».!!  which  w5.  1 '?"J' V ^ f*“'  “ 

that  date.”  (Section  3228,  Revised  Statutes.)  [Read  at  112121. J 

3181  Amended  Returns  and  Repnds  for  Years  Prior 

is  acknowledged  of  your  letter  of  Septembei  8 1919,  with  refer 
ence  to  the  question  of  refund  in  the  case  of  your  client,  the. . . ••••••••• 

ComnLv  Wisconsin,  whose  invested  capital  has  been 

reduhd  'in  order  to  provide  for  depreciation  which  had  not  pen  de- 
ducted during  the  years  1909  to  1917,  inclusive.  You  state  that  a letter 
addressed  to  the  cLpany  by  the  Revenue  Agent  m charge,  on  August 

IS,  contained  the  following  paragraph: 

‘‘On  account  of  the  limitation  contained  in  the  Revenue 
Act  of  1918,  no  refund  is  allowable  for  any  year  Prior  to 
1914.  For  this  reason  it  will  be  useless  for  you  to  file 

amended  returns  for  years  prior  to  1914.  3220 

You  question  the  statement  made  therein  and  refer  to  Sections  322U 
and  3228  [1121801  of  the  Revised  Statutes  in  support  of  your 
SStlSion  tharthilomplny  should  be  entitled  to  file  amended  returns 
for  1909  and  all  subsequent  years.  Pn  reply,  you  are  advised  that 
c;tatement  of  the  Revenue  Agent  is  erroneous.  _ . • j • 

3182  The  five-year  limitation  on  assessment  and  suit 

tion  250  (d)  [P029]  applies  only  to  taxes  due  under  the  Revenue 

Act  of  1918. 


INC. 


386  TAX 


SUITS  FOR  RECOVERY  OF  TAXES. 

2183  Section  252  [][2121]  does  not  operate  so  as  to  take  away  the  rights 
which  a taxpayer  has  under  Section  3228,  Revised  Statutes 

[j[2180],  to  file  a claim  for  refund  within  two  years  after  the  time  the 
cause  of  action  accrued.  (Letter  to  Ernst  and  Ernst,  Washington,  D.  C., 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  October  9,  1919.) 

2184  We  now  come  to  the  taxes  of  1909  and  1910.  The  1909  tax  was 
paid  June  28,  1910,  but  claim  for  refund  was  not  filed  until  June 

10,  1913,  nearly  three  years  thereafter.  The  1910  tax  was  paid  June  8, 
1911,  but  claim  for  refund  was  not  filed  until  June  10,  1913,  two  years  and 
one  day  (excluding  Sunday,  June  8,  1913)  thereafter.  The  relevant  sec- 
tions of  the  United  States  Revised  Statutes  are  as  follows:  [112177,  112178 
and  1f2180,  above]. 

2l8o  Sections  3226,  3227  and  3228  of  the  Revised  Statutes  (Comp.  St. 

1913,  Sections  5949-5951)  must  be  read  together,  and,  when  so  read, 
provide  a simple  and  orderly  system  whereby  an  aggrieved  taxpayer  may 
sue  to  recover  taxes  wrongfully  collected. 

2186  In  the  first  place,  under  section  3226,  no  suit  can  be  maintained  unless 
the  taxpayer  appeals  to  the  Commissioner  of  Internal  Revenue.  This 

appeal  under  section  3228  must  be  presented  to  the  Commissioner  of  Internal 
Revenue  within  two  years  after  the  cause  of  action  accrued.  Under  section 
3227  no  suit  can  be  maintained  unless  brought  within  two  years  next  after 
the  cause  of  action  accrued.  Under  section  3228  the  accrual  of  the  cause 
of  action  is  at  the  date  when  the  tax  is  illegally  assessed  or  collected. 
Obviously  the  wrongful  act  was  done  when  the  United  States,  acting 
in  this  instance  through  the  Collector,  received  the  money  in  payment 
of  the  tax.  Under  section  3227,  the  date  of  accrual  is  the  date  when  the 
Commissioner  of  Internal  Revenue  decides  adversely  to  the  taxpayer. 
Of  course,  under  that  section  the  taxpayer  need  not  wait  longer  than 
six  months  in  the  event  that  the  Commissioner  delays  his  decision. 

2187  To  illustrate,  therefore,  with  the  precise  facts'  in  the  case  at  bar:  On 
June  28,  1910,  the  Mail  Company  paid  the  Collector  the  tax  for  the 

year  1909.  The  appeal  to  the  Commissioner  of  Internal  Revenue  should 
have  been  made  on  or  before  June  28,  1912,  but  was  not  made  until  June 

10,  1913.  On  June  8,  1911,  the  Mail  Company  paid  the  Collector  for  the 
tax  for  the  year  1910.  The  appeal  to  the  Commissioner  of  Internal  Revenue 
should  have  been  made  on  or  prior  to  June  8,  1913,  but  was  not  made  until 
two  days  later,  to  wit,  June  10,  1913.  Thus  the  condition  precedent  with 
which  it  was  necessary  to  comply  before  the  Mail  Company  could  maintain 
a suit  was  not  complied  with,  and  no  cause  of  action  ever  accrued  for  the 
years  1909  and  1910  in  favor  of  the  Mail  Company  against  the  Collector. 

2188  If  to  illustrate,  an  appeal  in  those  cases  had  been  presented  to  the 
Commissioner  of  Internal  Revenue  within  two  years,  say  on  or  be- 
fore June  8,  1912,  and  on  or  before  June  9,  1913  (June  8,  1913,  being  a 
Sunday)  respectively,  then  the  Mail  Company  under  section  3227  would 
have  been  in  time  if  suit  had  been  commenced  on  or  before  June  8,  1914 
and  June  8,  1915,  respectively.  Merck  v.  Treat,  174  Fed.  388,  98  Q C.  a! 
606.  * * * . (Mail  & Newspaper  Transportation  Co.,  et.  al.,  v.  Ander- 
son, Collector,  Circuit  Court  of  Appeals,  Second  Circuit,  New  York  April 

11,  1916.-  234  Fed.  590.)  ' ^ 


INC. 


387  TAX 


SUITS  FOR  RECOVERY  OF  TAXES. 


2189  Conditions  Precedent  to  Suit  Which  the  Law  Requires.— -[Com- 
ment : The  following  example  of  procedure,  with  the  Court  s com- 
ment thereon,  is  taken  from  Gulf  Oil  Corporation  v.  Lewellyn  in  the 
lower  court  (242  Fed.  709).  (Reversed  by  Circuit  Court  of  Appeals,  245 
Fed.  1.  Decision  of  Circuit  Court  reversed  by  U.  S.  Supreme  Court  (248 


U.  S.,  71).] 

2190  From  the  evidence  produced  at  the  trial, 
following : 

FACTS. 


the  Court  has  found  the 


2191  first.  * * ❖ 

2192  SECOND.  The  Gulf  Oil  Corporation,  on  the  14th  day  of  Febru- 
ary, 1914,  in  compliance  with  the  provisions  of  the  Act  of  Congress 

of  October  3,  1913,  made  a return  of  its  annual  net  income  for  the  twelve 
months  ending  December  31,  1913,  as  required  by  said  Act.  In  making 
said  return  the  Gulf  Oil  Corporation  certified  that  it  had  not  included  in  the 
statement  of  gross  income  for  the  year  1913  certain  dividends  amounting 
to  $11,424,440  received  by  it  from  subsidiary  companies  out  of  earnings 
and  surplus  of  said  subsidiary  companies  accrued  prior  to  January  1,  1913. 

2193  third.  In  said  return  the  Gulf  Oil  Corporation  showed  net  in- 
come for  the  twelve  months  ending  December  31,  1913,  of  $886,- 

250.44,  but  under  date  of  May  1,  1914,  the  said  C.  G.  Lewellyn,  Collector, 
mailed  to  said  corporation  notice  of  an  assessment  of  tax  thereon  amounting 
to  $9,072.56.  A claim  for  abatement  of  this  overcharge  amounting  to  $210.06 
was  filed  with  the  Collector  June  9,  1914,  and  on  June  30,  1914,  the  Gulf  Oil 
Corporation  paid  to  the  said  C.  G.  Lewellyn,  Collector,  the  sum  of  $8,862.50, 
being  the  amount  of  said  assessment,  less  the  $210.06  for  which  abatement 
was  claimed.  Said  claim  for  abatement  having  been  disallowed,  said  Gulf 
Oil  Corporation,  on  the  5th  day  of  November,  1914,  paid  the  said  Collector 
the  additional  sum  of  $210.06,  with  interest  amounting  to  $6.30,  making  a 
total  payment  of  $216.36. 

2194  fourth.  On  the  30th  day  of  December,  1914,  the  said  C.  G. 
Lewellyn,  Collector,  acting  under  instructions  from  the  Commis- 
sioner of  Internal  Revenue  at  Washington,  D.  C.,  mailed  notice  and  demand 
for  tax  assessment  against  the  Gulf  Oil  Corporation  for  the  year  ending 
December  31,  1913,  amounting  to  $114,034.34.  In  fact,  this  additional  as- 
sessment amounted  to  $114,244.40,  being  the  1%  upon  the  entire  amount  of 
the  dividends  received  by  the  Gulf  Oil  Corporation  from  subsidiary  compan- 
ies out  of  surplus  accrued  to  such  subsidiaries  prior  to  January  1,  1913,  and 
payable  to  the  Gulf  Oil  Corporation  prior  to  March  1,  1913,  and  said  ad- 
ditional assessment  was  based  solely  on  said  dividends.  In  making  the  as- 
sessment, however,  the  Commissioner  of  Internal  Revenue  reconsidered  and 
allowed  the  previous  claim  for  abatement  of  $210.06,  erroneously  assessed 
against  the  corporation  in  the  original  assessment,  and  credited  the  same 
as  having  been  paid  upon  the  assessment  of  December  30,  1913,  leaving  the 
net  balance  of  such  assessment  $114,034.34  as  stated. 

2195  fifth.  The  notice  and  demand  of  the  said  C.  G.  Lewellyn,  Col- 
lector, for  the  payment  of  this  additional  tax  recited  that  if  the  tax 

is  not  paid  on  or  before  January  8,  1915,  it  would  be  the  duty  of'  the  Collec- 
tor to  collect  said  tax,  together  with  5%  additional  and  interest  at  the  rate 
of  I % per  month  until  paid. 

2196  SIXTH.  That  subsequently  the  plaintiff  filed  with  the  defendant 
for  presentation  to  the  Commissioner  of  Internal  Revenue  a claim  for 

the  abatement  of  said  income  tax  amounting  to  $114,034.34,  a copy  of 


388  TAX 


INC. 


SUITS  FOR  RECOVERY  OF  TAXES. 

which  claim  is  attached  to  and  made  a part  of  plaintiff's  Statement  as  Exhibit 
A.  That  after  an  examination  of  said  claim  for  abatement  the  Commis- 
sioner of  Internal  Revenue  rejected  the  same. 

2197  SEVENTH.  On  February  17,  1915,  the  said  Gulf  Oil  Corporation 
paid  to  the  said  C.  G.  Lewellyn,  Collector,  said  additional  income 

taxes  assessed  for  the  period  ending  December  31,  1913,  in  the  sum  of 
$114,034.34,  and  at  the  same  time  filed  with  C.  G.  Lewellyn  a written 
protest,  a copy  of  which  protest  is  attached  to  and  made  a part  of  plain- 
tiff’s statement  as  Exhibit  B. 

2198  EIGHTH.  That  subsequently  the  plaintiff  filed  with  the  said  C.  G. 
Lewellyn  for  presentation  to  the  Commissioner  of  Internal  Revenue 

a claim  for  the  refund  of  the  net  amount  of  the  assessment  of  said  income 
tax,  to  wit:  $114,034.34,  and  also  the  amount  of  the  credit  allowed  thereon 
of  $210.06,  representing  an  over  assessment  against  the  corporation  on  the 
basis  of  its  return  as  originally  filed,  the  two  amounts  constituting  the  entire 
amount  of  the  assessment  in  the  sum  of  $114,244.40.  A copy  of  the  said 
claim  for  refund  is  attached  to  and  a part  of  plaintiff’s  Statement  as  Ex- 
hibit C. 

2199  ninth.  That  after  consideration  of  said  claim  for  refund,  the 
Commissioner  of  Internal  Revenue  rejected  the  same,  and  the  said 

C.  G.  Lewellyn  was  instructed  to  notify  the  Gulf  Oil  Corporation,  and  on  or 
about  April  13,  1915,  did  so  notify  said  corporation,  that  said  claim  was  re- 
jected a copy  of  which  notice  is  attached  to  and  made  a part  of  plaintiff’s 
statement  as  Exhibit  D. 

Jit  * ♦ sK  ♦ 

2200  The  payment  of  all  taxes  hitherto  required  of  the  several  subsidiaries 

by  acts  of  Congress,  and  the  full  disclosure  by  the  plaintiff  in  its  re- 
turn for  1913  of  the  dividends  from  its  subsidiaries  negative  any  suggestion 
that  the  conduct  of  the  plaintiff  has  been  in  any  way  evasive  or  otherwise 
improper.  The  plaintiff  has  merely  asserted  its  legal  rights.  Its  rights  to 
bring  this  action  is  clear  because  it  has  performed  all  the  conditions  pre- 
cedent to  suit  which  the  law  requires.  ^ * (242  Fed.  709.) 

2201  A Suit  for  Recovery  of  Taxes  Erroneously  or  Illegally  Assessed 
Can  Be  Brought  Against  the  Collector  Only  Who  Collected  the 

Taxes,  and  Not  His  Successor. — The  appended  decision  (236  Fed.  604) 
of  the  United  States  District  Court  for  the  Southern  District  of  New  York, 
in  the  case  of  Duncan  I.  Roberts  v.  John  Z.  Lowe,  Jr.,  collector,  is  published 
for  the  information  of  internal  revenue  officers  and  others  concerned. 

2202  [Summary:  A suit  to  recover  back  taxes  can  not  be  maintained 
against  the  successor  to  the  collector  to  whom  the  taxes  were  paid,  ex- 
cept in  his  individual  capacity.  The  remedy  lies  either  in  an  action  against 
the  collector  who  actually  received  the  taxes  or  in  an  action  against  the 
United  States.]  (T.  D.  2394,  Nov.  14,  1916.) 

2203  The  appended  decision  of  the  United  States  Circuit  Court  of  Appeals 
for  the  Third  Circuit  in  the  case  of  Philadelphia,  Harrisburg  & Pitts- 
burgh Railroad  Company  to  use,  etc.,  v.  Ephraim  Lederer,  collector  of  in- 
ternal revenue,  is  published  for  the  information  of  internal-revenue  officers 
and  others  concerned. 

Before  Buffington,  McPherson,  and  Wooley,  Circuit  Judges. 

2204  The  satisfactory  opinion  of  Judge  Thompson  (239  Fed.,  184)  re- 
lieves us  from  discussing  nearly  all  the  questions  raised  by  this  writ 


INC.  389 


TAX 


SUITS  FOR  RECOVERY  OF  TAXES. 

of  error.  We  concede  the  force  of  the  company’s  argument  that  in  sub- 
stance, and  especially  in  practical  effect,  suits  such  as  this  are  against  the 
collector  as  an  official  rather  than  as  an  individual — his  personal  liability  is 
rarely  if  ever  enforced — and  it  may  be  that  Congress  might  with  safety  and 
propriety  extend  the  existing  law  to  cover  the  situation  now  presented.  But 
until  the  change  be  actually  made  we  are  bound  by  the  law  as  it  stands,  and 
we  see  no  reason  to  doubt  that  the  statutes  and  decisions  now  in  force  p^- 
vent  the  company  from  recovering  in  this  action  for  the  taxes  collected  by 
William  McCoach,  the  defendant’s  predecessor  in  office.  No  suit  to  recover 
them  has  been  brought  against  McCoach,  and  for  this  reason  the  Act  of 
1899  does  not  apply. 

2205  We  need  hardly  say  that  without  statutory  permission  no  suit  to 
recover  a Federal  tax  can  be  maintained.  Moreover  the  statutes  on 
this  subject  must  be  strictly  obeyed;  they  lay  down  the  conditions  and  limita- 
tions under  which  the  sovereign  consents  to  be  sued,  and  this  consent  should 
not  be  enlarged  by  construction.  We  turn  for  a few  moments  to  the  act  of 
1899,  since  this  seems  to  be  the  company’s  principal  reliance.  Some  addi- 
tional facts  should  be  stated  in  order  to  make  the  position  clear.  The  com- 
pany paid  the  tax  for  1909  in  June,  1910,  the  tax  for  1910  in  June,  1911, 
and  the  tax  for  1911  in  June,  1912.  These  taxes  were  paid  under  protest 
to  McCoach,  who  remained  in  office  until  October  7,  1913.  During  his  term, 
namely,  in  June,  1912,  January,  1913,  and  May,  1913,  respectively,  ffie 
company  claimed  the  refund  of  these  three  taxes ; and  in  June,  1913,  ff 
presened  a petition  to  abate  the  tax  of  1912  apparently  on  the  ground  that 
penalties  had  been  incurred  in  addition  to  the  tax,  although  we  do  not  pre- 
cisely know  what  abatement  was  asked  for.  The  claim  for  the  refund  of 
the  tax  for  1909  was  rejected  by  the  Commissioner  of  Internal  Revenue  on 
July  15,  1912,  but  apparentlv  the  subsequent  claims  for  refund  of  the  taxes 
of  1910  and  1911  and  also  the  petition  for  abatement  in  connection  with  the 
tax  for  1912  were  not  disposed  of  until  February,  1914. 

2206  On  October  22,  1913,  after  McCoach  had  retired  from  office,  the 
company  filed  a supplemental  affidavit  with  the  commissioner  in  sup- 
port of  its  petition  to  abate  the  tax  of  1912,  and  on  the  same  day  asked  Inm 
to  reopen  and  reconsider  his  refusal  to  refund  the  tax  of  1909.  On  October 
27,  1913,  this  request  to  reopen  was  granted,  and  at  the  same  time 
the  commissioner  asked  for  additional  information  and  affidavits  in  refer- 
ence to  the  claims  for  the  refund  of  the  taxes  for  1909,  1910,  and  1911,  and 
also  in  reference  to  the  petition  to  abate  the  tax  of  1912.  Accordingly,  an 
affidavit  was  furnished  on  January  14,  1914.  In  February,  1914,  the  peti- 
tion for  abatement  was  refused,  and  apparently  at  the  same  time  the  claims 
for  the  refund  of  the  taxes  for  1909,  1910,  and  1911  were  also  refused,  for 
on  February  13,  1914,  Lederer  notified  the  company  that  these  claims,  and 
also  the  petition  for  abatement,  had  been  examined  and  rejected  by  the  com- 
missioner. In  March,  1914,  a claim  to  refund  the  tax  for  1913  was  pre- 
sented, and  was  refused  soon  afterwards.  The  present  suit  was  brought  on 
June  29,  1914,  and  sought  to  recover  from  Lederer  the  taxes  for  the  four 

years. 

2207  From  these  facts  it  seems  clear  to  us  that  the  Act  of  1899  does  not 
apply.  The  act  is  as  follows  , , 

No  suit,  action,  or  other  proceeding,  lawfully  commenced  by  or 
against  the  head  of  any  department  or  Bureau  or  other  officer  of  the 

390  TAX 


INC. 


SUITS  FOR  RECOVERY  OF  TAXES. 


United  States  in  his  official  capacity  or  in  relation  to  the  discharge  of 
his  official  duties,  shall  abate  by  reason  of  his  death,  or  the  expiration 
of  his  term  of  office,  or  his  retirement,  or  resignation  or  removal  from 
office;  but,  in  such  event  the  court,  on  motion  or  supplemental  petition 
filed,  at  any  time  within  twelve  months  thereafter,  showing  a necessity 
for  the  sur\dval  thereof,  to  obtain  a settlement  of  the  questions  involved, 
may  allow  the  same  to  be  maintained  by  or  against  his  successor  in  office, 
and  the  court  may  make  such  order  as  shall  be  equitable  for  the  payment 
of  costs. 

2208  only  “suit,  action,  or  other  proceeding”  that  could  have  been  begun 
against  McCoach  while  he  was  in  office  would  have  been  a suit  for  the 

taxes  of  1909  and  1910,  but  no  such  suit  was  brought,  and  it  can  not  be  suc- 
cessfully contended  that  a mere  claim  for  refund,  which  is  a matter  wholly 
for  the  commissioner  is  a suit  proceeding  against  the  collector.  The  basis 
of  an  action  against  the  collector  is  his  receipt  of  the  tax,  and  if  he  has  not 
received  it  we  do  not  see  how  he  can  be  called  on  to  pay  it  back.  And  the 
fact  that  Lederer  was  the  channel  by  which  the  commissioner  transmitted 
the  refusal  to  refund  did  not  impose  liability.  Lederer  was  liable,  if  at  all, 
for  the  tax  of  1912,  for  this  had  come  into  his  own  hands,  but  no  statute 
made  him  liable  for  the  money  that  was  collected  by  his  predecessor  but 
had  never  been  sued  for. 

2209  Po^-  these  reasons,  and  for  those  to  be  found  in  Judge  Thompson's 

opinion,  the  judgment  is  affirmed.  (242  Fed.  492.)  (T.  D.  2507, 

July  2,  1917.) 

2210  Claims  for  Refund  of  Sums  Recovered  by  Suit. — (a)  Claims  by 
taxpayers  for  the  amount  of  a judgment  representing  taxes  or  pen- 
alties erroneosuly  collected  should  be  made  on  Form  46.  The  claimant 
should  state  the  grounds  of  his  claim  under  oath,  giving  the  names  of  all 
the  parties  to  the  suit,  the  cause  of  action,  the  date  of  its  commencement,  the 
date  of  the  judgment,  the  court  in  which  it  was  recovered,  and  its  amount. 
To  this  affidavit  there  should  be  annexed  a certified  copy  of  the  final  judg- 
ment, a certificate  of  probable  cause,  and  an  itemized  bill  of  the  cost  paid  re- 
ceipted by  the  clerk  or  other  proper  officer  of  the  court,  together  with  a certi- 
fied copy  of  the  docket  entries  of  the  court  in  the  case  or  so  much  thereof  as 
may  be  reauired  by  the  Commissioner.  When  a recoverv  is  had  in  any  suit 
or  proceeding  against  a collector  or  other  officer  of  the  revenue  for  any 
act  done  by  him,  or  for  the  recovery  of  any  money  exacted  by  or  paid  to  him 
and  by  liim  paid  into  the  Treasury,  in  the  performance  of  his  official  duty, 
and  the  court  certifies  that  there  was  probable  cause  for  the  act  done  by 
the  collector  or  other  officer,  or  that  he  acted  under  the  directions  of  the 
Secretary  of  the  Treasury,  or  other  proper  officer  of  the  Government,  no 
execution  shall  issue  against  such  collector  or  other  officer,  but  the  amount 
so  recovered  shall,  upon  final  iudgment,  be  provided  for  and  paid  out  of 
the  proper  appropriation  from  the  Treasury.  See  section  989  of  the  Revised 
Statutes,  (b)  Tf  the  judgment  debtor  shall  have  already  paid  the  amount 
recovererl  against  him,  the  claim  should  be  made  in  his  name.  There  should 
also  be  a certificate  of  the  clerk  of  the  court  in  which  the  iudgment  was  re- 
covered (or  other  satisfactory  evidence),  showing  that  the  iudgment  has 
been  satisfied  and  specifying  the  exact  sum  paid  in  its  satisfaction,  with  a 
detail  of  all  items  of  costs  which  were  ]mid  bv  the  iudgment  debtor  or  for 
which  he  is  liable.  See  further  article  1031  fjf21191  and  Regulations  No. 
14  (revised).  (Art.  10v38,  Reg.  45,  Rev.,  April  17,  1919.) 


INC. 


391  TAX 


COMMITTEE  OF  REVIEW  AND  APPEALS. 

2211  LawK23.  The  “Advisory  Tax  Board.” — “Sec.  130L  (a)  * 

(b)  * * (c)  * (d)  (1)  There  is  hereby  created  a 

board  to  be  known  as  the  “Advisory  Tax  Board,”  hereinafter  called 
the  Board,  and  to  be  composed  of  not  to  exceed  six  niembers  to  be 
appointed  by  the  Commissioner  with  the  approval  of  the  Secretary. 
The  Board  shall  cease  to  exist  at  the  expiration  of  ^o  years  after  the 
passage  of  this  Act,  or  at  such  earlier  time  as^the  Commissioner  with 
the  approval  of  the  Secretary  may  designate.” 

2212  Law  1[424.  “Vacancies  in  the  membership  of  the  Board  shall  be 

filled  in  the  same  manner  as  an  original  appointment.  Any 
member  shall  be  subject  to  removal  by  the  Commissioner  with  the  appro va 
of  the  Secretary.  The  Commissioner  with  the  approval  of  the  becietary 
shall  designate  the  chairman  of  the  Board.  Each  member  shall  receive  an 
annual  salary  of  $9,000,  payable  monthly,  together  with  actual  necessary 
expenses  when  absent  from  the  District  of  Columbia  on  official  business. 

2213  Law^I425.  “(2)  The  Commissioner  may,  and  on  the  requ^t  of 

any  taxpayer  directly  interested  shall,  submit  to  the  Board 
any  question  relating  to  the  interpretation  or  administration  of  the  income 
war-profits  or  excess-profits  tax  laws,  and  the  Board  shall  report  its  findings 

and  recommendations  to  the  Commissioner.”  ^ ^ 

2214  Law  11426.  “(3)  The  Board  shall  have  its  office  in  the  Bureau  ot 

Internal  Revenue  in  the  District  of  Columbia.  The  ex- 
penses and  salaries  of  members  of  the  Board  shall  be  audited,  allowed,  and 
paid  out  of  appropriations  for  collecting  internal  revenue,  in  the  same  man- 
ner as  expenses  and  salaries  of  employees  of  the  Bureau  of  Internal  Rev- 
enue are  audited,  allowed,  and  paid.”  . 

2215  LawM27.  “(4)  The  Board  shall  have  the  power  to  summon  wit- 

nesses, take  testimony,  administer  oaths,  and  to  require 
any  person  to  produce  books,  papers,  documents,  or  other  data  relating  to 
any  matter  under  investigation  by  the  Board.  Any  member  of  the  Board 
may  sign  subpoenas  and  members  and  employees  of  the  Bureau  of  Internal 
Revenue  designated  to  assist  the  Board,  when  authorized  by  the  Board,  may 
administer  oaths,  examine  witnesses,  take  testimony  and  receive  evidence. 

2216  The  Advisory  Tax  Board  Membership  During  Its  Existence. 

Commissioner  Daniel  C.  Roper  announced  today  his  appointments 
to  the  new  Advisory  Tax  Board  of  the  Bureau  of  Internal  Revenue.  Five 
memberships  are  announced.  The  sixth  membership  has  been  reserved  as  a 
roving  commission  for  experts  who  will  be  called  in  from  time  to  time  from 

various  industries.  The  men  named  today  are : r i tt  • 

Dr  T S.  Adams,  Professor  of  Political  Economy  of  Yale  Univ- 
ersity and  formerly  of  the  Wisconsin  Tax  Commission. 

T.  E.  Sterrett,  of  New  York,  Certified  Public  Accountant,  and 
formerly  President  of  the  American  Institute  of  Accountants. 

Striart  W.  Cramer,  of  Charlotte,  North  Carolina,  engineer,  con- 
tractor and  cotton  manufacturer;  former  President  of  the  National 

Association  of  American  Cotton  Manufacturers.  r t . i 

L.  F.  Speer,  former  Deputy  Commissioner,  Bureau  of  Internal 

Revenue,  Income  Tax  Division.  j r i 

Fred  T.  Field,  of  Boston,  Mass.,  expert  tax  lawyer,  and  formerly 

Assistant  Attorney  General  of  Massachusetts. 


392 


TAX 


INC. 


COMMITTEE  OF  REVIEW  AND  APPEALS. 

2217  The  chairman  of  the  new  board  of  advisers  will  be  Dr.  Adams,  who 
has  been  active  in  the  Bureau’s  affairs  for  some  time. 

2218  Particular  attention  will  be  given  to  problems  arising  where  differ- 
ences of  opinion  exist  between  the  taxpayers  and  the  Bureau.  Such 

differences  occur  not  only  with  individuals,  but  also  with  groups  and  even 
with  classes  of  industry. 

2219  Formal  hearings  will  be  given  to  taxpayers  in  every  case  where  the 
facts  warrant,  and  it  was  stated  today  at  the  Revenue  Bureau  that 

the  smallest  individual  or  the  most  eminent  legal  counsel  for  the  largest 
corporation  shall  find  a hearing  equally  accessible.  Commissioner  Roper 
has  already  announced  his  policy  “to  employ  every  means  available  so 
that  the  scales  of  justice  may  be  held  evenly  in  deciding  each  case.” 

2220  The  Board  will  be  called  upon  to  decide  questions  involving  the 
general  aspects  of  taxation  and  differentiation  of  economic  activities, 

accounting,  forms  of  organization,  trade  customs,  industrial  management, 
legal  procedure  and  administration.  Special  studies  will  be  made  of  such 
matters  as  they  affect  Federal  taxation.  (Official  announcement  from  the 
Bureau  of  Internal  Revenue,  dated  March  14,  1919.) 

2221  Submission  of  Questions  to  Advisory  Tax  Board. — Questions  re- 
lating to  the  interpretation  or  administration  of  the  income  tax  and 

war  profits  and  excess  profits  tax  laws  may  be  submitted  to  the  Advisory 
Tax  Board  by  the  Commissioner  on  his  own  initiative  or  at  the  request 
of  any  taxpayer  directly  interested  for  the  purpose  of  obtaining  the  recom- 
mendation of  the  Board  thereon.  When  a final  conclusion  has  been  reached 
by  the  income  tax  unit  of  the  Internal  Revenue  Bureau  as  to  the  disposi- 
tion of  a matter,  any  taxpayer  directly  interested  therein  may  request  the 
Commissioner  to  submit  such  matter  to  the  Board.  In  the  case  of  matters 
arising  in  connection  with  the  audit  of  a taxpayer’s  return  the  taxpayer  will 
ordinarily  be  notified  of  such  conclusion  prior  to  assessment  by  letter.  The 
taxpayer  shall  file  with  the  Commissioner  (to  be  transmitted  to  the  in- 
come tax  unit)  a request  in  writing  for  submission  with  a statement  of 
his  objections  to  the  conclusion  of  the  unit  and  the  reasons  for  such  objec- 
tions. Such  request  and  statement  shall  be  filed  with  the  Commissioner 
within  thirty  days  after  the  taxpayer  has  been  notified  of  the  conclusion 
of  the  income  tax  unit  or  within  such  longer  period  as  the  Commissioner 
rnay  allow,  but  the  Board  may  at  its  discretion  at  any  time  receive  addi- 
tional statements  of  objections  or  reasons  therefor.  (Art.  1701,  Reg-  45 
Rev.,  April  17,  1919.) 

2222  Procedure  Before  Advisory  Tax  Board.— Matters  submitted  to 
the  Advisory  Tax  Board  will  ordinarily  be  considered  upon  the 

papers,  but  a hearing  for  oral  presentation  of  a case  will  be  granted  when- 
ever the  Board  deems  such  hearing  necessary  for  the  proper  disposition 
thereof.  Matters  will  ordinarily  be  considered  upon  the  facts  presented  to 
the  income  tax  unit.  New  evidence  will  not  ordinarily  be  received  by  the 
Board,  but  matters  will  be  recommitted  to  the  income  tax  unit  for  further 
presentation  of  facts.  Oral  or  written  evidence  may,  however,  be  re- 
ceived by  the  Board  whenever  it  deems  such  action  necessary  for  the  pro- 
tection of  the  Government  or  the  prevention  of  injustice  to  the  taxpayer. 
Decisions  by  the  Board  upon  matters  referred  to  it  at  the  request  of  tax- 

393  TAX 


INC. 


RULES  AND  REGULATIONS. 


payers  will  be  transmitted  to  the  Commissioner.  (Art.  1702,  Reg.  45, 
Rev.,  April  17,  1919.) 

2223  The  Advisory  Tax  Board  Dissolved. — The  Board  will  be  dis- 
solved at  the  end  of  September,  1919,  by  reason  of  the  fulfillment 

of  its  function  and  the  development  of  the  Income  Tax  Unit  of  the  Inter- 
nal Revenue  Bureau.  (Official  announcement  from  the  Bureau  of  Inter- 
nal Revenue,  August,  1919.) 

2224  Organization  of  a Committee  on  Review  and  Appeal  to  Take 
Over  the  Work  of  the  Advisory  Tax  Board  Which  Ceased  tO' 

Exist  on  October  1,  1919. — Taxpayers  in  many  parts  of  the  country  have 
expressed  interest  in  the  plans  of  the  Bureau  for  continuing  the  important 
work  entrusted  to  the  Advisory  Tax  Board.  The  function  of  the  Board  has 
been  to  review,  upon  appeal,  the  administrative  decisions  of  the  Income 
Tax  Unit  in  important  income  and  excess  profits  cases,  particularly  cases 
involving  exceptional  or  unusual  conditions  with  respect  to  questions  of 
invested  capital,  amortization,  depletion,  depreciation,  etc.  The  newly 
organized  Committee  on  Review  and  Appeal  will  take  over  this  highly  im- 
portant function,  and  taxpayers  are  assured  of  the  same  thoughtful  and 
impartial  consideration  of  their  problems  that  has  been  a feature  of  the 
work  of  the  retiring  Board. 

2225  p,  s.  Talbert,  head  of  the  Technical  Division  of  the  Income  Tax 
Unit,  has  been  selected  as  chairman  of  the  committee  because  of  his 

exceptional  experience  and  peculiar  qualifications  for  this  important  task. 
Mr.  Talbert  is  one  of  our  leading  experts  on  income  tax  matters.  He 
worked  continuously  with  the  Tax  Advisers  in  drafting  the  administrative 
regulations  for  the  enforcement  of  the  1917  law  and  has  also  played  an 
important  part  in  framing  the  regulations  under  the  Act  of  February  24, 
1919.  Mr.  Talbert  will  be  relieved  from  duty  as  head  of  the  Technical 
Division  in  order  that  he  may  devote  his  entire  time  to  the  work  of  the 
committee. 

2226  The  individual  members  of  the  Committee  on  Review  and  Appeal 
will  be  selected  with  the  greatest  care  from  our  most  experienced 

men  in  order  that  their  combined  judgment  may  represent  the  best  experi- 
ence and  highest  intelligence  of  the  Bureau’s  personnel.  I am  confident  that 
this  body  of  men  will  continue  in  a most  satisfactory  manner  the  work 
inaugurated  by  the  Advisory  Tax  Board  and  taxpayers  may  be  assur^  of 
courteous,  intelligent  and  impartial  hearings.  (Announcement  by  Com- 
missioner Daniel  C.  Roper,  dated  September  27,  1919.) 


2227  Law  M33.  The  Commissioner  Authorized  to  Make  Rules  and 

Regulations. — “Sec.  1309.  That  the  Commissioner, 
with  the  approval  of  the  Secretary,  is  hereby  authorized  to  make  all  need- 
ful rules  and  regulations  for  the  enforcement  of  the  provisions  of  this  Act. 

2228  Promulgation  of  Regulations — No.  45,  Revised. — In  pursuance 
of  the  statute  the  foregoing  regulations  [Reg.  45,  Rev.,  April  17, 

1919:  see  Finder  Page  1]  are  hereby  made  and  promulgated  and  all 
rulings  inconsistent  herewith  are  hereby  revoked.  (Art.  1800,  Reg.  45, 
Rev.,  April  17,  1919.) 


INC. 


394  TAX 


RULES  AND  REGULATIONS. 


2229  Effective  Date  of  Treasury  Decisions. — Treasury  decisions  pro- 
mulgating' rulings  of  the  Internal  Revenue  Bureau  become  effective 

upon  the  date  of  approval  unless  otherwise  stated  therein.  Cases  previously 
adjusted  in  contravention  of  law  as  pronounced  in  such  decisions,  are  sub- 
ject to  readjustment  in  accordance  with  the  decision.  [Read  at  112132.1 
(Art.  38,  1[245,  Reg.  33,  Rev.,  Jan.  2,  1918.) 

2230  Policy  of  the  Bureau  of  Internal  Revenue  with  Regard  to  Re- 
quests for  Rulings  and  Advice  Upon  Abstract  Propositions. — 

The  Bureau  of  Internal  Revenue  herein  definitely  outlines  its  policy  with 
regard  to  requests  which  are  received  daily  for  rulings  and  advice  upon 
abstract  propositions  involving  questions  of  income  tax  and  profit  lia- 
bility. For  example,  taxpayers  considering  the  reorganization  of  corpora- 
tions frequently  ask  whether  the  contemplated  plans  will  result  in  the 
realization  of  taxable  income.  These  requests  for  advance  information 
have  become  so  numerous,  that  the  Bureau  deems  it  advisable  to  state 
why  it  is  found  necessary  to  decline  to  make  advance  rulings  in  particular 
cases. ^ The  policy  of  the  Bureau,  it  is  announced,  will  be  not  to  answer 
such  inquiries  except  under  the  following  circumstances : 

The  transaction  must  be  completed  and  not  merely  proposed  or  planned. 
The  complete  facts  relating  to  the  transaction,  together  with  abstracts 
from  contracts  or  other  documents  necessary  to  present  the  complete  facts 
must  be  given. 

The  names  of  all  the  real  parties,  interested  (not  “dummies”  used  in  the 
transaction)  must  be  stated  regardless  of  who  presents  the  question,  whether 
attorney,  accountant,  tax  service  or  other  representative. 

2231  q'he  conclusions  upon  which  the  rulings  are  based  are  as  follows : 
“An  examination  of  the  revenue  laws  setting  forth  the  duties  of  the 

Commissioner  of  Internal  Revenue  does  not  disclose  any  function  assigned 
to  him  by  statute  which  authorizes  him  to  make  a decision  in  any  particular 
case  which  does  not  arise  in  actual  course  of  administering  the  law.  He  is 
authorized,  with  the  approval  of  the  Secretary  of  the  Treasury,  to  make 
regulations,  but  this  would  not  aifthorize  him,  even  with  the  approval  of 
the  Secretary,  to  decide  any  particular  case  in  advance  of  its  actual  pres- 
entation of  the  facts  for  a decision. 

2232  “In  the  interval  between  an  informal  advance  decision  and  the 
time  when  the  case  is  finally  presented  for  actual  decision,  develop- 
ments may  occur  which  affect  the  decision.  When  a question  is  actually 
presented  in  the  regular  course  of  administration  for  the  decision  of  the 
Commissioner,  the  decision  must  then  be  in  accordance  with  such  light, 
whether  from  experience  or  from  judicial  decision,  as  he  may  then  have. 
Any  taxpayer  who  had  relied  on  an  advance  decision  would  necessarily  be 
prejudiced  whenever  the  final  decision  did  not  agree  with  the  advance  de- 
cision. The  fact  that  taxpayers  asking  for  advance  decisions  are  usually 
unwilling  to  accept  an  oral  opinion  shows  that  taxpayers  are  intending  to 
rely  on  such  advance  decisions,  and  are  likely  to  be  misled  by  them  if 
change  later  becomes  necessary 

2233  “ii;  ^ matter  of  practical  experience  that  when  facts  are  pre- 

sented for  advance  decision  it  is  practically  impossible  to  present 

the  same  facts  as  will  afterwards  come  up  in  the  regular  course  for  actual 
decision.  Reorganization  plans,  for  instance,  when  they  actually  work 
out,  may  be  changed  in  some  particular  which  the  taxpayer  regards  as 
unimportant,  but  which  in  fact  may  be  decisive  of  the  case. 

INC.  395 


TAX 


SUPREME  COURT  DECISIONS. 


2234  “The  large  number  of  taxpayers  which  must  be  dealt  with  under 
the  present  law  and  the  great  variety  of  intricate  questions  involved 

requires  employes  not  only  of  native  ability  but  of  special  training.  Even 
such  a force  is  taxed  to  the  utmost  in  dealing  with  the  actual  pses  as  they 
arise,  and  every  attempt  to  render  an  advance  decision  takes  just  so  mudi 
time  away  from  the  taxpayers  who  have  a definite  right  under  the  law  to  a 
consideration  of  their  cases  which  are  ready  for  final  disposal. 

2235  “Experience  in  the  past  shows  that  when  such  questions  were  con- 
sidered a single  advance  decision  was  not  sufficient  in  most  cases. 

2236  “It  is  realized  that  the  uncertainty  which  exists  in  the  minds  of 
business  men  as  to  the  construction  of  various  parts  of  the  law  is 

unfortunate  and  tends  to  hamper  business  development,  but  since  such 
uncertainty  can  be  resolved  only  through  decisions  of  the  courts,  and  since 
an  advance  decision  by  the  Commissioner  is  not  a real  but  only  an  apparent 
resolution  of  the  uncertainty,  it  appears  that  in  giving  such  advance  decisions 
the  Commissioner  would  be  doing  the  taxpayer  an  injustice  rather  than  a 
favor. 

2237  “Where  a question  presented  is  not  covered  by  the  regulations  and 
is  so  general  that  the  regulations  should  contain  a provision  bear- 
ing on  it,  an  amendment  of  the  regulations  will  be  prepared  as  heretofore. 

2238  “The  conclusions  here  stated  are  the  same  conclusions  that  have 
been  reached  in  practically  every  instance  by  bodies  whose  duty  it 

is  to  make  decisions  based  on  facts — that  it  is  unsafe  and  misleading  to 
treat  hypothetical  questions  or  to  give  advance  information  even  on  real 
questions.”  (Statement  by  the  Bureau  of  Internal  Revenue,  dated 
August  26,  1919.) 

2239  LawTJ428.  Leaves  of  Absence  for  Internal-Revenue  Officers.^ — 

“Sec.  1302.  That  all  internal-revenue  agents  and  in- 
spectors shall  be  granted  leave  of  absence  with  pay,  which  shall  not  be 
cumulative,  not  to  exceed  thirty  days  in  any  calendar  year,  under  such 
regulations  as  the  Commissioner,  with  the  approval  of  the  Secretary,  may 
prescribe.”  * 

2240  Law  T[465.  Invalidating  Clause. — “Sec.  1402.  ^ That  if  any  clause, 

sentence,  paragraph,  or  part  of  this  Act  shall  for  any 
reason  be  adjudged  by  any  court  of  competent  jurisdiction  to  be  invalid, 
such  judgment  shall  not  affect,  impair,  or  invalidate  the  remainder  of  this 
Act,  but  shall  be  confined  in  its  operation  to  the  clause,^  sentence,  paragraph, 
or  part  thereof  directly  involved  in  the  controversy  in  which  such  judg- 
ment has  been  rendered.” 

2241  Cases  Involving  the  Constitutionality  of  the  Revenue  Acts  of 
1916,  1917,  and  1918. — [No  suit  brought  under  any  one  of  these 

three  Acts  has  been  decided  by  the  Supreme  Court.— January  1,  1920.] 

2242  Cases  Involving  the  Constitutionality  of  the  Act  of  October  3, 
1913.  The  following  cases  arising  under  the  Income  Tax  Law  of 

October  3,  1913,  have  been  decided  in  the  Supreme  Court  of  the  United 
States. 

2243  Frank  R.  Brushaber,  Appellant,  v.  Union  Pacific  Railroad  Com- 

pany. (240  U.  S.  1.) 

Appeal  from  the  District  Court  of  the  Southern  District  of  New  York. 
[For  the  opinion  see  1[2260.] 

INC.  396  TAX 


SUPREME  COURT  DECISIONS. 


2244  John  F.  Dodge  and  Horace  E.  Dodge,  Appellants,  v.  James  J. 

Brady,  Collector  of  Internal  Revenue.  (240  U.  S.  122.) 

[For  the  opinion  see  ^2294.] 

2245  John  R.  Stanton,  Appellant,  v.  Baltic  Mining  Company  et  al.  (240 

U.  S.  103.) 

Appeal  from  U.  S.  District  Court,  District  of  Massachusetts. 

[For  the  opinion  see  j[2297.] 

2246  Tyee  Realty  Company,  Plaintiff  in  Error,  v.  Charles  W.  Anderson,, 

Collector  of  Internal  Revenue.  (240  U.  S.  115.) 

In  error  to  U.  S.  District  Court  S.  D.  New  York. 

[For  the  opinion  see  j[2290.] 

2247  Edwin  Thorne,  Plaintiff  in  Error,  v.  Charles  W.  Anderson,  Col- 

lector of  Internal  Revenue.  (240  U.  S.  115.) 

In  error  to  U.  S.  District  Court  S.  D.  New  York. 

[For  the  opinion  see  ^2290.] 

2248  John  F.  Dodge  and  Horace  E Dodge,  Appellants,  v.  William  H. 

Osborn,  Commissioner  of  Internal  Revenue.  (240  U.  S.  118.) 
Appeal  from  the  Court  of  Appeals  of  the  District  of  Columbia. 

2249  [Comment:  The  appellants  here  [P248],  sought  in  the  lower  courts 
to  enjoin  the  assessment  and  collection  of  the  additional  tax.  The 

Court  of  Appeals  of  the  District  of  Columbia  affirmed  the  decree  of  the 
Supreme  Court  of  the  District  of  Columbia  dismissing  the  bill  and  held 
that  the  constitutional  questions  could  not  be  considered  in  a proceeding 
to  enjoin  collection.  The  U.  S.  Supreme  Court  affirmed.  For  the  opinion 
see  paragraph  2167.] 

2250  Howard  Gould,  Plaintiff  in  Error,  v.  Katherine  C.  Gould  (245 

U.  S.  151.)  ^ 

In  error  to  the  Supreme  Court  of  the  State  of  New  York. 

[For  the  opinion  see  ][2306.] 

2251  Henry  R.  Towne,  Plaintiff  in  Error,  v.  Mark  Eisner,  Collector  of 

Internal  Revenue.  (245  U.  S.  418.) 

In  error  to  the  U.  S.  District  Court  for  the  S.  D.  of  New  York. 

[For  the  opinion  see  |[2313.] 

2252  William  E.  Peck  & Co.,  Inc.,  Plaintift  in  Error,  v.  John  Z.  Lowe 

Jr.,  Collector  of  Internal  Revenue.  (247  U.  S.  165.) 

In  error  to  the  U.  S.  District  Court  for  the  S.  D.  of  New  York. 

[For  the  opinion  see  ^[2329.] 

2253  E.  J.  Lynch,  Collector  of  Internal  Revenue,  Petitioner,  v.  H C 

Hornby.  (247  U.  S.  339.) 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the 
Eighth  Circuit. 

[For  the  opinion  see  ]f2337.] 


INC.  397 


TAX 


SUPREME  COURT  DECISIONS. 


2254  E T Lynch,  Collector  of  Internal  Revenue,  Petitioner,  v.  Henry 

Turrish.  (247  U.  S.  221.)  i 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the 

Eighth  Circuit. 

[For  the  opinion  see  1|2351.J 

2255  Charles  A.  Peabody,  Plaintiff  in  Error,  v.  Mark  Eisner,  Collector 

of  Internal  Revenue.  (247  U.  S.  347.) 

In  error  to  the  U.  S.  District  Court  for  the  S.  D.  of  New  York. 

[For  the  opinion  see  112378.] 

2256  Southern  Pacific  Company,  Plaintiff  in  Error,  v.  John  Z.  Lowe, 

Jr.  Collector  of  Internal  Revenue.  (247  U.  S.  330.) 

In  error  to  the  U.  S.  District  Court  for  the  S.  D.  of  New  York. 

[For  the  opinion  see  1[2380.] 

2257  Gulf  Oil  Corporation,  Petitioner,  v.  C.  J.  Lewellyn,  Collector  of 

Internal  Revenue.  (248  U.  S.  71.)  , r ..u 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the 

Third  Circuit.  . i 

[For  the  opinion  see  1f2395.j 

2258  Alvah  Crocker,  et  al.,  Trustees,  Petitioners,  v.  John  F.  Malley, 

Collector  of  Internal  Revenue.  (249  U.  S.  223.) 

On  writ  of  certiorari  to  the  U.  S.  Circuit  Court  of  Appeals  for  the 

First  Circuit.  i 

[For  the  opinion  see  Tf2399.J 

2259  Emily  R.  DeGanay,  v.  Ephraim  Lederer,  Collector  of  Internal 

Revenue.  (250  U.  S.  376.)  i r i n-u*  a 

Certificate  from  the  U.  S.  Circuit  Court  of  Appeals  for  the  Third 

Circuit.  . . 1 

[Eor  the  opinion  see  1[240b.j 


Brushaber  v.  U.  P.  Railroad  Company. 

(240  U.  S.  1.) 

2260  The  appended  decision  of  the  Supreme  Court  of  the  United 

case  of  Frank  R.  Brushaber  v.  Union  Pacific  Railroad  Co.  is  publish^ 
for  the  information  of  internal-revenue  officers  and  others  concerned,  (i.  L>. 
2290,  Jan.  31,  1916.) 

(January  24,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinon  of  the  Court. 

2261  As  a stockholder  of  the  Union  Pacific  Railroad  Company  the  appell^t 
filed  his  bill  to  enjoin  the  corporation  from  complying  with  the  income 

tax  provisions  of  the  Tariff  Act  of  October  3 1913  (Section  II,  ch. 

166).  Because  of  constitutional  questions  duly  arising  the  case  is  here  on  direct 
appeal  from  a decree  sustaining  a motion  to  dismiss  because  no  ground  fo 

2262  '^he^^^i^ght  to  prevent  the  corporation  from  returning 

tax  was  based  upon  many  averments  as  to  the  repugnancy  of  the  statute 
to  the  Constitution  of  the  United  States,  of  the  peculiar  relation  of  the  cor- 
poration  to  the  stockholders  and  their  particular  interests  resulting  from  many 
of  the  administrative  provisions  of  the  assailed  act,  of  the  confusion,  wrong  and 
multiplicity  of  suits  and  the  absence  of  all  means  of  redress  which  would  result 
if  the  corporation  paid  the  tax  and  complied  with  the  act  in 
without  protest,  as  it  was  alleged  it  was  its  intention  to  do.  To  put  out  of  the 


398 


TAX 


INC. 


SUPREME  COURT  DECISIONS. 


way  a question  of  jurisdiction  we  at  once  say  that  in  view  of  these  averments 
and  the  ruling  in  Pollock  v.  Farmers’  Loan  & Trust  Co.,  157  U.  S.  429,  sustaining 
the  right  of  a stockholder  to  sue  to  restrain  a corporation  under  proper  averments 
from  voluntarily  paying  a tax  charged  to  be  unconstitutional  on  the  ground  that 
to  permit  such  a suit  did  not  violate  the  prohibitions  of  Section  3224,  Revised 
Statutes,  against  enjoining  the  enforcement  of  taxes,  we  are  of  opinion  that  the 
contention  here  made  that  there  was  no  jurisdiction  of  the  cause  since  to  ener- 
tain  it  would  violate  the  provisions  of  the  Revised  Statutes  referred  to  is  without 
merit.  Before  coming  to  dispose  of  the  case  on  the  merits,  however,  we  observe 
that  the  defendant  corporation  having  called  the  attention  of  the  government  to 
the  pendency  of  the  cause  and  the  nature  of  the  controversy  and  its  unwilling- 
ness to  voluntarily  refuse  to  comply  with  the  act  assailed,  the  United  States 
as  amicus  curiae  has  at  bar  been  heard  both  orally  and  by  brief  for  the  purpose 
of  sustaining  the  decree. 

2263  Aside  from  the  averments  as  to  citizenship  and  residence,  recitals  as  to 
the  provisions  of  the  statute  and  statements  as  to  the  business  of  the 

corporation  contained  in  the  first  ten  paragraphs  of  the  bill  advanced  to  sustain 
jurisdiction,  the  bill  alleged  twenty-one  constitutional  objections  specified  in  that 
number  of  paragraphs  or  subdivisions.  As  all  the  grounds  assert  a violation 
of  the  Constitution,  it  follows  that  in  a wide  sense  they  all  charge  a repugnancy 
of  the^  statute  to  the  Sixteenth  Amendment  under  the  more  immediate  sanction 
of  which  the  statute  was  adopted. 

2264  The  various  propositions  are  so  intermingled  as  to  cause  it  to  be  difficult 
to  classify  them.  We  are  of  opinion,  however,  that  the  confusion  is  not 

inherent,  but  rather  arises  from  the  conclusion  that  the  Sixteenth  Amendment 
provides  for  a hitherto  unknown  power  of  taxation,  that  is,  a power  to  levy 
an  income  tax  which  although  direct  should  not  be  subject  to  the  regulation  of 
apportionment  applicable  to  all  other  direct  taxes.  And  the  far-reaching  effect 
of  this  erroneous  assumption  will  be  made  clear  by  generalizing  the  many  conten- 
tions advanced  in  argument  to  support  it,  as  follows:  (a)  The  Amendment  author- 
izes only  a particular  character  of  direct  tax  without  apportionment,  and  there- 
fore if  a tax  is  levied  under  its  assumed  authority  which  does  not  partake  of  the 
characteristics  exacted  by  the  Amendment,  it  is  outside  of  the  Amendment  and 
is  . void  as  a direct  tax  in  the  general  constitutional  sense  because  not  appor- 
tioned. (b)  As  the  Amendment  authorizes  a tax  only  upon  incomes  “from 
whatever  source  derived,’’  the  exclusion  from  taxation  of  some  income  of  desig- 
nated persons  and  classes  is  not  authorized  and  hence  the  constitutionality  of  the 
law  must  be  tested  by  the  general  provisions  of  the  Constitution  as  to  taxation, 
and  thus  again  the  tax  is  void  for  want  of  apportionment,  (c)  As  the  right  to 
tax  “incomes  from  whatever  source  derived’’  for  which  the  Amendment  pro- 
vides must  be  considered  as  exacting  intrinsic  uniformity,  therefore  no  tax  comes 
under  the  authority^  of  the  Amendment  not  conforming  to  such  standard,  and 
hence  all  the  provisions  of  the  assailed  statute  must  once  more  be  tested  solely 
under  the  general  and  pre-existing  provisions  of  the  Constitution,  causing  the 
statute  again  to  be  void  in  the  absence  of  apportionment,  (d)  As  the  power 
conferred  by  the  Amendment  is  new  and  prospective,  the  attempt  in  the  statute 
to  make  its  provisions  retroactively  apply  is  void  because  so  far  as  the  retro- 
active period  is  concerned,  it  is  governed  by  the  pre-existing  constitutional  re- 
quirement as  to  apportionment. 

2265  But  it  clearly  results  that  the  propositions  and  the  contentions  under  it, 
if  acceded  to,  would  cause  one  provision  of  the  Constitution  to  destroy 

another;  that  is,  they  would  result  in  bringing  the  provisions  of  the  Amendment 
exempting  a direct  tax  from  apportionment  into  irreconcilable  conflict  with  the 
general  requirements  that  all  direct  taxes  be  apportioned.  Moreover,  the  tax 
authorized  by  the  Amendment,  being  direct,  would  not  come  under  the  rule 
of  uniformity  applicable  under  the  Constitution  to  other  than  direct  taxes,  and 
thus  it  would  come  to  pass  that  the  result  of  the  Amendment  would  be  to 
authorize  a particular  direct  tax  not  subject  either  to  apportionment  or  to  the 
rule  of  geographical  uniformity,  thus  giving  power  to  impose  a different  tax 
in  one  state  or  states  than  was  levied  in  another  state  or  states.  This  result 
instead  of  simplifying  the  situation  and  making  clear  the  limitations  on  the 
taxing  power,  which  obviously  the  Amendment  must  have  been  intended  to 
accomplish,  would  create  radical  and  destructive  changes  in  our  constitutional 
system  and  multiply  confusion. 

2266  But  let  us  by  a demonstration  of  the  error  of  the  fundamental  proposition 
as  to  the  significance  of  the  Amendment  dispel  the  confusion  necessarily 

arising  from  the  arguments  deduced  from  it.  Before  coming,  however,  to  the 


INC.  399 


TAX 


SUPREME  COURT  DECISIONS. 

text  of  the  Amendment,  to  the  end  that  its  significance  may  be  determined  in 
the  light  of  the  previous  legislative  and  judicial  history  of  the  subject  with  which 
the  Amendment  is  concerned  and  with  a knowledge  of  the  conditions  which  p 
sumpt^vely  Ted  up  to  its  adoption  and  hence  of  the  purpose  it  was  intended  to 
accomplish,  we  make  a brief  statement  on  those  subjects. 

2267  That  the  authority  conferred  upon  Congress  by  section  ^ J 

“to  lay  and  collect  taxes,  duties,  imposts  and  excises  is  exhaustive  ana 
embraces  every  conceivable  power  of  taxation  has  never  been 
it  has,  has  been  so  often  authoritatively  declared  as  to  render  ^ ^ 

to  state  the  doctrine.  And  it  has  also  never  been  questioned  from  the  lonnda 
tion  without  stopping  presently  to  determine  under  which  of 
ings  The  power  was  properly  to  be  classed,  that  there  was  authority  given  as 
the  part  was  included  in  the  whole,  to  lay  and  collect  income  taxes.  Again, 
it  has  never  moreover  been  questioned  that  the  conceded  complete  and  all- 
emtacing  taxing  power  was  subject,  so  far  as  they  were  f 

to  limitations  resulting  from  the  requirements  of  ^rt.  I,  sec.  8,  cl.  1,  that  an 
duties  imposts  and  excises  shall  be  uniform  throughout  the  United  btates,  and 
t^the  imitations  of  Art.  I,  sec.  2,  cl.  3,  that  “direct  taxes  shall  be  apportioned 
among  thrse^era^^  of  Art.’l,  sec.  9,  cl.  4,  that  “no  capitation  or 

other  ^direct,  tax  shall  be  laid,  unless  in  proportion  to  the  census  or  enumeration 
hereinbefore  directed  to  be  taken.”  In  fact  the  two  great  subdivisions  embracing 
the  complete  and  perfect  delegation  of  the  power  tax  ^;^Vh.ef  fustic 
limitations  as  to  such  power  were  thus  aptly  stated  by  ^hief 
in  Pollock  V.  Farmers’  Loan  & Trust  Company  supra,  at  page  557^  of  direct 
matter  of  taxation,  the  Constitution  recognizes  the  two  great  classes  ot  direct 
and  indirect  taxes,  and  lays  down  two  rules  by  which  their  imposition  must 
be^governed,  namely:  The  rule  of  apportionment  ^as  to  direct  taxes,  and  ^he 
rule^of  uniformity  as  to  duties,  imposts  and  excis^es.  the 

ever  as  long  ago  pointed  out  in  Veazie  Bank  v.  Fenno,  8 Wall,  533,  541,  that  the 
requirement  of  apportionment  as  to  one  of  the  great  classes  and  of  uniformity 
a^to  the  other  class  were  not  so  much  a limitation  upon  the  complete  and  all 
embracing  authority  to  tax,  but  in  their  essence  were  simply  F^g^JfVhrwho^e 
Lrning  the  mode  in  which  the  plenary  power  was  to  be  exerted.  In  the  whole 
history  of  the  Government  down  to  the  time  of  the  adoption  of  the  Sixteenth 
Amendment,  leaving  aside  some  conjectures  expressed  to  p^ssibihty  of  a 

tax  lying  intermediate  between  the  two  great  classes  and  embraced  by  neither, 
no  question  has  been  anywhere  made  as  to  the  correctness  of  these  proposition's. 
At  the  very  beginning,  however,  there  arose  differences  of  opinion  conc^nmg  the 
criteria  t7  be  applied  in  determining  in  which  of  the  two  great  subdivisions 
a tax  would  fall.  Without  pausing  to  state  at  length  the  basis  of  these 
differences  and  the  consequences  which  arose  frc^  them,  as  the  w^®  ® 
subject  was  elaborately  reviewed  in  Pollock  v.  Farmers  Loan  & Tru 
Comoanv  157  U.  S.  429;  158  U.  S.  601,  we  make  a condei^ed  statement  which 
is  in^substance  taken  from  what  was  said  in  that  case.  Early  the 
were  manifested  in  pressing  on  the  one  hand  and  opposing  on  other  the 
passage  of  an  act  levying  a tax  without  apportionment  on  carriages  for  the 
Conveyance  of  persons^  and  when  such  a tax  was  enacted  the  yo^tion  o its 
repugnancy  to  the  Constitution  soon  came  to  this  court  for  determination. 
(Hylton  V United  States,  3 Dali  171.)  It  was  held  that  the  tax  came  wi  hm 
the^class  of  excises,  duties  and  imposts  and  therefore  did  not  CouCt 

ment,  and  while  this  conclusion  was  agreed  to  by  all  fbe  members  of  the  court 
who  took  part  in  the  decision  of  the  case,  there  was  not  an  exact  coincidence 
in  the  reasoning  by  which  the  conclusion  was  sustained.  Without  stating  the 
minor  differences,  it  may  be  said  with  substantial  accuracy  that  the  divergent 
C^asoning  was  this:  On  the  one  hand,  that  the  fax  was  not  m the  class  of 
direct  taxes  requiring  apportionment  because  it  ^ was  not  levied  ^ir^ctly  on 
property  because  of  its  ownership  but  rather  on  its  use  .^^^/berefore  an 
Lcise  duty  or  impost;  and  on  the  other,  that  in  any  event  the  class  of  direct 
taxes  mcluded  only  taxes  directly  levied  on  real  estate  because  of  its  owner- 
ship Putting  out  of  view  the  difference  of  reasoning  which  led  to  the  concurrent 
conclusion  in^  the  Hylton  case,  it  is  undoubted  that  it  came  to  pass  in  legislative 
practice  that  the  line  of  demarcation  between  the  two  great  classes  of  direct 
Lxefon  the  one  hand  and  excises,  duties  and  Imposts  on  the  other  which  was 
exemplified  by  the  ruling  in  that  case,  was  accepted  and  acted  upon.  In  the 


INC. 


400  TAX 


SUPREME  COURT  DECISIONS. 

first  place  this  is  shown  by  the  fact  that  wherever  (and  there  were  a number  of 
cases  of  that  kind)  a tax  levied  directly  on  real  estate  or  slaves  because  of 
ownership  It  was  treated  as  coming  within  the  direct  class  and  apportionment 
was  pro^aded  for,  while  no  instance  of^  apportionment  as  to  any  other  kind  of 
tax  IS  afforded.  Again  the  situation  is  aptly  illustrated  by  the  various  acts 
taxing  incomes^  derived  from  property  of  every  kind  and  nature  which  were 
enacted  beginning  in  1861  and  lasting  during  what  may  be  termed  the  Civil 
War  period  It  is  not  disputable  that  these  latter  taxing  laws  were  classed  under 
the  head  of  excises,  duties  and  imposts  because  it  was  assumed,  that  they  were 
of  that  character  inasmuch  as,  although  putting  a tax  burden  on  income  of 
every  kind,  including  that  derived  from  property  real  or  personal,  they  were 
not  tapces  directly  on  property  because  of  its  ownership.  And  this  practical  con- 
struction came  in  theory  to  be  the  accepted  one  since  it  was  adopted  without 
dissent  by  the  most  eminent  of  the  text-writers.  1 Kent.  Com.  254,  256;  1 Story 
.Const.  Lim.  (5th  ed.)  480;  Miller  on  the  Constitution, 
237;  Pomeroys  Constitutional  Law,  Section  281;  Hare  Const.  Law,  Vol.  1 249 
Taxation,  502;  Ordronaux,  Constitutional  Legislation,  22^ 
Upon  the  lapsing  of  a considerable  period  after  the  repeal  of  the  income 
tax  laws  referred  to,  in  1894  an  act  was  passed  laying  a tax  on  incomes 
from  all  classes  of  property  and  other  sources  of  revenue  which  was  not  appor- 
tionerl,  and  which  therefore  was  of  course  assumed  to  come  within  the  classifi- 
cation of  excises,  duties  and  imposts  which  were  subject  to  the  rule  of  uniformity 
but  not  to  the  rule  of  apportionment.  The  constitutional  validity  of  this  law 
vas  challenged  on  the  ground  that  it  did  not  fall  within  the  class  of  excises 
duties  and  imposts,  but  was  direct  in  the  constitutional  sense  and  was  therefore 
void  for  want  of  apportionment,  and  that  question  came  to  this  court  and  was 
p.assed  upon  in  Pollock  v.  Farmers’  Loan  & Trust  Co.,  157  U.  S.  429*  158  U.  S. 
oUl.  ihe  court,  fully  recognizing  in  the  passage  which  we  have  previously  quoted 
t^rie  all-embracing  chamcter  of  the  two  great  classifications  including  on  the  one 
hana,  direct  taxes  subject  to  apportionment,  and  on  the  other,  excises,  duties  and 
imposts  subject  to  uniformity,  held  the  law  to  be  unconstitutional  in  substance 
for  these  reasons.  Concluding  that  the  classification  of  direct  was  adopt^'d  for 
Ihe  purpo.se  of  rendering  it  impossible  to  burden  by  taxation  accumulations  of 
property,  real  or  personal,  except  subject  to  the  regulation  of  apportionment. 
It  was  held  that  the  duty  existed  to  fix  what  was  a direct  tax  in  the  constitutional 
sense  so  as  to  accomplish  this  purpose  contemplated  by  the  Constitution  (157  U 
b.  Coming  to  consider  the  validity  of  the  tax  from  this  point  of  view,  while 

not  questioning  at  all  that  in  common  understanding  it  was  direct  merely  on  in- 
come and  only  indirect  on  property,  it  was  held  that  considering  the  substance  of 
ttr.ngs  It  was  direct  on  property  in  a constitutional  sense  since  to  burden  an  in- 

the  point  of  substance  to  burden  the  property  from 
which  the  income  was  derived  and  thus  accomplish  the  very  thing  which  the 
provision  as  to  apportionment  of  direct  taxes  was  adopted  to  prevent.  As  this 
conclusion  but  enforced  a regulation  as  to  the  mode  of  exercising  power  under 
particular  circumstances  it  did  not  in  any  way  dispute  the  all  embracing  taxing 
authority  possessecl  by  Congress,  including  necessarily  therein  the  power  to  im- 
pose income  taxes  if  only  they  conformed  to  the  constitutional  regulations  which 
were  applicable  to  them.  Moreover  in  addition  the  conclusion  reached  in  the 
ioilock  case  did  not  in  any  degree  involve  holding  that  income  taxes  genericallv 
and  necessarily  came  within  the  class  of  direct  taxes  on  property,  but  on  the 
contrary  recognized  the  fact  that  taxation  on  income  was  in  its  nature  an  excise 
entUled  to  be  enforced  as  such  unless  and  until  it  was  concluded  that  to  enforce 
It  would  amount  to  accomplishing  the  result  which  the  requirement  as  to  appor- 
tionment of  direct  taxation  was  adopted,  in  which  case  the  duty  would  arise  to 
disregard  form  and  consider  substance  alone  and  hence  subject  the  tax  to  the 
regulation  as  to  apportionment  w’^hich  otherwise  as  an  excise  would  not  apply 
to  it.  JNothing  could  serve  to  make  this  clearer  than  to  recall  that  in  the  Pollock 
case  in  so  far  as  the  law  taxes  incomes  from  other  classes  of  property  than  real 
estate  and  invested  personal  property,  that  is,  income  from  “professions,  trades 
employments,  or  vocations”  (158  U.  S.  637),  its  validity  was  recognized;  indeed 
It  was  expressly  declared  that  no  dispute  was  made  upon  that  subject  and  atten- 
tion was  called  to  the  fact  that  taxes  on  such  income  had  been  sustained  as 
excise  taxes  in  the  past.  Ib.  p.  635.  The  whole  law  was,  however,  declared  un- 
constitutional on  the  ground  that  to  permit  it  to  thus  operate  would  relieve  real 
estate  and  invested  personal  property  from  taxation  and  “would  leave  the  burden 
ot  the  tax  to  be  borne  by  professions,  trades,  employments,  or  vocations;  and  in 
that  way  what  was  intended  as  a tax  on  capital  would  remain,  in  substance,  a 


INC. 


401  TAX 


SUPREME  COURT  DECISIONS. 


tax  on  occupations  and  labor”  (Ib.  p.  637),  a result  which  it  was  held  could  not 
have  been  contemplated  by  Congress. 

2269  This  is  the  text  of  the  Amendment: 

“That  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes 
from  whatever  source  derived,  without  apportionment  among  the  several  States, 
and  without  regard  to  any  census  or  enumeration.” 

2270  It  is  clear  on  the  face  of  this  text  that  it  does  not  purport  to  confer  power 

to  levy  income  taxes  in  a generic  sense — an  authority  already  possessed 

and  never  questioned— or  to  limit  and  distinguish  between  one  kind  of  income 
taxes  and  another,  but  that  the  whole  purpose  of  the  Amendment  was  to  relieve 
all  income  taxes  when  imposed  from  apportionment  from  a consideration  of  the 
source  whence  the  income  was  derived.  Indeed,  in  the  light  of  the  history  which 
we  have  given  and  of  the  decision  in  the  Pollock  case  and  the  ground  upon  which 
the  ruling  in  that  case  was  based,  there  is  no  escape  from  the  conclusion  that 
the  Amendment  was  drawn  for  the  purpose  of  doing  away  for  the  future  ^with 
the  principle  upon  which  the  Pollock  case  was  decided,  that  is,  of  determining 
whether  a tax  on  income  was  direct  not  by  a consideration  of  the  burden  placed 
on  the  taxed  income  upon  which  it  directly  operated,  but  by  taking  into  view 
the  burden  which  resulted  on  the  property  from  which  the  income  was  derived, 
since  in  express  terms  the  Amendment  provides  that  income  taxes,  from  what- 
ever source  the  income  may  be  derived,  shall  not  be  subject  to  the  regulations 
of  apportionment.  From  this  in  substance  it  indisputably  arises,  first,  that  all 
the  contentions  which  we  have  previously  noticed  concernnig  the  assumed  hm- 
itations  to  be  implied  from  the  language  of  the  Amendment  as  to  the  nature  and 
character  of  the  income  taxes  which  it  authorized  find  no  support  in  the  text 
and  are  in  irreconcilable  conflict  with  the  very  purpose  which  the  Amendment 
was  adopted  to  accomplish.  Second,  that  the  contention  that  the  Amendment 
treats  a tax  on  income  as  a direct  tax  although  it  is  relieved  from  apportionment 
and  is  necessarily  therefore  not  subject  to  the  rule  of  uniformity  as  such  rule 
only  applies  to  taxes  which  are  not  direct,  thus  destroying  the  two  great  dassi- 
fications  which  have  been  recognized  and  enforced  from  the  beginning,  is  also 
wholly  without  foundation  since  the  command  of  the  Amendment  that  all  income 
taxes  shall  not  be  subject  to  apportionment  by  a consideration  of  the  sources 
from  which  the  taxed  income  may  be  derived,  forbids  the  application  to  such 
taxes  of  the  rule  applied  in  the  Pollock  case  by  which  alone  such  taxes  were 
removed  from  the  great  class  of  excises,  duties  and  imposts  subject  to  the  rule  of 
uniformity  and  were  placed  under  the  other  or  direct  class.  This  must  be  unless 
it  can  be  said  that  although  the  Constitution  as  a^  result  of  the  Amendment  in 
express  terms  excludes  the  criterion  of  source  of  income,  that  criterion  yet 
mains  for  the  purpose  of  destroying  the  classifications  of  the  constitution  by 
taking  an  excise  out  of  the  class  to  which  it  belongs  and  transferring  it  to  a 
class  in  which  it  cannot  be  placed  consistently  with  the  requirements  of  the 
Constitution.  Indeed,  from  another  point  of  view,  the  Amendment  demonstrates 
that  no  such  purpose  was  intended  and  on  the  contrary  shows  that  it  was 
drawn  with  the  object  of  maintaining  the  limitations  of  the  Constitution  and 
harmonizing  their  operation.  We  say  this  because  it  is  to  be  observed  that 
although  from  the  date  of  the  Hylton  case  because  of  statements  made  in  the 
opinions  in  that  case  it  had  come  to  be  accepted  that  direct  taxes  in  the  constitu- 
tional sense  were  confined  to  taxes  levied  directly  on  real  estate  because  of  its 
ownership,  the  Amendment  contains  nothing  repudiating  or  challenging  the  ruling 
in  the  Pollock  case  that  the  word  direct  had  a broader  significance  since  it  em- 
braced also  taxes  levied  directly  on  personal  property  because  of  its  ownership, 
and  therefore  the  amendment  at  least  impliedly  makes  such  wider  significance  a 
part  of  the  constitution — a condition  which  clearly  demonstrates  that  the  purpose 
was  not  to  change  the  existing  interpretation  except  to  the  extent  necessary  to 
accomplish  the  result  intended,  that  is,  the  prevention  of  the  resort  to  the 
gQ'Qj-Qgs  from  which  a taxed  income  was  derived  in  order  to  cause  a direct  tax 
on  the  income  to  be  a direct  tax  on  the  source  itself  and  thereby  to  take  an 
income  tax  out  of  the  class  of  excises,  duties  and  imports  and  place  it  in  the 

class  of  direct  taxes.  , . . , i • 

2271  We  come  then  to  ascertain  the  merits  of  the  many  contentions^  made  in 
the  light  of  the  Constitution  as  jt  now  stands,  that  is  to  say  including 
within  its  terms  the  provisions  of  the  Sixteenth  Amendment  as  correctly  inter- 
preted We  first  dispose  of  two  propositions  assailing  the  validity  of  the  statute 
on  the  one  hand  because  of  its  repugnancy  to  the  Constitution  in  other  respects, 
and  especially  because  its  enactment  was  not  authorized  by  the  Sixteenth  Amend- 
ment. 


INC. 


402  TAX 


SUPREME  COURT  DECISIONS. 


2272  The  statute  was  enacted  October  3,  1913,  and  provided  for  a general^  yearly- 
income  tax  from  December  to  December  of  each  year.  Exceptionally, 

however,  it  fixed  a first  period  embracing  only  the  time  from  March  1,  to  Decem- 
ber 31,  1913,  and  this  limited  retroactivity  is  assailed  as  repugnant  to  the  due 
process  clause  of  the  Fifth  Amendment  and  as  inconsistent  with  the  Sixteenth 
Awiendment  itself.  But  the  date  of  the  retroactivity  did  not  extend  beyond  the 
time  when  the  Amendment  was  operative,  and  there  can  be  no  dispute  that 
there  was  power  by  virtue  of  the  A.rnendment  during  that  period  to^  levy  the 
tax,  without  apportionment,  and  so  far  as  the  limitations  of  the  Constitution  in 
other  respects  are  concerned,  the  contention  is  not  open,  since^  in  Stockdale 
vs.  Insurance  Companies,  20  Wall  323,  331,  in  sustaining  a provision  in  a prior 
income  tax  law  which  was  assailed  because  of  its  retroactive  character,  it  was 
said: 

“The  right  of  Congress  to  have  imposed  this  tax  by  a new  statute,  although 
the  measure  of  it  was  governed  by  the  income  of  the  past  year,  cannot 
be  doubted,  much  less  can  it  be  doubted  that  it  could  impose  such  a tax  on  the 
income  of  the  current  year,  though  part  of  that  year  had  elapsed  when  the  statute 
was  passed.  The  joint  resolution  of  July  4,  1864,  imposed  a tax  of  five  per 
cent,  upon  all  income  of  the  previous  year,  although  one  tax  on  it  had  already 
been  paid,  and  no  one  doubted  the  validity  of  the  tax  or  attempted  to  resist  it.” 

2273  The  statute  provides  that  the  tax  should  not  apply  to  enumerated  organ- 

izations or  corporations,  such  as  labor,  agricultural  or  horticultural  organ- 
izations, mutual  savings  banks,  etc.,  and  the  argument  is  that  as  the  Arnendmcnt 
authorized  a tax  on  incomes  “from  whatever  source  derived,”  by  implication  it 
excluded  the  power  to  make  these  exemptions.  But  this  is  only  a form  of  pt- 
pressing  the  erroneous  contention  as  to  the  meaning  of  the  Amendment,  which 
we  have  already  disposed  of.  And  so  far  as  this  alleged  illegality  is  based  on 
other  provisions  of  the  Constitution,  the  contention  is  also  not  open,  since  it 
was  expressly  considered  and  disposed  of  in  Flint  v.  Stone  Tracy  Co.,  220  U.  S. 
108,  173.  _ _ 

2274  Without  expressly  stating  all  the  other  contentions,  we  summarize  them 
to  a degree  adequate  to  enable  us  to  typify  and  dispose  of  all  of  them. 

2275  1.  The  statute  levies  one  tax  called  a normal  tax  on  all  incomes  of  in- 

dividuals up  to  $20,000  and  from  that  amount  up  by  gradations,  a pro- 
gressively increasing  tax  called  an  additional  tax,  is  imposed.  No  tax,  however, 
is  levied  upon  incomes  of  unmarried  individuals  amounting  to  $3,000  or  less  nor 
upon  incomes  of  married  persons  amounting  to  $4,000  or  less.  The  progressive 
tax  and  the  exempted  amounts,  it  is  said,  are  based  on  wealth  alone  and  the 
tax  is  therefore  repugnant  to  the  due  process  clause  of  the  Fifth  Amendment. 
227G  2.  The  act  provides  for  collecting  the  tax  at  the  source,  that  is,  makes 

it  the  duty  of  corporations,  etc.,  to  retain  and  pay  the  sum  of  the  tax 
on  interest  due  on  bonds  and  mortgages,  unless  the  owner  to  whom  the  interest 
is  payable  gives  a notice  that  he  claims  an  exemption.  This  duty  cast  upon  cor- 
porations, because  of  the  cost  to  which  they  are  subjected,  is  asserted  to  be 
repugnant  to  due  process  of  law  as  a taking  of  their  property  without  compen- 
sation, and  we  recapitulate  various  contentions  as  to  discrimination  against 
corporations  and  against  individuals  predicated  on  provisions  of  the  act  dealing 
with  the  subject: 

2277  (a)  Corporations  indebted  upon  coupon  and  registered  bonds  are  dis- 
criminated against,  since  corporations  not  so  indebted  are  relieved  of  any 

labor  or  expense  involved  in  deducting  and  paying  the  taxes  of  individuals  on 
the  income  derived  from  bonds. 

2278  (b)  Of  the  class  of  corporations  indebted  as  above  stated,  the  law  further 
discriminates  against  those  which  have  assumed  the  payment  of  taxes 

on  their  bonds,  since,  although  some  or  all  of  their  bondholders  may  be  exempt 
from  taxation,  the  corporations  have  no  means  of  ascertaining  such  fact,  and  it 
would  therefore  result  that  taxes  would  often  be  paid  by  such  corporations  when 
no  taxes  were  owing  by  the  individuals  to  the  Government. 

2279  (c)  The  law  discriminates  against  owners  of  corporate  bonds  in  favor 
of  individuals,  none  of  whose  income  is  derived  from  such  property,  since 

bondholders  are,  during  the  interval  between  the  deducting  and  the  paying  of 
the  tax  on  their  bonds,  deprived  of  the  use  of  the  money  so  withheld. 

2280  (d)  Again  corporate  bondholders  are  discriminated  against  because  the  law 
does  not  release  them  from  payment  of  taxes  on  their  bonds  even  after 

the  taxes  have  been  deducted  by  the  corporation,  and  therefore  if  after  deduc- 
tion the  corporation  should  fail,  the  bondholders  would  be  compelled  to  pay  the 
tax  a second  time. 


INC. 


403  TAX 


SUPREME  COURT  DECISIONS. 


2281  (e)  Owners  of  bonds  the  taxes  on  which  have  been  assumed  by  the  cor- 
porations are  discriminated  against  because  the  payment  of  the  taxes  by 

the  corporation  does  not  relieve  the  bondholders  of^  their  duty  to  include  the 
income  from  such  bonds  in  making  a return  of  all  income,  the  result  being  a 
double  payment  of  the  taxes,  labor  and  expense  in  applying  for  a refund,  and 
a deprivation  of  the  use  of  the  sum  of  the  taxes  during  the  interval  which  elapses 
before  they  are  refunded.  . , , . , i,  j 

2282  3.  The  provision  limiting  the  amount  of  interest  paid  which  may  be  de- 
ducted from  gross  income  of  corporations  for  the  purpose  of  fixing  the 

taxable  income  to  interest  on  indebtedness  not  exceeding  one-half  the  sum  of 
bonded  indebtedness  and  paid-up  capital  stock,  is  also  charged  to  be  wanting 
in  due  process  because  discriminating  between  different  classes  of  corporations 

and  individuals.  .... 

2283  4.  It  is  urged  that  want  of  due  process  results  from  the  provision  allow- 
ing individuals  to  deduct  from  their  gross  income  dividends  paid  them  by 

corporations  whose  incomes  are  taxed  and  not  giving  such  rights  of  deduction 

to  corporations.  i ^ ..t, 

2284  5 Want  of  due  process  is  also  asserted  to  result  from  the  fact  that  the 
act  allows  a deduction  of  $3,000  or  $4,000  to  those  who  pay  the  normal 

tax  that  is,  whose  incomes  are  $20,000  or  less,  and  does  allow  the  deduction  to 
those  whose  incomes  are  greater  thati  $20,000;  that  is,  such  persons  are  not 
allowed  for  the  purpose  of  the  additional  or  progressive  tax  a second  right  to 
deduct  the  $3,000  or  $4,000  which  they  have  already  enjoyed.  And  a further 
violation  of  due  process  is  based  on  the  fact  that  for  the  purpose  of  the  addi- 
tional tax  no  second  right  to  deduct  dividends  received  from  corporations  is 

permitted.  , . . 

2285  In  various  forms  of  statement,  want  of  due  process,  it  is  moreover  in- 
sisted, arises  from  the  provisions  of  the  act  allowing  a deduction  for  the 

purpose  of  ascertaining  the  taxable  income  of  stated  amounts  on  the  ground 
that  the  provisions  discriminate  between  married  and  single  people  and  dis- 
criminate between  husbands  and  wives  who  are  living  together  and  those  who 

l?8G°7.  Discrimination  and  want  of  due  process  results,  it  is  said,  from  the 
fact  that  the  owners  of  houses  in  which  they  live  are  not  compelled  to 
estimate  the  rental  value  in  making  up  their  incomes,  while  those  who  are 
living  in  rented  houses  and  pay  rent  are  not  allowed,  in  making  up  their  taxable 
income,  to  deduct  rent  which  they  have  paid,  and  that  want  of  due  process  also 
results ’from  the  fact  that  although  family  expenses  are  not  as  a rule  permitted 
to  be  deducted  from  gross,  to  arrive  at  taxable  income,  farmers  are  permitted 
to  omit  from  their  income  return,  certain  products  of  the  farm  which  are  sus- 
ceptible of  use  by  them  for  sustaining  their  families  during  the  year. 

2287  So  far  as  these  numerous  and  minute,  not  to  say  in  many  respects  hyper- 
critical contentions,  are  based  upon  an  assumed  violation  of  the  uni- 
formity clause,  their  want  of  legal  merit  is  at  once  apparent,  since  it  is  settled 
that  that  clause  exacts  only  a geographical  uniformity  and  there  is  not  a sem- 
blance of  ground  in  any  of  the  propositions  for  assuming  that  a violation  of  such 
uniformity  is  complained  of.  Knowlton  v.  Moore,  178  U.  S.  41;  Patron  v. 
Brady  184  U.  S.  608,  622;  Flint  v.  Stone  Tracy  Co.  220  U.  S.  107,  158;  Billings 

V.  United  States,  232  U.  S.  608,  622.  r-r  i a • i 

2288  So  far  as  the  due  process  clause  of  the  Fifth  Amendment  is  relied  upon, 
it  suffices  to  say  that  there  is  no  basis  for  such  reliance  since  it  is  equally 

well  settled  that  such  clause  is  not  a limitation  upon  the  taxing  power  conferred 
upon  Congress  by  the  Constitution;  in  other  words,  that  the  Constitution  does 
not  conflict  with  itself  by  conferring  upon  the  one  hand  a taxing  power  and 
takino-  the  same  power  away  on  the  other  by  the  limitations  of  the  due  process 
clause  Treat  v.  White,  181  U.  S.  264;  Patton  v.  Brady,  184  U.  S.  608;  McCray 
V United  States,  195  U.  S.  27,  61;  Flint  v.  Stone  Tracy  Co.,  supra;  Billings  v. 
United  States,  232  U.  S.  261,  282.  And  no  change  in  the  situation  here  would 
arise  even  if  ’it  be  conceded,  as  we  think  it  must  be,  that  this  doctrine  would 
have  no  application  in  a case  where  although  there  was  a seeming  exercise  of 
the  taxing  power,  the  act  complained  of  was  so  arbitrary  as  to  constrain  to  the 
conclusion  that  is  was  not  the  exertion  of  taxation  but  a confiscation  of  property, 
that  is,  a taking  of  the  same  in  violation  of  the  Fifth  Amendment,  or,  what  is 
equivalent  thereto,  was  so  wanting  in  basis  for  classification  as  to  produce  such 
a gross  and  patent  inequality  as  to  inevitably  lead  to  the  same  conclusion. 
We  say  this  because  none  of  the  propositions  relied  upon  in  the  remotest  degree 
present  such  questions.  It  is  true  that  it  is  elaborately  insisted  that  although 


INC. 


404  TAX 


SUPREME  COURT  DECISIONS. 


t]iere  be  no  express  constitutional  provision  prohibiting  it,  the  progressive  feature 
of  the  tax  causes  it  to  transcend  the  conception  of  all  taxation  and  to  be  a mere 
arbitrar}"  abuse  of  power  which  must  be  treated  as  wanting  in  due  process. 
But  the  proposition  disregards  the  fact  that  in  the  very  early  history  of  the 
Government  a progressive  tax  was  imposed  by  Congress  and  that  such  authority 
was  exerted  in  some  if  not  all  of  the  various  income  taxes  enacted  prior  to  1894 
to  \yliich  we  have  previously  adverted.  And  over  and  above  all  this  the  con- 
tention but  disregards  the  further  fact  that  its  absolute  want  of  foundation  in 
reason  was  plainly  pointed  out  in  Knowlton  v.  Moore,  supra,  and  the  right  to 
urge  it  was^  necessarily  foreclosed  by  the  ruling  in  that  case  made.  In  this 
situation,  it  is,  of  course,  superfluous  to  say  that  arguments  as  to  the  expediency 
of  levying  such  taxes  or  of  the  economic  mistake  or  wrong  involved  in  their 
imposition  are  beyond  judicial  cognizance.  Besides  this  demonstration  of  the 
want  of  merit  in  the  contention  based  upon  the  progressive  feature  of  the  tax, 
the  error  in  the  others  is  equally  well  established  either  by  prior  decisions  or 
by  the  adequate  bases  for  classification  which  are  apparent  on  the  face  of  the 
assailed  provisions,  that  is,  the  distinction  between  individuals  and  corporations, 
the  difference  between  various  kinds  of  corporations,  etc.,  Knowlton  v.  Moore, 
supra  Flint  v.  Stone  Tracy  Co.,  supra;  Billings  v.  United  States,  supra;  National 
Bank  v.  Commonwealth,  9 Wall  353;  Ffational  Safe  Deposit  Co.  v.  Illinois,  232 
IJ.  S.  58,  70._  In  fact,  comprehensively  surveying  all  the  contentions  relied  upon, 
aside  from  the  erroneous  construction  of  the  Amendment  which  we  have  pre- 
viously disposed  of,  we  cannot  escape  the  conclusion  that  they  all  rest  upon 
the  mistaken  theory  that  although  there  be  differences  between  the  subjects 
taxed,  to  differently  tax  them  transcends  the  limit  of  taxation  and  amounts  to  a 
want  of  due  process,  and  that  where  a tax  levied  is  believed  by  one  who  resists 
its  enforcement  to  be  wanting  in  wisdom  and  to  operate  injustice,  from  that  fact 
in  the  nature  of  things  there  arises  a want  of  due  process  of  law  and  a resulting 
authority  in  the  judiciary  to  exceed  its  powers  and  correct  what  is  assumed 
to  be  mistaken  or  uinvise  exertions  by  the  legislative  authority  of  its  lawful 
powers,  even  although  there  be  no  semblance  of  warrant  in  the  Constitution  for 
so  doing. 

2289  We  have  not  referred  to  a contention  that  because  certain  administrative 
powers  to  enforce  the  act  were  conferred  by  the  statute  upon  the  Secre- 
tary of  the  Treasury,  therefore  it  was  void  as  unwarrantedly  delegating  legislative 
authority,  because  we  think  to  state  the  proposition  is  to  answer  it.  Flint  v. 
(dark,  1’43  U.  S.  649;  Buttfield  v.  Stranahan,  192  U.  S.  470,  496;  Oceanic  Steam 
Navigation  Co.  v.  Stranahan,  214  U.  S.  320. 

Affirmed. 

^Ir.  Justice  McReynolds  took  no  part  in  the  consideration  and  decision  of 
this  case. 


Tyee  Realty  Company  vs.  Anderson 
and 

Edwin  Thorne  vs.  Anderson. 

(240  U.  S.  115.) 

2290  The' appended  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Tyee  Realty  Co.  v.  Anderson,  collector,  and  Edwin  Thorne  v. 

Anderson,  collecter,  is  published  for  the  information  of  internal  revenue  officers 
and  others  concerned.  (T.  D.  2300,  March  3,  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

2291  Both  the  plaintiffs  in  error,  the  one  in  393  a corporation,  and  the  other 
in  394  an  individual,  paid  under  protest  to  the  Collector  of  Internal 

Revenue,  taxes  assessed  under  the  Income  Tax  section  of  the  Tariff  Act  of 
October  3,  1913  (Sec.  II,  ch.  16,  38  Stat.  166).  After  an  adverse  ruling  by  the 
Commissioner  of  Internal  Revenue  on  appeals  which  were  prosecuted  con- 
formably to  the  statute  (Rev.  Stat.  Sections  3220,  3226)  by  both  the  parties 
for  a refunding  to  them  of  the  taxes  paid,  these  suits  were  commenced  to  recover 
lhc  amounts  paid  on  the  ground  of  the  repugnance  to  the  Constitution  of  the 
Section  of  the  Statute  under  which  the  taxes  had  been  collected,  and  the  cases  are 
here  on  direct  writs  of  error  to  the  judgments  of  the  court  below  sustaining 
demurrers  to  both  coniplaints  on  the  ground  that  they  stated  no  cause  of  action. 

2292  }*'vcry  contention  relied  u])on  for  reversal  in  the  two  cases  is  embraced 
within  the  following  proposition:  (a)  that  the  lax  imposed  by  the  statute 

was  not  sanctioned  by  the  Sixteenth  Amendment  because  the  statute  exceeded 


INC.  405 


TAX 


SUPREME  COURT  DECISIONS. 


the  exceptional  and  limited  power  of  direct  income  taxation  for  the  first  time 
conferred  upon  Congress  by  that  Amendment  and,  being  outside  of  the  Amend- 
ment and  governed  solely  therefore  by  the  general  taxing  authority  conferred 
upon  Congress  by  the  Constitution,  the  tax  was  void  as  an  attempt  to  levy 
a direct  tax  without  apportionment  under  the  rule  established  by  Pollock  v. 
Farmers’  Loan  & Trust  Company,  157  U.  S.  429;  158  U.  S.  601.  (b)  That  the 

statute  is  moreover  repugnant  to  the  Constitution  because  of  the  provision  therein 
contained  for  its  retroactive  operation  for  a designated  time  and  because  of  the 
illegal  discrmiination  and  inequalities  which  it  creates,  including  the  provision 
for  a progressive  tax  on  the  income  of  individuals  and  the  method  provided  in 
the  statute  for  computing  the  taxable  income  of  corporations. 

2293  But  we  need  not  now  enter  into  an  original  consideration  of  the  merits 
of  these  contentions,  because  each  and  all  of  them  were  considered  and 
adversely  disposed  of  in  Brushaber  v.  Union  Pacific  Railroad  Company  [^2260]. 
That  case,  therefore,  is  here  absolutely  controlling  and  decisive.  It  follows 
chat  for  the  reasons  stated  in  the  opinion  in  the  Brushaber  case  the  judgments 
in  these  cases  must  be  and  they  are 

AFFIRMED. 


Dodge  vs.  Brady. 

(240  U.  S.  122.) 

2294  The  appended  decision  of  the  Supreme  Court  of  the  Utrlted  States  jn  the 
case _of  Dodge  v.  Brady,  collector,  is  published  for  the  information  of 

internal-revenue  officers  and  others  concerned,  (T.  D.  2302,  March  3,  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  clelivered  the  opinion  of  tlie  Court. 

2295  The  appellants  are  the  same  persons  who  sued  in  Dodge  v.  Osborn,  just 
decided  [t[2167].  After  the  dismissal  of  that  suit  by  the  Supreme  Court 

of  the  District  of  Columbia  for  want  of  jurisdiction  the  parties,  on  June  10, 
1914,  filed  their  bill  in  the  court  below  against  the  Collector  of  Internal  Revenue 
to  enjoin  the  collection  of  the  surtaxes  assessed  against  them  which  were  dis- 
puted in  the  previous  case  on  substantially  the  same  grounds  alleged  in  the 
complaint  in  that  case.  The  bill  alleged,  however,  that  plaintiffs  had  filed  with 
the  Collector  “an  appeal  or  claim  for  the  remission  and  abatement  of  the  sur- 
taxes” because  of  the  unconstitutionality  of  the  statute  imposing  them  and  that 
the  Commissioner  of  Internal  Revenue  to  whom  the  claim  bad  been  forwarded 
by  the  Collector  had  such  protest  under  advisement.  Upon  the  filing  of  the 
bill  the  plaintiffs  moved  for  a preliminary,  injunction  which  ^vus  denied  July  29, 
1914.  On  the  same  day  by  leave  of  court  a supplemental  bill  was  filed  which 
alleged  that  since  the  filing  of  the  original  bill  the  Commissioner  of  Internal 
Revenue  had  ruled  adversely  upon  plaintiffs’  pretest  and  that  thereupon  they 
had  paid  the  surtaxes  to  the  Collector  under  protest,  and  they  prayed  a recovery 
of  the  amount  paid  to  the  Collector  and  for  the  other  relief  asked  in  the  original 
bill.  The  defendant  moved  to  dismiss  the  bill  for  w'ant  of  jurisdiction  because 
the  suit  was  brought  to  enjoin  the  collection  of  a tax  contrary  to  the  provisions 
of  Section  3224  Revised  Statutes  and  for  want  of  equity  because  the  Income  Tax 
Law  was  constitutional  and  valid.  The  court  sustained  the  motion  on^  the 
latter  ground  and  dismissed  the  bill  on  the  merits  and  the  case  is  here  on  direct 
appeal  because  of  the  constitutional  questions. 

2293  The  Government  insists  that  the  court  belorv  was  rvtihout  jurisdiction  to 
decide  the  merits  and  we  come  first  to  that  quesetion.  It  is  apparent  if 
the  original  bill  alone  is  taken  into  view  that  the  suit  was^  brought  to  enjoin 
the  collection  of  a tax  and  the  court  was  without  jurisdiction  by  the  reasons 
stated  in  the  previous  case.  And  it  is  argued  by  tlie  Government  that  there 
was  no  jurisdiction  under  the  supplemental  bill  since  it  fails  to  allege  that  an 
appeal  was  taken  to  the  Commissioner  of  Internal  Revenue  after  the  payment 
of  the  taxes  and  that  he  refused  to  refund  them  and  therefore  fails  to  allege  a 
'compliance  with  the  conditions  imposed  by  sections  3220  and  3226  of  the  Revised 
Statutes  as  prerequisites  to  a suit  to  recover  taxes_  wrongfully  collected.  But 
broadly  considering  the  whole  situation  and  taking  into  view  the  peculiar  facts 
of  the  case,  the  protest  to  the  Commissioner  and  his  exertion  of  authority  over 
it  and  his  adverse  ruling  upon  the  merits  of  the  tax,  thereby  passing  upon 
every  question  which  he  would  be  called  upon  to  decide  on  an_  appeal  for  a 
refunding  of  the  taxes  paid,  we  think  that  this  case  is  so  exceptional  in  char- 
acter as  not  to  justify  uf  in  holding  that  reversible  error  was  committed  by 
the  court  below  in  passing  upon  the  case  upon  its  merits,  thus  putting  an  end 
to  further  absolutely  useless  and  unnecessary  controversy.  We  say  useless  and 


INC. 


406  TAX 


SUPREME  COURT  DECISIONS. 


unnecessary  because  on  the  merits  all  the  contentions  urged  by  the  appellants 
concerning  the  unconstitutionality  of  the  law  and  of  the  surtaxes  which  it  imposes 
have  been  considered  and  adversely  disposed  of  in  Brushaber  v.  Union  Pacific 
Railroad  Company  [([2260]. 

Judgment  Affirmed. 


Stanton  v.  Baltic  Mining  Co. 

(240  U.  S.  103.) 

2297  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Stanton  v.  Baltic  Mining  Co.  is  published  for  the  information  of 

internal-revenue  officers  and  others  concerned.  (T.  D.  2303,  March  3.  1916.) 

(February  21,  1916.) 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

2298  As  in  Brushaber  v.  Union  Pacific  Railroad  Company  [lf2260],  this  case  was 
commenced  by  the  appellant  as  a stockholder  of  the  Baltic  Mining  Com- 
pany, the  appellee,  to  enjoin  the  voluntary  payment  by  the  corporation  and  its 
officers  of  the  tax  assessed  against  it  under  the  Income  Tax  section  of  the  Tariff 
Act  of  October  3,  1913  (38  Stat.  166,  181).  As  the  grounds  for  the  equitable 
relief  sought  in  this  case  so  far  as  the  question  of  jurisdiction  is  concerned  are 
substantially  the  same  as_  those  which  were_  relied  upon  in  the  Brushaber  case, 
It  follows  tliat  the  luling  in  that  case  upholding  the  power  to  dispose  of  the  con- 
troversy in  controlling  here  and  v;e  put  that  subject  out  of  view. 

2299  Further  also  like  the  Brushaber  case  this  is  before  us  on  a direct  appeal 
prosecuted  for  the  purpose  of  reviewing  the  action  of  the  court  below  in 

Ciisuiissriig  on  motion  tlie  bill  for  want  of  equity. 

2oOO  dhe  bill  averred:  “Tliat  under  and  by  virtue  of  the  alleged  authority  con- 
tained in  said  Income  Tax  Law,  if  valid  and  constitutional,  the  respondent 
coinpany  is  taxable  at  the  rate  of  1%  upon  its  gross  receipts  from  all  sources, 
during  the  calendar  year  ending  December  31,  1914,  after  deducting  (1)  its  ordi- 
nary and  necessary  expenses  paid  within  the  year  in  the  maintenance  and  oper- 
ation of  its  business  and  properties  and  (2)  all  losses  actually  sustained  within 
the  year  and  not  compensated  by  insurance  or  otherwise,  including  depreciation 
arising  from  depletion  of  its  ore  deposits  to  the  limited  extent  of  5%  of  the  ‘gross 
value  at  the  mdne  of  the  output’  during  said  year.”  It  was  further  alleged  that 
the  company  would  li:  not  restrained  make  a return  for  taxation  conformably  to 
the  statute  and  would  pay  the  tax  upon  the  basis  stated  without  protest  and  that 
to  do  so  would  result  in  depriving  the  complainant  as  a stockholder  of  rights 
secured  by  the  Constitution  of  the  United  States  as  the  tax  which  it  was  proposed 
to  pay  without  protest  was  void  for  repugnancy  to  that  Constitution.  The  bill 
contained  many  averments  on  the  following  subjects  which  may  be  divided  into 
two  generic  classes:  (A)  Those  concerning  the  operation  of  the  law  in  question 
upon  individuals  generally  and  upon  other  mining  corporations  and  the  discrim- 
ination against  mining  corporations  which  arose  in  favor  of  such  other  cor- 
porations and  individuals  by  the  legislation,  as  well  as  discrimination  which  the 
provisions  of  the  act  operated  against  mining  corporations  because  of  the  separate 
and  more  unfavorable  burden  cast  upon  them  by  the  statute  than  was  placed 
upon  other  corporations  and  individuals— averments  all  of  which  were  obviously 
made  to  support  the  subsequent  charges  which  the  bill  contained  as  to  the  re- 
pugnancy of  the  law  imposing  the  law  to  the  equal  protection,  due  process  and 
uniformity  clauses  of  the  Constitution.  And  (B)  those  dealing  with  the  practical 
results  on  the  company  of  the  operation  of  the  tax  in  question  evidently  alleged 
for  the  purpose  of  sustaining  the  charge  which  the  bill  made  that  the  tax  levied 
was  not  what  was  deemed  to  be  the  peculiar  direct  tax  which  the  Sixteenth 
Amendment  exceptionally  authorized  to  be  levied  without  apportionment  and  of 
t^he  resulting  repugnancy  of  the  tax  to  the  Constitution  as  a direct  tax  on  property 
because  of  its  ownership  levied  without  conforming  to  the  regulation  of  appor- 
tionment generally  required  by  the  Constitution  as  to  such  taxation. 

2301  We  need  not  more  particularly  state  the  averments  as  to  the  various  con- 
tentions  in  class  (A),  as  their  character  will  necessarily  be  made  manifest 
by  the  statement  of  the  legal  propositions  based  on  them  which  we  shall  hereafter 
have  occasion  to  make.  As  to  the  averments  concerning  class  (B),  it  suffices  to 
say  that  it  resulted  from  copious  allegations  in  the  bill  as  to  the  value  of  the  ore 
body  contained  in  the  mine  which  the  company  worked  and  the  total  output  for 
the  year  of  the  product  of  the  mine  after  deducting  the  expenses  as  previously 
stated,  that  the  5%  deduction  permitted  by  the  statute  was  inadequate  to  allow 
for  the  depletion  of  the  ore  body  and  therefore  the  law  to  a large  extent  taxes  not 
the  mere  profit  arising  from  the  operation  of  the  mine,  but  taxes  as  income  the 


INC.  407 


TAX 


SUPREME  COURT  DECISIONS. 


yearly  product  which  represented  to  a large  extent  the  yearly  depletion  or  ex- 
haustion of  the  ore  body  from  which  during  the  year  ore  was  taken.  Indeed, 
the  following  alleged  facts  concerning  the  relation  which  the  annual  production 
bore  to  the  exhaustion  or  diminution  of  the  property  in  the  ore  bed  must  be 
taken  as  true  for  the  purpose  of  reyiewing  the  judgment  sustaining  the  motion 

to  dismiss  the  bill.  , . , , , ^ ^ 

“That  the  real  or  actual  yearly  income  deriyed  by  the  respondent  company 
from  its  business  or  pronerty,  does  not  exceed  $550,000.  ihat,  undp-  the  Income 
Tax  the  said  company  is  held  taxable  in  an  ayerage  year,  to  the  amount  of 
approximately  $1,150,000,  the  same  being  ascertained  by  deducting  from  its  net 
receipts  of  $1  400,000  only  a depreciation  of  $100,000  on  its  plant  and  a depletion 
of  its  ore  supply  limited  by  law  to  5 per  cent  of  the  yalue  of  its  annual  gross  re- 
ceipts and  amounting  to  $150,000;  whereas,  in  order  properly  to  ascertain  its  actual 
income  $750,000  per  annum  should  be  allowed  to  be  deducted  for  such  depletion, 
or  fiye  times  the  amount  actually  allowed.”  j r i 

2302  Without  attempting  minutely  to  state  eyery  possible  ground  ot  attack 
which  might  be  deduced  from  the  ayerments  of  the  bill,  but  in  substance 

embracing  eyery  material  grieyance  therein  asserted  and  pressed  in  argument 
upon  our  attention  in  the  elaborate  briefs  which  haye  been  submitted,  we  come 
to  separately  dispose  of  the  legal  propositions  adyanced  in  the  bill  and  arguments 

concerning  the  two  classes.  . . 

2303  Class  A Under  this  the  bill  charged  that  the  proyisions  oi  the  statute 
are  “unconstitutional  and  yoid  under  the  Fifth  Amendment,  in  that  they 

deny  to  mining  companies  and  their  stockholders  equal  protection  of  the  laws 
and  depriye  them  of  their  property  without  due  process  of  law,  for  the  following 


reasons^ecause  all  other  individuals  or  corporations  were  given  a right  to  deduct 
a fair  and  reasonable  percentage  for  losses  and  depreciation  of  their  capital  and 
they  were  therefore  not  confined  to  the  arbitrary  5%  fixed  as  the  basis  for  deduc- 
tions by  mining  corporations.  , . . 

(2)  Because  by  reason  of  the  difference  in  the  allowances  which  the  statute 

permitted  the  tax  levied  was  virtually  a net  income  tax  on  other  corporations  and 
individuals  and  a gross  tax  on  mining  corporations.^  , 

(3)  Because  the  statute  established  a discriminating  rule  as  to  individuals  and 

other  corporations  as  against  mining  corporations  on  the  subject  of  the  method 
of  the  allowance  for  depreciations. , j . r .t  • 

(4)  Because  the  law  permitted  all  individuals  to  deduct  from  their  net  income 
dividends  received  from  corporations  which  had  paid  the  tax  on  their  incomes, 
and  did  not  give  the  right  to  corporations  which  had  paid  their  income  tax.  This 
was  illustrated  by  the  averment  that  99%  of  the  stock  of  the  defendant  company 
was  owned  by  a holding  company  and  that  under  the  statute  not  only  was  the 
corporation  obliged  to  pay  the  tax  on  its  income,  but  so  also  was  the  holding 
company  obliged  to  pay  on  the  dividends  paid  it  by  the  defendant  company. 

(5)  Because  of  the  discrimination  resulting  from  the  provision  of  the  statute 
providing  for  a progressive  increase  of  taxation  or  surtaxes  to  individuals  and 

(6)  Because  of  the  exemptions  which  the  statute  made  of  individual  incomes 
below  $4,000  and  of  incomes  of  labor  organizations  and  various  other  exemptions 

which  were  set  forth.  u 

But  it  is  apparent  from  the  mere  statement  of  these  contentions  that  each 
and  all  of  them  were  adversely  disposed  of  by  the  decision  in  the  Brushaber 
case  and  they  all  therefore  may  be  put  out  of  view. 

Class  B Under  this  class  these  propositions  are  relied  upon:  ^ 

(1)  That  as  the  Sixteenth  Amendment  authorized  only  an  exceptional  direct 
income  tax  without  apportionment,  to  which  the  tax  in  question  does  not  con- 
form it  is  therefore  not  within  the  authority  of  that  amendment. 

(2)  Not  being  within  the  authority  of  the  Sixteenth  Amendment  the  tax  is 
therefore  within  the  ruling  of  Pollock  v.  Farmers’  Loan  & Trust  Company,  157 
U S.  429;  158  U.  S.  601,  a direct  tax  and  void  for  want  of  compliance  with  the 

regulation  of  apportionment.  _ , . , . n-  . -.i  • r c- 

2304  As  the  first  proposition  is  plainly  in  conflict  with  the  meaning  of  the  Six- 
teenth Amendment  as  interpreted  in  the  Brushaber  case  it  may  also  be 
nut  out  of  view  As  to  the  second,  while  indeed  it  is  distinct  from  the  subjects 
considered  in  the  Brushaber  case  to  the  extent  that  the  particular  tax  which  the 
statute  levies  on  mining  corporations  here  under  consideration  is  distinct  from 
the  tax  on  corporations  other  than  mining  and  on  individuals  which  was  disposed 
of  in  the  Brushaber  case,  a brief  analysis  will  serve  to  demonstrate  that  the  dis- 


INC.  408  TAX 


SUPREME  COURT  DECISIONS. 


tinction  is  one  without  a difference  and  therefore  that  the  proposition  is  also  fore- 
closed by  the  previous  ruling.  The  contention  is  that  as  the  tax  here  imposed  is 
not  on  the  net  product  but  in  a sense  somewhat  equivalent  to  a tax  on  the  gross 
product  of  the  working  of  the  mine  by  the  corporation,  therefore  the  tax  is  not 
within  the  purview  of  the  Sixteenth  Amendment  and  consequently  it  must  be 
treated  as  a direct  tax  on  property  because  of  its  ownership  and  as  such  void  for 
want  of  apportionment.  But  aside  from  the  obvious  error  of  the  proposition 
intrinsically  considered,  it  manifestly  disregards  the  fact  that  by  the  previous 
ruling  it  was  settled  that  the  provisions  of  the  Sixteenth  Amendment  conferred 
no  new  power  of  taxation  but  simply  prohibited^  the  previous  complete  and 
plenary  power  of  income  taxation  possessed  by  Congress  from  the  beginning 
from  being  taken  out  of  the  category  of  indirect  taxation  to  which  it  inherently 
belonged  and  being  placed  in  the  category  of  direct  taxation  subject  to  appor- 
tionment by  a consideration  of  the  sources  from  which  the  income  was  derived, 
that  is  by  testing  the  tax  not  by  what  it  was — a tax  on  income,  but  by  a mistaken 
theory  deduced  from  the  origin  or  source  of  the  incomie  taxed.  Mark,  of  course, 
in  sa3dng  this  we  are  not  here  considering  a tax  not  within  the  provisions  of  the 
Sixteenth  Amendment,  that  is,  one  in  which  the  regulation  of  apportionment  or 
the  rule  of  uniformity  is  wholly  negligible  because  the  tax  is  one  entirely  beyond 
the  scope  of  the  taxing  power  of  Congress  and  where  consequently  no  authority 
to  impose  a burden  either  direct  or  indirect  exists.  In  other  'words,  we  are 
here  dealing  solely  with  the  restriction  imposed  by  the  Sixteenth  Amendment 
on  the  right  to  resort  to  the  source  whence  an  income  is  derived  in  a case  where 
there  is  power  to  tax  for  the  purpose  of  taking  the  income  tax  out  of  the  class 
of  indirect  to  which  it  generically  belongs  and  putting  in  the  class  of  direct  to 
which  it  would  not  otherwise  belong  in  order  to  subject  it  to  the  regulation  of 
apportionment.  But  it  is  said  that  although  this  be  undoubtedly  true  as  a general 
rule,  the  peculiarity  of  mining  property  and  the  exhaustion  of  the  ore  body  which 
must  result  from  working  the  mine,  causes  the  tax  in  a case  like  this  where  an 
inadequate  allowance  by  way  of  deduction  is  made  for  the  exhaustion  of  the  ore 
body  to  be  in  the  nature  of  things  a tax  on  property  because  of  its  ownership 
and  therefore  subject  to  apportionment.  Not  to  so  hold,  it  is  urged  is  as  to  min- 
ing property  but  to  say,  that  mere  form  controls,  thus  rendering  in  substance  the 
command  of  the  Constitution  that  taxation  directly  on  property  because  of  its 
ownership  be  apportioned,  wholly  illusory  or  futile.  But  this  merely  asserts  a 
right  to  take  the  taxation  of  mining  corporations  out  of  the  rule  established  by 
the  Sixteenth  Amendment  when  there  is  no  authority  for  so  doing.  It,  moreover, 
rests  upon  the  wholly  falacious  assumption  that  looked  at  from  the  point  of 
view  of  substance  a tax  on  the  product  of  a mine  is  necessarily  in  its  essence 
and  nature  in  every  case  a direct  tax  on  property  because  of  its  ownership  unless 
adequate  allowance  be  made  for  the  exhaustion  of  the  ore  body  to  result  from 
working  the  mine.  We  say  wholly  fallacious  assumption  because  independently 
of  the  effect  of  the  operation  of  the  Sixteenth  Amendment  it  was  settled  in 
Stratton’s  Independence  v.  Howbert  231  U.  S.  399  that  such  a tax  is  not  a 
tax  upon  property  as  such  because  of  its  ownership,  but  a true  excise  levied 
on  the  results  of  the  business  of  carrying  on  mining  operations.  (Pp.  413  et  seq.) 
2305  As  it  follows  from  what  we  have  said  that  the  contentions  are  in  substance 
and  effect  controlled  by  the  Brushaber  case  and  in  so  far  as  this  may  not 
be  the  case  are  without  merit,  it  results  that  for  the  reasons  stated  in  the  opinion 
in  that  case  and  those  expressed  in  this,  the  judgment  must  be  and  it  is 

Affirmed. 


Gould  vs.  Gould. 

(245  U.  S.  151.) 

November  19,  1917. 

Mr.  Justice  McReynolds  delivered  the  opinion  of  the  Court. 

2300  A decree  of  the  Supreme^  Court  for  New  York  County  entered  in  1909 
forever  separated  the  parties  to  this  proceeding,  then  and  now  citizens  of 
the  United  States,  from  bed  and  board;  and  further  ordered  that  plaintiff  in 
error  pay  to  Katherine  C.  Gould  during  her  life  the  sum  of  three  thousand  dollars 
($3,000.00)  every  month  for  her  support  and  maintenance.  The  question  pre- 
sented is  whether  such  monthly  payments  during  the  years  1913  and  1914  con- 
stituted parts  of  Mrs.  Gould’s  income  within  the  intendment  of  the  Act  of  Con- 
gress approved  October  3,  1913  (38  Stat.  114,  166),  and  were  subject  as  such  to 
the  tax  prescribed  therein.  The  court  below  answered  in  the  negative;  and  we 
think  it  reached  the  proper  conclusion. 


INC.  409  TAX 


SUPREME  COURT  DECISIONS. 


2307  Pertinent  portions  of  the  Act  follow: 

“Section  II,  A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  col- 
lected and  paid  annually  upon  the  entire  net  income  arising  or  accruing 
from  all  sources  in  the  preceding  calendar  year  to  every  citizen  of  the  United 
States,  whether  residing  at  home  or  abroad,  and  to  every  person  residing  in  the 
United  States,  though  not  a citizen  thereof,  a tax  of  1%  per  annum  upon  such 
income,  except  as  hereinafter  provided;  * * * 

“B.  ihat,  subject  only  to  such  exemptions  and  deductions  as  are  hereinafter 
allowed,  the  net  income  of  a taxable  person  shall  include  gains,  profits,  and  in- 
come derived  from  salaries,  wages,  or  compensation  for  personal  service  of  what- 
ever kind  and  in  whatever  form  paid,  or  from  professions,  vocations,  businesses, 
trade,  commerce,  or  sales,  or  dealings  in  property,  whether  real  or  personal, 
growing  out  of  the  ownership  or  use  of  or  interest  in  real  or  personal  property, 
also  from  interest,  rent,  dividends,  securities,  or  the  transaction  of  any  lawful 
business  carried  on  for  gain  or  profit,  or  gains  or  profits  and  income  derived 
from  any  source  whatever,  including  the  income  from  but  not  the  value  of 
property  acquired  by  gift,  bequest,  devise,  or  descent:  * ^ ^ 

230^  In  the  interpretation  of  statutes  levying  taxes  it  is  the  established  rule 
not  to  extend  their  provisions,  by  implication,  beyond  the  clear  import 
of  the  language  used  or  to  enlarge  their  operations  as  to  embrace  matters  not 
specifically  pointed  out.  In  case  of  doubt  they  are  construed  most  strongly 
against  the  Government,  and  in  favor  of  the  citizen.  United  States  v.  Wiggles- 
worth,  2 Story  369;  American  Net  and  Twine  Company  v.  Worthington,  141 
U.  S.  468,  474;  Benziger  v.  United  States;  192  U.  S.  38,  55. 

2809  As  appears  from  the  above  quotations,  the  net  income  which  sub- 
division 1 directs  an  annual  tax  shall  be  assessed,  levied,  collected  and 
paid  is  defined  in  division  B.  The  use  of  the  word  itself  in  the  definition  of 
“income”  causes  some  obscurity,  but  we  are  unable  to  assert  that  alimony  paid 
to  a divorced  wife  under  a decree  of  court  falls  fairly  within  any  of  the  terms 
employed. 

2310  In  Audubon  v.  Shufeldt,  181  U.  S.  575,  577,  578,  we  said:  “Alimony  does 

not  arise  from  any  business  transaction,  but  from  the  relation  of  mar- 
riage. It  is  not  founded  on  a contract,  express  or  implied,  but  on  the  natural 
and  legal  duty  of  the  husband  to  support  the  wife.  The  general  obligation  to 
support  is  made  specific  by  the  decree  of  the  court  of  appropriate  jurisdiction, 
♦ * * Permanent  alimony  is  regarded  rather  as  a portion  of  the  husband’s 

estate  to  which  the  wife  is  equitably  entitled,  than  as  strictly  a debt;  alimony 
from  time  to  time  may  be  regarded  as  a portion  of  his  current  income  or  earn- 
ings; * * * 

2311  The  net  income  of  the  divorced  husband  subject  to  taxation  v/as  not  de- 
creased by  payment  of  alim.ony  under  the  court’s  order;  and,  on  the  other 

hand,  the  sum  received  by  the  wife  on  account  thereof  cannot  be  regarded  as 
income  arising  or  accruing  to  her  within  the  enactment. 

2312  The  judgment  of  the  court  below  is  Affirmed. 


Towne  v.  Eisner. 

(245  U.  S.  418.) 

2313  The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Henry  R.  Towne  v.  Mark  Eisner,  collector,  is  published  for  the 

information  of  internal-revenue  officers  and  others  concerned.  (T.  D.  2634,  Tan. 
21,  1918.) 

(January  7,  1918.) 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

2314  This  is  a suit  to  recover  the  amount  of  a tax  paid  under  duress  in  respect 
of  a stock  dividend  alleged  by  the  Government  to  be  income.  A de- 
murrer to  the  declaration  was  sustained  by  the  District  Court  and  judgment 
was  entered  for  the  defendant,  242  Fed.  Rep.  702.  The  facts  alleged  are  that 
the  corporation  voted  on  December  17,  1913,  to  transfer  $1,500,000  surplus, 
being  profits  earned  before  January  1,  1913,  to  its  capital  account,  and  to  issue 
fifteen  thousand  shares  of  stock  representing  the  same  to  its  stockholders  of 
record  on  December  26;  that  the  distribution  took  place  on  January  2,  1914, 
and  that  the  plaintiff  received  as  his  due  proportion  four  thousand  and  one 
hundred  and  seventy-four  and  a half  shares.  The  defendant  compelled  the 
plaintiff  to  pay  an  income  tax  upon  his  stock  as  equivalent  to  $417,450  income 
in  cash.  The  District  Court  held  that  the  stock  was  income  within  the  mean- 
ing of  the  Income  I' ax  Act  of  October  3,  1913,  c.  16,  Section  II;  A,  subdivision 
1 and  2;  and  B.  38  Stat.  114,  166,  167.  It  also  held  that  the  Act  so  constructed 


< 

« 

« 


c 


INC.  410  TAX 


SUPREME  COURT  DECISIONS. 


was  constitutional,  whereas  the  declaration  set  up  that  so  far  as  the  Act  pur- 
ported to  confer  power  to  make  this  levy  it  was  unconstitutional  and  void. 

2315  The  Government  in  the  first  place  moved  to  dismiss  the  case  for  want  of 
jurisdiction,  on  the  ground  that  the  only  question  here  is  the  construction 

of  the  statute,  not  its  constitutionality.  It  argues  that  if  such  a stock  dividend 
is  not  income  within  the  meaning  of  the  constitution,  it  is  not  income  within 
the  intent  of  the  statute,  and  hence  that  the  meaning  of  the  Sixteenth  amendment 
is  not^  an  immediate  issue,  and  is  important  only  as  throwing  light  on  the  con- 
struction of  the  Act.  But  it  is  not  necessarily  true  that  income  means  the 
same  thing  in  the  Constitution  and  the  Act.  A word  is  not  a cr3^stal,  trans- 
parent and  unchanged;  it  is  the  skin  of  a living  thought  and  may  vary  greatly 
in  color  and  content  according  to  the  circumstances  and  the  time  in  which  it 
is  used.  Larnar  v.  United  States,  240  U.  S.  60,  65.  Whatever  the  meaning  of 
the  Constitution,  the  Government  had  applied  its  force  to  the  plaintiff  on  the 
assertion  that  the  statute  authorized  it  to  do  so,  before  the  suit  was  brought, 
and  the  Court  below  has  sanctioned  its  course.  Bhe  plaintiff  says  that  the  statute 
as  it  is  construed  and  administered  is  unconstitutional.  He  is  not  to  be  defeated 
by  the  reply  that  the  Government  does  not  adhere  to  the  construction  by  virtue 
of  which  alone  it  has  taken  and  keeps  the  plaintiff’s  money,  if  this  Court  should 
think  that  the  construction  would  make  the  Act  unconstitutional.  While  it  keeps 
the  money  it  opens  the  question  whether  the  Act  construed  as  it  has  construed 
It  can  be  maintained.  The  motion  to  dismiss  is  overruled.  Billings  v.  United 
States  232  U.  S.  261,  276.  B.  Altman-Comany  v.  United  States  224  U.  S.  583, 
396,  597. 

2316  The  case  being  properly  here,  however,  the  construction  of  the  Act  is 
open,  as  well  as  its  constitutionality,  if  construed  as  the  Government  has 

construed  it  by  its  conduct.  Billings  v.  United  States  ubi  supra.  Notwithstanding 
the^  thoughtful  discussion  that  the  case  received  below  we  can  not  doubt  that  the 
dividend^  was  capital  as  well  for  the  purposes  of  the  Income  Tax  Law  as  for 
distribution  between  tenant  for  life  and  remainderman.  What  was  said  by  this 
Court  upon  the  latter  question  is  equally  true  for  the  former.  “A  stock  dividend 
really  takes  nothing  from  the  property  of  the  corporation,  and  adds  nothing  to 
the  interest  of  the  shareholders.  Its  property  is  not  diminished  and  their  inter- 
ests are  not  increased.  * * * The  proportional  interest  of  each  shareholder 

r-emains  the  same.  The  only  change  is  in  the  evidence  which  represents  that 
interest,  the  new  shares  and  the  original  shares  together  representing  the  same 
proportional  interest  that  the  original  shares  represented  before  the  issue  of  the 
new  ones.”  Gibbons  v.  Mahon,  136  U,  S.  549,  559,  560.  In  short,  the  corporation 
IS  no  poorer  and  the  stockholder  is  no  richer  than  they  were  before  Logan 
County  V.  United  States,  169  U.  S.  255,  261.  If  the  plaintiff  gained  any  small 
advantage  by  the  change  it  certainly  was  not  an  advantage  of  $417,450,  the  sum 
upon  which  he  was  taxed.  It  is  alleged  and  admitted  that  he  received  no  more 
in  the  way  of  dividends  and  that  his  old  and  new  certificates  together  are  worth 
only  what  the  old  ones  were  worth  before.  If  the  sum  had  been  carried  from 
^ capital  account  without  a corresponding  issue  of  stock  certificates, 
which  there  was  nothing  in  the  nature  of  things  to  prevent,  we  do  not  suppose 
that  any  one  would  contend  that  the  plaintiff  had  received  an  accession  to  his 
income  PresumaMy  his  certificate  would  have  the  same  value  as  before.  Again 
it  certificates  for  $1,000  par  were  split  up  in  ten  certificates,  each  for  $100  we 
presume  that  no  one  would  call  the  new  certificates  income.  What  has  happened 
IS  that  the  plaintiff’s  old  certificates  have  been  split  up  in  effect  and  have  dim- 
inished in  value  to  the  extent  of  the  value  of  the  new. 

^ . Judgment  reversed. 

Mr.  Justice  McKenna  concurs  in  the  result. 

[For  refund,  because  of  above  decision,  of  taxes  paid,  see  [[2129.] 

[For  the  bearing  of  the  above  on  the  question  of  the  taxing  of  stock  dividends 
as  income  under  the  Revenue  Acts  of  1916,  1917  and  1918,  see  [[850.] 

[For  U.  S.  District  Court  decision  on  “stock  dividends”  under  Revenue  Act 
of  1916  see  [[853.] 

2317  Digest  of  the  Recert  Decisions  of  the  Supreme  Court.— [Comment:  Of 
the  cases  referred  to  those  brought  under  the  Act  of  October  3,  1913  only, 
are  reproduced  in  full  as  indicated  by  the  paragraph  references.  The  other 
cases  digested  were  brought  under  the  Excise  Tax  Act  of  August  5,  1909.) 

The  following  propositions  of  law,  slated  for  the  information  and  guidance 
of  internal  revenue  officers  and  others  concerned,  are  expressed  or  implied  in 
the  recent  decisions  of  the  Supreme  Court  of  the  United  States,  in  United  States 


INC.  411 


TAX 


SUPREME  COURT  DECISIONS. 

V.  Biwabik  Mining  Company  (T,  D.  2721)  (247  U-  S 116)  Goldfield  Consolidated 
Mines  Company  v.  Scott  (T.  D.  2722)  (247  U.  S.  126)  Doyle  v.  Mitchell  Br^. 
Co  (T  D 2723)  (247  U.  S.  179),  Hays  v.  Gauley  Mountain  Coal  Company  (i.  U. 

'nxi  U ^ 189).  United  States  v.  Cleveland,  Cincinnati,  Chicago  & St. 

Louis  Railway  Company  (T,  D,  2725)  (247  U.  S.  195),  William  E.  Peck  & Co. 
(Inc.)  V.  Lowe  (T.  D.  2726  [1123291,  Lynch  v.  Turnsh  (T.  D.  2729)  [|23511  South- 
ern Pacific  V.  Lowe  (T.  D.  2730  [[[2380],  Lynch  v Hornby  (T.  D.  2731)  [112337], 
and  Peabody  v.  Eisner  (T.  D.  2732)  [^2378] : , • m t a * =: 

2318  1.  In  the  determination  of  net  income  the  Excise^  iax  ot  August  t), 
1909,  permitted  the  deduction  from  gross  income  of  “a  reasonable  allow- 
ance for  depreciation  of  property,  if  any”;  the  Income  Tax  Act  of  October  3, 
1913  permitted  “a  reasonable  allowance,  for  the  exhaustion,  wear  and  tear 
of  property  arising  out  of  its  use  or  employment  in  the  business,  not  to 
exceed,  in  the  case  of  mines,  5 per  centum  of  the  gross  value  at  the  mine  ot 
the  output  for  the  year  for  which  the  computation  is  made  ; and  the  Income 
Act  of  September  8,  1916,  as  amended  permits,  in  the  case  of  mines,  a reponable 
allowance  for  depletion  thereof  not  to  exceed  the  market  value  in  the  mine 
of  the  product  thereof  which  has  been  mined  and  sold  during  the  year  for 
which  the  return  and  computation  are  made.” 

2319  (a)  As  mining  leases  are  not  conveyances  of  the  ore  in  place,  but  are 
grants  of  the  privilege  of  entering  upon  the  premises  and  mining  and 

removing  the  ore,  under  none  of  the  Acts  of  1909,  1913  or  1916,  may  a lessee  of 
mining  property  deduct  as  so  much  depletion  of  capital  assets  the  propor- 
tionate value  in  place  on  January  1,  1909,  or  any  other  date,  of  each  ton  of  ore 
mined  during  the  taxable  year.  See  T.  D.  1606  (75);  Article  145  of  Regulations 
No  33-  and  Article  8,  171  and  172  of  Regulations  No.  33  (revised).  (United 
States  V.  Biwabik  Mining  Company.  See  Von  Baumbach  v.  Sargent  Land  Com- 
pany, 242  U.  S.  503.)  . .... 

2320  (b)  Under  the  Act  of  1909  a mining  corporation  owning  its  mine  is  not 
entitled  to  a deduction  from  its  gross  income  of  any  amount  whatever 

on  account  of  depletion  or  exhaustion  of  the  ore  bodies  caused  by  its  operations 
for  the  year  for  which  the  tax  is  assessed,  nor  to  a deduction  against  the  gross 
proceeds  from  the  mining  and  treatment  of  ores  to  the  extent  of  the  cost  value 
of  the  ore  in  the  ground  before  it  was  mined.  T.  D.  1675  (80-89)  and  T.  D. 
1742  (96-105)  are  modified  accordingly.  In  view  of  their  different  provisions 
this  rule  is  inapplicable  to  situations  arising  under  the  Acts  of  1913  and  1916. 
See  Articles  141  and  142  of  Regulations  No.  33;  and  Articles  8,  171  and  172  of 
Re-^mlations  No  33  (revised).  (Goldfield  Consolidated  Mines  Company  v.  Scott. 
See  Stratton’s  Independence  v.  Howbert,  231  U.  S.  399;  Stanton  v.  Baltic  Mining 

Compan}'-,  240  U.  S.  103.)  i .i 

2321  2.  The  Excise  Tax  Act  of  August  5,  1909,  measured  the  tax  by  the  net 
income  of  a corporation  “received”  by  it  from  all  sources  during  the 

taxable  year;  the  Income  Tax  Act  of  October  3,  1913,  imposed  the  tax  upon  the 
net  income  “arising  or  accruing”  from  all  sources  during  the  taxable  year;  and 
the  Income  Tax  Act  of  September  8,  1916,  as  amended  upon  the  net  income 
“received”  from  all  sources  during  the  taxable  year. 

2322  (a)  Where  property  is  acquired  by  a corporation  and  subsequently  sold 
for  a higher  price,  under  all  three  Acts  the  gain  on  the  sale  is  income 

to  the  corporation.  If,  however,  the  property  was  acquired  before  January  1, 
1909  only  such  portion  of  the  gain  as  accrued  subsequent  to  December  31,  1908, 
was ’taxable  under  the  Act  of  1909,  and  if  it  was  acquired  before  March  1,  1913, 
only  such  portion  of  the  gain  as  accrued  subsequent  to  February  28,  1913,  was 
taxable  under  the  Act  of  1913,  or  is  taxable  under  the  Act  of  1916.  See  Regu- 
lations No.  31,  T.  D.  1606  (40,  50,  76),  T.  D.  1675  (37,  48,  75)  T.  D.  1742  (43,  55, 
91);  and  Articles  88,  101  and  116  of  Regulations  No.  33  (revised)  (Doyle  v. 
Mit’chell  Bros.  Co.;  Hays  v.  Gauley  Mountain  Coal  Company;  United  States  v. 
Cleveland,  Cincinnati,  Chicago  & St.  Louis  Railway  Company.) 

2323  (b)  In  order  to  determine  whether  there  has  been  gain  or  loss  on  a sale,  and 
the  amount  of  the  gain,  if  any,  in  general  under  all  three  Acts  an  amount 

must  be  withdrawn  from  the  gross  proceeds  sufficient  to  restore  the  cost  of  the 
property  or  the  capital  value  that  existed  at  the  commencement  of  the  period 
under  consideration  (either  January  1,  1909,  or  March  1,  1913).  Interest  should 
not  be  added  to  the  purchase  price  in  order  to  ascertain  the  cost  of  the  property. 
In  apportioning  the  profits  derived  from  a disposition  of  property  acquired 
before  and  sold  after  January  1,  1909,  for  the  purpose  of  the  Act  of  1909,  or 
acquired  before  and  sold  after  March  1,  1913,  for^  the  purpose  of  the  Act  of 
1913  the  division  may  be  pro  rata  according  to  the  time  elapsed  or  may  be  based 


INC.  412  TAX 


SUPREME  COURT  DECISIONS. 


on  an  appraisal  or  inventory  taken  as  of  December  31,  1908,  or  February  28,  1913. 
This  is  a matter  of  detail,  to  be  settled  according  to  the  best  evidence  obtainable 
and  in  accordance  with  valid  departmental  regulations.  For  the  purpose  of 
the  Act  of  1916,  however,  the  fair  market  price  or  value  as  of  March  1,  1913, 
to  be  ascertained  in  any  practicable  manner,  is  the  statutory  basis  for  deter- 
mining the  amount  of  gain  on  a sale  of  property  acquired  before  that  date. 

See  Regulations  No.  31,  T.  D.  1578,  T.  1588,  T.  D.  1606  (37,  71),  T.  D.  1675 

(36,  55,^69),  T.  D.  1742  (42,  62,  86);  Articles  4,  90,  91,  92,  93,  101,  109,  111,  112 

and  116  of  Regulations  No.  33  (revised),  and  T.  D.  2649.  (Doyle  v.  Mitchell 

Bros.  Co.;  Hays  v.  Gauley  Mountain  Coal  Company;  United  States  v.  Cleveland, 
Cincinnati,  Chicago  & St.  Louis  Railway  Company.) 

2424  (c)  The  Act  of  1913  is  valid  and  constitutional  in  taxing  net  income 

derived  from  sales  in  foreign  commerce.  The  same  principle  applies 
to  the  Acts  of  1909  and  1916.  (William  E.  Peck  & Co.  (Inc.)  v.  Lowe.) 

2325  (d)  Where  a stockholder  in  a corporation  receives  as  a liquidation  divi- 

dend, representing  his  share  in  the  distribution  of  the  proceeds  of  the 
sale  of  the  property  of  the  corporation  upon  dissolution,  a sum  greater  than 
the  cost  of  his  stock,  under  the  Acts  of  both  1913  and  1916  the  gain  is  income 
to  the  stockholder.  If,  however,  he  acquired  the  stock  before  March  1,  1913, 
only  such  portion  of  the  gain  as  accrued  subsequent  to  February  28,  1913,  was 
taxable  under  the  Act  of  1913  or  is  taxable  under  the  Act  of  1916.  Compare 
the  case  of  a dividend  in  ordinary  course  in  paragraph  (f)  below.  See  the 
citations  in  paragraphs  (a)  and  (b)  above.  (Lynch  v.  Turrish). 

232<3  (c)  Vvherc  a corporation  owns  all  the  stock  and  operates  a lease  all  the 

property  and  business  of  another  corporation,  acting  as  banker  for  it 
and  the  two  corporations  being  in  substance  identical  and  merged  for  all  prac- 
tical purposes,  under  the  Acts  of  both  1913  and  1916  surplus  of  the  lessor  cor- 
poration accrues  as  income  to  the  lessee  corporation  as  and  when  accumulated 
by  the  lessor  corporation,  notwithstanding  the  formal  distribution  of  such  surplus 
in  dividends  to  the  lessee  corporation  ma}'-  not  occur  during  the  taxable  year. 
This  special  situation  forms  an  exception  to  the  general  rule  stated  in  paragraph 
(f)  below.  See  Articles  125,  207  and  208  of  Regulations  No.  33  (revised). 
(Southern  Pacific  Company  v.  Lowe.) 

2327  (f)  Where  a stockholder  of  a corporation  receives  dividends  paid  in  the 
ordinary  course  of  business,  even  though  extraordinary  in  amount,  under 

the  Acts  of  both  1913  and  1916  such  dividends  are  income  in  the  year  in  which 
they  are  received  by  the  stockholder.  If  paid  out  of  surplus  accrued  to  the 
corporation  prior  to  March  1,  1913,  they  were  subject  to  tax  under  the  Act  of 
1913,  although  expressly  exempt  from  tax  under  the  Act  of  1916.  A dividend 
paid  by  a going  corporation  out  of  current  earnings  or  accumulated  surplus 
when  declared  by  the  directors  in  their  discretion,  being  in  the  nature  of  a 
recurrent  return  upon  the  stock,  is  distinguishable  from  a so-called  dividend  in 
liquidation  of  the  entire  assets  and  business  of  the  corporation,  which  is  a return 
to  the  stockholder  of  the  value  of  his  stock  upon  the  surrender  of  his  entire 
interest  in  the  corporation.  Compare  the  case  of  a liquidation  dividend  in  para- 
graph (d)  above.  Sec  Articles  105,  106  and  107  of  Regulations  No.  33  (revised), 
T.  D.  2659  and  T.  D.  2678.  (Lynch  v.  Hornby;  Peabody  v.  Eisner.) 

2328  (g)  A dividend  in  ordinary  course  paid  on  stock  of  a corporation  in  prop- 
erty or  stock  other  than  its  own  is  income  to  the  stockholders  to  the 

amount  of  its  cash  value  when  received  under  the  Acts  of  both  1913  and  1916. 
A dividend  paid  in  stock  of  another  corporation  is  not  a stock  dividend.  See 
Articles  4 and  106  of  Regulations  No.  33  (revised).  (Peabody  v.  Eisner.  Compare 
Towne  v.  Eisner  (245  U.  S.  418.)  [^2313.]  (T.  D.  2740,  June  24,  1918.) 


Peck  vs.  Lowe. 

(247  U.  S.  165.) 

2.329  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case 
of  William  E.  Peck  & Company  (Inc.)  v.  John  Z.  Lowe,  Jr.,  collector  of 
internal  revenue,  is  published  for  the  information  of  internal  revenue  officers  and 
others  concerned.  (T.  D.  2726,  June  4,  1918.) 

(May  20,  1918.) 

Mr.  Justice  Van  Devanter  delivered  the  opinion  of  the  Court. 

2330  This  was  an  action  to  recover  a tax  paid  under  protest  and  alleged  to  have 
been  itnposed  contrary  to  the  constitutional  provision  (Art.  1,  sec.  9,  cl.  5) 
tliat  “No  tax  or  duty  shall  be  laid  on  articles  exported  from  any  State.”  The 
judgment  below  was  for  the  defendant.  234  Fed.  125. 


INC.  413 


TAX 


SUPREME  COURT  DECISIONS. 


2331  The  plaintiff  is  a domestic  corporation  chiefly  engaged  in  buying  goods 
in  the  several  States,  shipping  them  to  foreign  countries  and  there  selling  them. 
In  1914  its  net  income  from  this  business  was  $30,173.66,  and  from  other  sources 
$12,436.24.  An  income  tax  for  that  year,  computed  on  the  aggregate  of  these 
sums,  was  assessed  against  it  and  paid  under  compulsion.  It  is  conceded  that  so 
much  of  the  tax  as  was  based  on  the  income  from  other  sources  was  valid,  and 
the  controversy  is  over  so  much  of  it  as  was  attributable  to^  the  income  from 
shipping  goods  to  foreign  countries  and  there  selling  them.  The  tax  was  levied 
under  the  Act  of  October  3,  1913,  c.  16,  sec.  It,  38  Stat.  166,  172,  which  provided 
for  annually  subjecting  ever}'’  dom^estic  corporation  to  the  payment  of  a tax  of  a 
specified  per  centum  of  its  “entire  net  income  arising  or  accruing  from  all  sources 
during  the  preceding  calendar  year,”  Certain  fraternal  and  other  corporations,  as 
also  income  from  certain  enumerated  sources,  were  specifically  excepted,  but  none 
of  the  exceptions  included  the  plaintiff  or  any  part  of  its  income.  So,  tested 
merely  by  the  terms  of  the  act,  the  tax  collected  from  the  plaintiff  was  rightly 
computed  on  its  total  net  income.  But  as  the  act  obviously  could  not  impose  a 
tax  forbidden  by  the  Constitution,  we  proceed  to  consider  whether  the  tax,  or 
rather  the  part  in  question,  was  forbidden  by  the  constitutional  provision  on 
which  he  plaintiff  relies, 

2332  The  Sixteenth  Amendment,  although  referred  to  in  argument,  has  no^real 
bearing  and  may  be  put  out  of  view.  As  pointed  out  in  recent  decisions, 

it  does  not  extend  the  taxing  power  to  new  or  excepted  subjects,  but  merely 
removes  all  occasion  which  otherwise  might  exist,  for  an  apportionment  among 
the  States  of  taxes  laid  on  Income,  whether  to  be  derived  from  one  source  or 
another.  Brushaber  v.  Union  Pacific  R.  R.  Co.,  240  U.  S.  1,  17-19;  Stanton  v. 
Baltic  Mining  Co.,  240  U.  S.  103,  112-113. 

2333  The  Constitution  broadly  empov/ers  Congress  not  only  “to  lay  and  collect 
taxes,  duties,  imposts  and  excises,”  but  also  “to  regulate  commerce  with 

foreign  nations.”  So,  if  the  prohibitory  clause  invoked  by  the  plaintiff  be  not 
in  the  way.  Congress  undoubtedly  has  power  to  lay  and  collect  such  a tax  as  is 
here  in  question.  That  clause  says,  “No  tax  or  duty  shall  be  laid  on  articles 
exported  from  any  State.”  Of  course  it  qualifies  and  restricts  the  power  to  tax 
as  broadly  conferred.  But  to  what  extent?  The  decisions  of  this  court  answer 
that  it  excepts  from  the  range  of  that  power  articles  in  course  of  exportation, 
Turpin  v.  Burgess,  117  U.  S.  504,  507;  the  act  or  occupation  of  exporting.  Brown 
V.  Maryland,  12  Wheat,  419,  445;  bills  of  lading  for  articles  being  exported.  Fair- 
bank  V.  United  States;  181  U.  S.  283;  charter  parties  for  the  carriage  of  cargoes 
from  state  to  foreign  ports.  United  States  v.  Hvoslef,  237  U.  S,  1;  and  policies  of 
marine  insurance  on  articles  being  exported — such  insurance  being  uniformly  re- 
garded as  “an  integral  part  of  the  exportation”  and  the  policy  as  “one  of  the 
ordinary  shipping  documents,”  Thames  and  Mersey  Inc.  Co.  v.  United  States,  237 
U.  S.  19.  In  short,  the  court  has  interpreted  the  clause  as  meaning  that  exporta- 
tion must  be  free  from  taxation,  and  therefore  as  requiring  “not  simply  an  omis- 
sion of  a tax  upon  the  articles  exported,  but  also  a freedom  from  any  tax  which 
directly  burdens  the  exportation.”  Fairbank  v.  United  States,  supra,  pp.  292-293. 
And  the  court  has  indicated  that  where  the  tax  is  not  laid  on  the  articles  them- 
selves while  in  course  of  exportation  the  true  test  of  its  validity  is  whether  it 
“so  directly  and  closely”  bears  on  the  “process  of  exporting”  as  to  be  in  substance 
a tax  on  the  exportation.  Thames  and  Mersey  Inc.  Co.  v.  United  States,  supra, 
p.  21  In  this  view  it  has  been  held  that  the  clause  does  not  condemn  or  invalidate 
charges  or  taxes,  not  laid  on  property  while  being  exported,  merely  because  they 
affect  exportation  indirectly  or  remotely;  thus  a charge  for  stamps  which  each 
package  of  manufactured  tobacco  intended  for  export  was  required  to  bear  before 
removal  from  the  factory  was  upheld  in  Pace  v.  Burgess,  92  U.  S.  372,  and 
Turpin  v.  Burgess,  117  U.  S.  504;  and  the  application  of  a manufacturing  tax  on 
all  filled  cheese  to  cheese  manufactured  under  contract  for  export,  and  actually 
exported,  was  upheld  in’  Cornell  v.  Coyne,  192  U.  S.  418.  In  that  case  it  was 
said,  p.  427:  “The  true  construction  of  the  constitutional  provision  is  that  no 
burden  by  way  of  tax  or  duty  can  be  cast  upon  the  exportation  of  articles,  and 
does  not  mean  that  articles  exported  are  relieved  from  the  prior  ordinary  burdens 
of  taxation  which  rest  upon  all  property  similarly  situated.  The  exemption 
attaches  to  the  export  and  not  to  the  article  before  its  exportation.” 

2334  While  fully  assenting  and  adhering  to  the  interpretation^  which  has  been 
put  on  the  clause  in  giving  effect  to  its  spirit  as  well  as  its  letter,  we  are 

of  opinion  that  to  broaden  that  interpretation  would  be  to  depart  from  both  the 
spirit  and  letter. 


INC. 


414  TAX 


SUPREME  COURT  DECISIONS. 

2335  The  tax  in  question  is  unlike  any  of  those  heretofore  condemned  It  is 

laid  on  articles  in  course  of  exportation  or  on  anything  which  in- 

I ^ ^ commerce  is  embraced  in  exportation  or  any  of  its 

processes  On  the  contrary  it  is  an  income  tax  laid  generally  on  net  incomes 

’d*"  t',  t'?'’  Congress  has  no  power 

to  tax  (see  Stamon  v.  Laltic  Mining  Co.,  supra,  p.  113),  it  is  both  nominally  and 
actually  a genera  ta.x.  It  is  not  laid  on  income  from  exportation  because  of  its 

wo"rds’o?‘',lm  A but  just  as  it  is  laid  on  other  income  The 

words  oi  the  Act  aie  net  income  arising  or  accruing  from  all  sources”  There 

mnL°l  At  most,  exportation  is  affected  only  indirectly  and  re- 

naW  and  rV  after  exportation  is  completed,  after  all  expenses  are 

paid  and  losses  adjusted  and  after  the  recipient  of  the  income  is  free  to  use  it 
as  he  chooses.  Thus  what  is  taxed-the  net  income-is  as  far  remOTed  from 
exportation  as  are  artimes  for  export  before  the  exportation  begins.  If  articles 

nn‘‘"o‘'tlie'thiie'''the''  “'’bj'act  to  taxation  under  general  laws 

up  to  the  t.inc  they  arc  pul  m course  of  exportation,  as  we  have  seen  they  are 

unavoidable  that  the  net  income  from  the  venture  wheu^com- 
P eted,  that  is  to  say,  after  the  exportation  and  sale  are  fully  conLmimted  s 
likewise  subjec  to  taxation  under  general  laws.  In  that  respect  ”he  status 

?xporh“''  articlerprior  to  the 

w°en‘ grounded"'  “bjeclion  urged  against  the  tax  is  not 

Judgment  Affirmed. 


Lynch  v.  Hornby. 

(247  U.  S.  339.) 

-23.  °!  ‘be  United  States  Supreme  Court  in  the  case 

IUl„.d  < d collector  of  internal  revenue,  v.  H.  C.  Hornby  is  pub- 

D 2731  JunV"l°‘l9r8')°"  revenue  officers  and  others  concerLd.  ^(T. 

Af  T .•  3,  1918.) 

^ Pitney  delivered  the  opinion  of  the  Court. 

HornMq  the  respondent,  recovered  a judgment  in  the  United  States  Dis- 
f against  Lynch,  as  Collector  of  Internal  Revenue  for  the  re 

9l"  (Cld  10  38®  sL  ll/"lt^U“°r'  October  3, 

A ' S 'rr  ’ 166),  and  paid  under  protest.  The  Circuit  Court  of 

Appeals  affirmed  the  judgment,  236  Fed.  Rep.  661,  and  the  case  corak  here  on 
posL'TTld  at  the  same  time  with  Lynch,  Collector  v.  Ttirrish 

F°sner  ^Collector  ’nost  V2378  ‘°r.  Post,  112380,  and  Peabody  v! 

2330  ’ TP.  fCt  ’ f i’  arising  under  the  same  Act,  and  this  day  decided 

.=830  The  facts  m brief,  are  as  follows:  Hornby,  from  1906  to  1915  was  the 

T nmbe  '0,000)  shares  of  the  capital  stock  of  the  Cloquet 

Lumbei  Conipany,  an  Iowa  corporation,  which  for  more  than  a quarter  of  a 
been  engaged  in  purchasing  timber  lands,  manufacturing  the  timber 

entir^eapilarstock  pWOOo! Yorind'^^^^ 

1914^^fhe°/on  Li, 400,  had  become  worth  at  least  $150,000.  In^the  year 

Imld  '.""’'L’  pb"g*“'Vbfmber,  anrdislribiUing  "hUmoc'^fs  amZglts'M^ek' 

.$210  000  jr"  idUrceiR  ‘oMlm"i.ar"l‘T'  aggregating  $650,000,  of  which 

owned  or  in  which  it  had  an  interest  on  March  1 1913  Hornhv’s  C A C C' 

;D?sSctcb°Ca^^d“l  If. he  Circuit  Court 
of  Appeals  together  with  Lynch,  Collector,  v.  Turrish  (236  Fed  Ron 
and  was  treated  as  prcscnlin.g  suhstanlially  Ihc  .sanic  ufsLn  ur.on  tim  n, ’ 
Jn  our  oiunion  it  is  distinguishable  from  the  Turrish  case  whoro  r ^ .\”t.rits. 
m question  was  a single  and  (inal  dividend  received  by' TiirHsh  froin  t be  I'f  ,T’ 
Company  in  hquidalion  of  tbe  entire  assets  and  biisiimss  .ImL,"  ‘ layette 
return  to  him  of  the  value  of  his  stock  upon  the  surrender  of  hifeXfintefest 


INC.  415 


TAX 


SUPREME  COURT  DECISIONS. 

in  the  company,  at  a price  that  represented  its  intrinsic  value  at  and  before  March 
1 1Q1  1 when  the  Income  Tax  Act  took  effect.  ....  r r-i  4- 

2^41  ’in  the  present  case  there  was  no  winding  up  or  I'^dt'^Ktiono.  tne  Cloque 
T limber  Comoanv,  nor  any  surrender  of  Hornby  s stock.  He  was  but  one 
of  manv%tockholders,  and  had  but  the  ordinary  f ^ 
ff  al  ana  Lrplus  of  the  company,  that  is,  a right  to  have  them  devoted^  to  the 
nroDer  business  of  the  corporation  and  to  receive  from  the  current  earning^ 
mcmi  ulate  r surplus  such  dividends  as  the  directors  in  their  discretion  might 
Sare  Qbbons  v.  Mahon,  136  U.  S.  549,  557.  The  operations  of  this  company 
in  the  year  1914  were,  according  to  the  facts  pleaded,  ot  a nature  essentially  like 

'those  in  which  it  had  been  engaged  for  more  ^^^ing'' 

fact  that  thev  resulted  in  converting  into  money,  and  thus  setting  ^^e  tor  ms 
tribution  as  dividends,  a part  of  its  surplus  assets  accumulated  prior  to  March  1, 
1913  does  not  render  Hornby’s  share  of  those  dividends  any  the  less  a part  of 
hL  income  within  the  true  intent  and  meaning  of  the  Act,  the  pertinent  language 

‘lubdivisiorA  That^‘heri®s'haU  be  levied,  assessed,  collected  and  paid 
annually  upon  the  entire  net  income  arising  or  accruing  from  all  sources  m the 
or^ceding  calendar  year  to  every  citizen  of  the  United  States  * * and  to 

^rerfre^sorretding  in  the  United  States,  * * a tax  of  1 per  centum  per 

annum  uDon  such  income,  except  as  hereinafter  provided ^ 

“R  Th?t  subject  only  to  such  exemptions  and  deductions  as  are  hereinafter 
allo^!md,  the’nefinconie  o'i  a taxable  person. shall  include  gfins  Fofits,  and  income 
derived  from  salaries,  wages,  or  compensation  for  personal  service, 
from  interest  rent,  dividends,  securities  or  the  transaction  of  any  lawful  business 
carried  on  for  gain  or  profit,  or  gains  or  profits  and  income  derived  from  any 

2342'^  Amon^^^  deductions  allowed  for.  the  purpose  of  the  normal  tax  U 
“seventh,  the  amount  received  as  dividends  upon  the  stock  01  from  t e 

net  carningrof  any  corporation,  * * - which  is  taxable  upon  its  net  income 

"s  here  nafter  proHded.”  There  is  a graduated  additional  tax,  commonly  known 
fs  a “surtax,”  upon  net  income  in  excess  of  $20,000, ^including  income 
dends  and  for  the  purpose  of  this  additional  tax  the  taxable  income  of  any 
imlividual  shall  embrace  the  share  to  which  he  .would  be  entitled  of  the  gams 
and  profits  if  divided  or  distributed,  whether  divided  or  distiibuted  or  not,  of 
A I emporations  * * * formed  or  fraudulently  availed  of  for  the  puipos^ 

of  prevetUiug  the  imposition  of  such  tax  through  the  .medium  of  permitting  such 
eains  and  profits  to  accumulate  instead  of  being  divided  or  distributed. 

2343  It  is  evident  that  Congress  intended  to  dravc  and  did  draw  a distinction 
between  a stockholder’s  undivided  share  or  interest  in  the  gams  and  profits 
of  a corporation,  prior  to  the  declaration  of  a dividend,  and  his  participation  m 
the*  divicknds  declared  and  paid;  treating  the  latter,  m ormnary  circumstances, 
as  a part  of  his  income  for  the  purposes  of  the  surtax,  and  not  regarding  the 
former  as  taxable  income  unless  fraudulently  accumulated  for  the  purpose  of 

3844"  TMs  treatment  of  undivided  profits  applies  only  to  profits  permitted  to 
accumulate  after  the  taking  effect  of  the  Act,  since  only  with 
these  is  a fraudulent  purpose  of  evading  the  tax  predicable.  Corporate  Profits 
that  accumulated  before  the  Act  took  effect  stand  on  a different  footing.  As  to 
the'^e  however,  just  as  we  deem  the  legislative  intent  mamfest  to  tax  the  stock- 
holder with  respeet  to  such  accumulations  , only  if  . and  when,  and  to  the  .extent 
that  his  interest  in  them  comes  to  fruition  as  income,  that  is,  m dividends 
declared  so  we  can  perceive  no  constitutional  obstacle  that  stands  m the  way 
of  cairyini?  out  this  intent  when  dividends  are  declared  out  of  a pre-existing 
surplus  The  Act  took  effect  on  March  1,  1913,  a few  days  after  the  lequis.ite 
number  of  States  had  given  approval  to  the  Sixteenth  Amendment,  under  which 
for  the  first  time  Congress  was  empowered  to  tax  income  from  property  without 
PDDortioning  the  tax  among  the  States  according  to  population.  Southern  Pacific 
Co  V Lowe^  supra.  That  the  retroactivity  of  the  Act.  from  the  date  of  its  passage 
(October  3,  1913)  to  a date  not  prior  to.  the  adoption  of  the  Amendment  was 
ncrniissible  is  settled  by  Brushaber  v.  Union  Pacific  R.  R.,  240  U.  S.  1,  20.  And 
we  deem  it  equally  clear  that  Congress  was  at  liberty  under  the  Amendment  to 
tax  as  income,  without  apportionment,  everything  that  became  income, 
o^-dinarv  sense  of  the  word,  after  the  adoption  of  the  Amendment,  including  divi- 
dends received  in  the  ordinary  course  by  a stockholder  from  a coiporation  even 
hoimh  they  were  extraordinary  in  amount  and  might  appear  upon,  analysis  to 
be  hnere  realization  in  possession  of  an  inchoate  and  contingent  interest  that 


INC. 


416  TAX 


SUPREME  COURT  DECISIONS. 


the  stockholder  had  in  a surplus  of  corporate  assets  previously  existing.  Divi- 
dends are  the  appropriate  fruit  of  stock  ownership,  are  commonly  reckoned  as 
income,  and  are  expended  as  such  by  the  stockholder  without  regard  to  whether 
they  are  declared  from  the  most  recent  earnings,  or  from  a surplus  accumulated 
from  the  earnings  of  the  past,  or  are  based  upon  the  increased  value  of  the 
property  of  the  corporation.  The  stockholder  is,  in  the  ordinary  case,  a different 
entity  from  the  corporation,  and  Congress  was  at  liberty  to  treat  the  dividends 
as  coming  to  him  ab  extra,  and  as  constituting  a part  of  his  income  when  thev 
came  to  hand. 

2345  Hence  we  construe  the  provision  of  the  Act  that  “the  net  income  of  a 
taxable  person  shall  include  gains,  profits,  and  income  derived  from 
interest,  rent,  dividends,  * * * oj-  income  de- 

rivea  frorn  any  source  whatever’  as  including  (for  the  purposes  of  the  additional 
tax)  all  dividends  declared  and  paid  in  the  ordinary  course  of  business  by  a cot 
poration  to  its  stockholders  after  the  taking  effect  of  the  Act  (March  1 1913) 
whether  froin  current  earnings,  or  from  the  accumulated  surplus  made  up  of  past 
earnings  or  increase  in  value  of  corporate  assets,  notwithstanding  it  accrued  to 
the  corpomtion  in  whole  or  in  part  prior  to  Alarch  1,  1913.  In  short,  the  word 
. was  employed  in  the  Act  as  descriptive  of  one  kind  of  gain  to  the 

maividual  stockholder;  dividends  being  treated  as  the  tangible  and  recurrent  re- 
turns upon  his  stock,  analogous  to  the  interest  and  rent  received  upon  other 
forms  ot  invested  capital. 

234G  In  the  more  recent  Income  Tax  Acts,  provisions  have  been  inserted  for 
the  purpose  of  excluding  from  the  effect  of  the  tax  any  dividends  declared 
out  of  earnings  or  profits  that  accrued  prior  to  March  1,  1913.  This  originated 
7 September  8,  1916  and  has  been  continued  in  the  Act  of  October 

3,  1917.*  We  are  referred  to  the  legislative  history  of  the  Act  of  1916  which  it  is 
contended  indicates  that  the  new  definition  of  the  term  “dividends”  was  intended 
to  be  declaratory  of  the  meaning  of  the  term  as  used  in  the  1913  Act.  We  cannot 
accept  this  suggestion,  deeming  it  more  reasonable  to  regard  the  chancre  as  a 
concession  to  the  equity  of  stockholders  granted  in  the  1916  Act  in  view  of 
constitutional  questions  ffiat  had  been  raised  in  this  case,  in  the  corApanion  case 
of  Lynch,  Collector  v.  Turrish  and  perhaps  in  other  cases.  These  two  cases 
were  commenced  in  October,  1915;  and  decisions  adverse  to  the  tax  were  rendered 
in  the  District  Court  in  January,  1916,  and  in  the  Circuit  Court  of  Appeals  Sen 
tember  4,  1916.  ^ ^ ^ 

2347  We  repeat  that  under  the  1913  Act  dividends  declared  and  paid  in  the 
ordinary  course  by  a corporation  to  its  stockholders  after  March  1 1913 
whether  from  current  earnings  or  from  a surplus  accumulated  prior  ti  that 
date,  were  taxable  as  income  to  the  stockholder 


* In  Act  of  September  8,  1916  (Ch.  463,  39  Stat.  756  757)  which  tnnh 
place  of  the  Act  of  1913,  (f,e  substance  of  what  we  have  quoted  from  pLagraph 
P.  of  the  1913  Act  y/as  embodied  m Sec.  2 (a),  but  with  this  proviso;  “ProfidS 
hat  the  terrn  dividends  as  used  in  this  title  shall  be  held  to  mean  any  dis- 
tribution  made  or  ordered  to  be  made  by  a corporation  * * * •- 

earnings  or  profits  accrued  since  March  first,  nineteen  hundred  and  thirteen  and 
payable  to  its  shareholders,  whether  in  cash  or  in  stock  of  the  corporation  ’’  e^c 
October  3,  1917  (Ch.  63,  40  Stat.  300,  329!  337-8^  Sec  2 
of  the  1916  Act  was  amended  by  being  repeated  without  the  proviso  (p’  329)  while 

sLjiSMb)!  Tfoifow^r'  a sub! 

. /'■^'^''''’ation  made  to  the  shareholders  or  members  of  a corporation 

1 ti  7 a"  ^‘'i  rf  hundred  and  seventeen,  or  subsequent  tax  yea?" 

shah  be  deemed  to  have  been  made  from  the  most  recently  accumulated  undivided 
profits  or  surplus,  and  shall  constitute  a part  of  the  annual  income  of  the  distrih! 
iitec  for  the  year  in  which  received,  and  shall  be  taxed  to  the  distributee  at  the 
rates  prescribed  by  law  for  the  years  in  which  such  profits  or  surplus  were  acem 
mulated  by  the  corporation,  * * * but  nothing  herein  shall  be  construed  ?s 

axing  any  earnings  or  profits  accrued  prior  to  March  first,  nineteen  hundred  and 
thirteen,  but  such  earnings  or  profits  may  be  distributed  in  stock  dividends  ?r 
otherwise,  exempt  from  the  tax,  after  the  distribution  of  earnings  and  profits 
accrued  since  March  first,  nineteen  hundred  and  thirteen,  has  been  made  The 
subdivision  shall  not  apply  to  any  distribution  made  prior  to  August  six  h nine 
tec,  himdred  and  seventeen  out  of  the  earnings  or  profits  akrued  pidor  to' 
March  first,  nineteen  hundred  and  thirteen.  puor  lo 


INC.  417 


TAX 


SUPREME  COURT  DECISIONS. 

3348  We  do  not  overlook  the  fact  that  every  dividend  distribution  diminishes 
bv  iust  so  much  the  assets  of  the  corporation,  and  m a theoretical  sense 
reduces  thi  intrinsic  value  of  the  stock.  But.  at  the  same  time,  it  demonstrates 
the  capacity  of  the  corporation  to  pay  dividends,  holds  out  a promise  of 
1 vidimds  in  the  future,  and  quite  probably  increases  the  market  value  of  the 
scares  irour  opiidon.  Congress  laid  hold  of  dividends  paid  in  the  ordmary 
hurse  as  de  facto  Income  of  the  stockholder,  without  regard  to  the  ultima  e 
effect  upon  the  corporation  resulting  from  their  payment.  , 

2349  Of  course  we  are  dealing  here  with  the  o.rdinary 

dends  declared  in  the  ordinary  way  of  business.  Lyjich, 

Turrish  and  Southern  Pacific  Co.  v.  Lowe,  Collector,  this  day  decided,  rest  upon 

their  special  facts  and  are  plainly  distinpishable.  return 

2350  It  results  from  what  we  have  said  that  it  was  erroneous  to 

of  the  tax  collected  from  the  respondent,  and  that  the  judgment  should  be 
^ Reversed,  and  the  cause  remanded  to 

the  District  Court  for  further  proceed- 
ings in  conformity  with  this  opinion. 

Lynch  v.  Turrish. 

(247  U.  S 221.)  . 

2351  The  appended  decision  of  the  United  States  Supreme  Court 

of  E l.  Lynch,  as  collector  of  internal  revenue,  v.  Henry  iurrisn,  is 
PubUsbecl  for  tiie  information  of  internal  revenue  officers  and  others  concerne  . 
(T.  D.  2929,  June  11,  1918.) 

(June  3,  191o.) 

Mr  Justice  McKenna  delivered  the  opinion  of  the  Court.  the 

2352  Suit  to  recover  an  income  tax,  paid  under  protest,  assessed  under  the 

Act  of  October  3,  1913,  38  Stat.  166.  , o-  • u 

33.13  The  facts,  as  admitted  by  demurrer,  are  these;  ^"^foV^the 

was  plaintiff  in  the  trial  court,  made  a return  of  his  income  tor  the 
calendar  year  1914  which  showed  that  he  had  no  net  income  for  that  year,  after- 
^m?Ss"Yhe"TomLssioner  of  Internal  Revenue  / -pplemen^  Tefause  o 

showing  that  he  had  received  a net  income  of  $32,712.08,  which  because  oi 
soecific  deductions  and  exemptions,  resulted  in  no  normal  tax,  but  as  the  net 
incLe  exceeded  the  sum  of  $20,000  the  Commissioner  assessed  f/^^mnal 
nr  suner-tax  of  one  per  cent  upon  the  excess,  resulting  in  a tax  of  $127.12,  whmh 
wnc:  sonedit  to  be  recovered.  The  reassessment  was  based  upon  certain  surns 
received  by  the  plaintiff  in  the  year  1914  as  distributions  from  corporations  sub- 
icet  to  the  Income  Tax  Law  and  held  bv  the  Commissioner  to  be  income  derived 
Lorn  divMendr  ^ by  the  plaintiff  on  stock  of  domestic  corporations;  of 

which  the  sum  of  $79,975,  received  as  a distribution  from  the  Payette  Lumber  & 
Manufacturing  Company,  and  without  which  no  lax  could  have  been  levie  agains 

2354  to  MarclT lfm\  and  continuously  thereafter  until  the  surrender  of 
his  stock  as  hereinafter  mentioned,  plaintiff  was  3,  stockholder  in  tne 

Payette  Company;  which  was  organized  in  the  year  1903  with  Pfwer  to  buy 
hold  and  seH  timber  lands,  and  in  fact  never  engaged  in  any  other  business 
than’  this  except  minor  business  incidental  to  it.  Immediately  ato  its  organ- 
ization this  company  began  to  invest  m tunber  lands,  and  prior  to  March  1,  1913, 

had  thus  invested  approximately  $1,375,000.  onn  000  of 

2355  On  March  1,  1913,  the  value  of  its  assets  was  not  less  875  000^ 

Avhich  sum  the  value  of  the  timber  lands  ^as  not  less  than  $2,875,0^. 

The  increase  was  due  to  the  gradual  rise  in  the  market  value  of  the  lands.  At 
that  date  the  value  of  Turrish’s  stock  was  twice  its  par  value,  or  $159,950,  and 
about  that  time  he  and  all  the  other  stockholders  gave  an  option  to  sell  their 
s^ock  for  twice  its  par  value.  The  holders  of  the  option  formed  another  corn 
nanv  called  the  Boise-Payette  Lumber  Company,  and  transferred  the  options  to 
U The  options  having  been  extended  to  December  31,  1913,  the  new  company 
informed  the  Payette  Company  and  its  stockholders  shortly  before  this  df^e  that 
instead  of  exercising  the  option  it  preferred  and  proposed  to  purchase  all  of  the 
assets  of  the  Payette  Company,  paying  to  that  company  such  a purchase  price 
?hat  there  would  be  available  for  distribution  to  its  stockholders  twice  he  par 
value  of  their  stock.  The  stockholders  by  resolution  authorized  this  sale,  and, 
pmsLnt  to  this  and  a resolution  of  the  directors,  the  Payette  Company  trans- 
ferred  to  the  new  company  all  of  its  assets,  property,  and  franchises  and  upon  the 
completion  of  the  transaction  found  itself  Muth  uo  assents  or  property  except  cash 

to  the  amount  of  double  the  par  value  of  its  stock  which  had  been  paid  to  it  by 


INC. 


418  TAX 


SUPREME  COURT  DECISIONS. 


the  new  company,  and  with  no  debts,  liabilities,  or  obligations  except  those  which 
the  new  company  had  assumed.  The  cash  was  distributed  to  the  stockholders 
on  the  surrender  of  their  certificates  of  stock,  and  the  company  went  out  of 
business.  In  this  way,  upon  the  surrender  of  his  shares,  Turrish  received  $159,- 
9^)0,  being  double  their  par  value. 

2356  The  Commissioner  of  Internal  Revenue  considered  that  of  this  sum  one- 
half  was  not  taxable,  being  the  liquidation  of  the  par  value  of  Turrish’s 
stock,  but  that  the  other  was  income  for  the  year  1914  and  taxable  under  the  Act 
of  1913. 

23o7  The  question  in  the  case  is  thus  indicated.  The  District  Court  took  a 
different  view  from  that  of  the  Commissioner  of  Internal  Revenue  and 
therefore  overruled  the  demurrer  to  Turrish’s  complaint  and  entered  judgment  for 
him  for  the  sum  prayed,  which  judgment  was  affirmed  by  the  Circuit  Court  of 
Appeals  for  the  Eighth  Circuit,  236  Fed.  653. 

2358  The  point  in  the  case  seems  a short  one.  It,  however,  has  provoked  much 
• discussion  on  not  only  the  legal  but  the  economic  distinction  between 

capital  and  income  and  by  what  processes  and  at  what  point  of  time  the  former 
produces  or  becomes  the  latter.  And  this  in  resolution  of  a statute  which  con- 
cerns the  activities  of  men  and  intended,  it  might  be  supposed,  to  be  without 
perplexities  and  readily  solvable  by  the  off-hand  conceptions  of  those  to  whom  it 
was  addressed. 

2359  The  provisions  of  the  Act,  so  far  as  material  tp  be  noticed,  are  the 
following:  That  there^  is  assessed  “upon  the  entire  net  income  arising 

or  accruing  from  all  sources  in  the  preceding  calendar  year  to  every  ♦ ♦ ♦ 

person  residing  in  the  United  States  * * a tax  of  one  per  centum  per 

annum  upon  such  income.”  * * * Par.  A,  Subdiv.  1. 

2360  In  addition  to  that  tax,  which  is  denominated  the  normal  income  tax  it  is 

, provided  that  there  shall  be  levied  “upon  the  net  income  of  every  indi- 
vidual an  additional  tax^  p^j.  centum  per  annum  upon  the  amount 

by  which  the  total  net  income  exceeds”  certain  amounts,  and  the  person  subject 
to  the  tax  is  required  to  make  a personal  return  of  his  total  net  income  from  all 
sources  imder  rules  a,nd  regulations  to  be  prescribed  by  the  Commissioner  of 
Internal  Revenue.  Subdiv.  2. 


236  By  Paragraph  B it  is  provided  that,  subject  to  certain  exemptions  and 
deductions,  the^  net  income  of  a taxable  person  shall  include  gains, 
prohts,  and  income  denved  from  salaries,  wages,  or  compensation  for  personal 
service  also  frorn  interest,  rent,  dividends,  securities,  or  the  transaction 

ot  any  lawful  business  carried  on  for  gain  or  profit,  or  gains  or  profits  and  income 
derived  from  any  source  whatever.” 

2362  After  specifying  the  exemptions  and  deductions  allowed,  the  law  declares 
as  follows:  Ihe  said  tax  shall  be  computed  upon  the  remainder  of  said 

net  income  of  each  person  subject  thereto,  accruing  during  each  preceding  calen- 
dar  year  ending  December  thirty-first:  Provided,  however.  That  for  the  year 
ending  December  thirty-first,  nineteen  hundred  and  thirteen,  said  tax  shall  be 
computed  on  the  net  income  from  March  first  to  December  thirty-first,  nineteen 
hundred  and  thirteen,  both  dates  inclusive.”  *,  * * p^r  D 

2363  It  will  be  observed,  therefore,  that  the  statute  levies' a normal  tax  and  an 
additional  tax  upon  net  incomes,  derived  from  whatever  source,  “arising 

or  accruing  each  preceding  calendar  year  ending  December  31,  except  that  for 
the  year  ending  December  31,  1913,  the  tax  shall  be  computed  on  the  net  income 
accruing  from  March  1,  1913,  to  December  31,  1913. 

2364  And  in  determining  the  application  of  the ‘statute  to  Turrish  we  must 
keep  in  miml  that  on  the  admitted  facts  the  distribution  received  by  him 

from  the  Paye  te  Company  manifestly  was  a single  and  final  dividend  in  liqtiida- 
lon  of  the  entire  assets  and  business  of  the  company,  a return  to  him  of  the 
value  of  his  stock  upon  the  surrender  of  his  entire  interest  in  the  company. 

when  the  ^crtoolc  effecU""' 

2365  The  District  Court  and  the  Circuit  Court  of  Appeals  decided  that  the 

cf  distributed  to  durrush  was  not  income  within  the  meaning  of 

nf  decision  on  two  propositions  as  expressed  in  the  opinion 

Appeals,  by  Sanborn,  Circuit  Judge— (a)  The  amount  was 
the  realization  of  an  investment  made  some  years  before,  representing  its  gradual 

oTthflaw'^tTn?  effective  date 

f the  law,  that  is,  before  March  1,  1913,  and  the  mere  change  of  form  of  the  proo- 

to  il^  hnlH?r?h'®  P^perty,  or  from  stock  to  cash"  was  not  income 

to  Its  holders  because  the  value  of  the  property  was  the  same  after  as  before  the 


INC. 


419  TAX 


SUPREME  COURT  DECISIONS. 


income,  gams 
2366  For  proposition 


change:  (b)  The  timber  lands  were  the  property,  capital  and  capital  assets  of 
their  legal  and  equitable  owner  and  the  enhancement  of  their  value  diming  a 
series  of  years  “prior  to  the  effective  date  of  the  income  tax  law,  although  divided 
or  distributed  by  dividend  or  otherwise,  subsequent  to  that  date,  does  not  become 
or  profits  taxable  under  such  an  act. 
rur  uiuposition  “a”  the  court  cited  Collector  v.  Hubbard,  12  Wall,  1; 
Bailey  v.  Railroad  Company,  22  Wall.  604,  and  the  same  case  in  106 
U.  S.  109.  For  proposition  “b”  Gray  v.  Darlington,  15  Wall.  63,  was  relied  on. 

2367  The  Government  opposes  both  contentions  by  an  elaborate  argument  con- 
taining definitions  of  capital  and  income  drawn  from  lepl  and  economic 

sources  and  given  breadth  to  cover  a number  of  other  cases  submitted  with  this. 
The  argument,  in  effect,  makes  any  increase  of  value  of  property  income,  emerg- 
ing as  such  and  taxable  at  the  moment  of  realization  by  sale  or  some  act  ot 
separation,  as  by  dividend  declared  or  by  distribution,  as  in  the^^instant^  case. 

2368  To  sustain  the  argument  these  definitions  are  presented:  “1.^  Capital  is 
anything,  material  or  otherwise,  capable  of  ownership,  viewed  in  its  static 

condition  at  a moment  of  time,  or  the  right  of  ownership  therem.  2.  Incorne  is 
the  service  or  return  rendered  by  capital  during^  a peiiod  of  time.  * * * 7’ 

Net  income  (‘profits’)  is  the  difference  between  income  and  outgo.  ^ /. 

In  the  actual  production  and  distribution  of  capital  there  is  a constant  conversion 
of  capital  into  income,  and  vice  versa.  8.  The  attempt  to  conceal  this  con- 
version by  treating  ‘‘income’  as  the  standard  return  from  capital  only 

leads  to  confusion  of  the  value  of  capital  with  capital  itself. 

2369  From  these  definitions  are  deduced  the  following  propositions,  which  are 

said  to  be  decisive  of  the  problems  in  the  cases:  ^ 

“1.  Income  being  derived  from  the  use  of  capital,  the  conversion  or  trai^fer 
of  capital  always  produces  income.  2.  Mere  appreciation  of  capital 
not  produce  ‘income,’  nor  mere  depreciation  ‘outgo.  3.  Net  income  is  the  dif- 
ference between  actual  ‘income’  and  actual  ‘outgo.’  4.  Income  is  not  confined  to 
money  income,  but  includes  anything  capable  of  easy  valuation  in  money. 

2370  It  will  be  observed  that  the  breadth  of  definition  and  the  breadth  of 
application  are  necessarv  to  the  refutation  of  the  reasoning  of  the  Circuit 

Court  of  Appeals.  There  is  direct  antagonism,  the  court  basing  its  reliance,  it 
says,  upon  what  it  asserts  is  the  common  sense  and  understanding  of  the  words 
of  the  law,  and  the  exposition  of  like  laws  by  the  decisions  of  this  court.  Ifie 
Government’s  resource  is  the  discussion  of  economists  and  the  fa(^,  concrete 
and  practical,  of  wealth  not  only  increased  but  come  to  actual  hand. 
case  is  an  example.  Turrish’s  stock  doubled  in  value.  He  paid  for  it  $79,975, 
he  received  $159,950.  It  requires  a struggle  to  resist  the  influence  of  the  fact, 
but  we  are  aided  and  fortified  by  our  own  precedents  and  saved  from  mucti  in- 
tricate and  subtle  discussion  and  an  elaborate  review  of  other  cases  cited  in 
confirmation  or  opposition. 

2371  In  Collector  v.  Hubbard,  supra,  the  distinction  between  a corporation 
and  its  stockholders  was  recognized  and  that  the  stockholder  had  not 

title  for  certain  purposes  to  the  earnings  of  the  corporation,  net  or  other,  prior 
to  a dividend  being  declared,  but  they  might  become  capital  by  investment  in 
permanent  improvements  and  thereby  increase  the  market  value  of  the  shares, 
“whether  held  bv  the  original  subscribers  or  by  assignees.  In  other  words,  it 
was  held  that  the  investments  of  the  corporation  were  the  investments  of  the 
stockholders;  that  is,  the  stockholders  could  have  an  interest,  taxable  under  the 
act  considered,  though  not  identical  with  the  corporation.  This  was  repeated 
in  Bailey  v.  Railroad  Company,  22  Wall.  604,  635,  636. 

2372  The  latter  case  came  here  again  in  106  U.  S.  109,  and  it  was  then  declared 
that  the  purpose  of  an  income  tax  law  was  to  tax  the  income  for  the  year 

that  it  accrued;  in  other  words,  no  tax  in  contemplation  of  the  law  accrued  upon 
something  except  for  the  year  in  which  that  something— earnings,  profits,  gams 
or  income— accrues.  In  that  case  the  subject  of  the  tax  was  scrip  dividend, 
but  the  certificates  did  not  show  the  year  of  the  earnings  and  testimony  as  to  the 
particular  year  was  admitted.  The  principle  applies  to  the  case  at  bar.  If 
increase  in  value  of  the  lands  was  income,  it  had  its  particular  time  and  su^ch 
time  must  have  been  within  the  time  of  the  law  to  be  subject  to  the  law,  that 
is,  it  must  have  been  after  March  1,  1913.  But,  according  to  the  fact  admitted, 
there  was  no  increase  after  that  date  and  therefore  no  increase  subject  to  the 
law.  There  was  continuity  of  value,  not  gain  or  increase.  In  the  first  proposi- 
tion of  the  Court  of  Appeals  we,  therefore,  concur. 


INC, 


420  TAX 


SUPREME  COURT  DECISIONS. 


2373  In  support  of  its  second  proposition  it  adduced,  as  we  have  seen,  Gray  v. 

Darlington,  15  Wall.  63.  The  case  arose  under  the  income  tax  law  of 
1867,  which  levied  “upon  the  gains,  profits,  and  income  of  every  person,  ♦ * ♦ 
whether  derived  from  any  kind  of  property  * hj  * or  from  any  other  source 
whatever  * * * ^ tax  of  five  per  centum  on  the  amount  so  derived  over 

$1,000  * * for  the  year  ending  the  thirty-first  of  December  next  preceding 

the  time  for  levying,  collecting  and  paying  said  tax.” 

2.374  Darlington,  in  1865,  being  the  owner  of  certain  United  States  Treasury 
notes,  exchanged  them  for  United  States  bonds.  In  1869  he  sold  the 
bonds  at  an  advance  of  $20,000  over  the  cost  of  the  notes  and  upon  this  amount 
was  levied  a tax  of  five  per  centum  as  gains,  profits  and  income  for  that  year. 
He  paid  the_  tax  under  protest  and  sued  to  recover,  and  prevailed.  This  court, 
by  Mr.  Justice  Field,  said;  “The  question  presented  is  whether  the  advance  in 
the  value  of  the  bonds,  during  this  period  of  four  years,  over  their  cost,  real- 
ized by  their  sale,  was  subject  to  taxation  as  gains,  profits,  or  income  of  the 
plaintifi:  for  the  3'^ear  in  which  the  bonds  were  sold.  The  answer  which  should 
be  given  to  this  question  does  not,  in  our  judgment,  admit  of  any  doubt.  The 
advance  in  the  value  of  property  during  a series  of  years  can,  in  no  just  sense 
be  considered  the  gains,  profits,  or  income  of  any  one  particular  year  of  the 
series,  although  the  entire  amount  of  the  advance  be  at  one  time  turned  into 
money  by  the  sale  of  the  property.  The  statute  looks,  with  some  exceptions, 
for^subjects  of  taxation  only  to  annual  gains,  profits  and  income.” 

2375  And  again,  “The  mere  fact  that  propeity  has  advanced  in  value  between 
the  date  of  its  acquisition  and  sale  does  not  authorize  the  imposition  of 
a tax  on  the  amount  of  the  advance.  Mere  advance  in  value  in  no  sense  consti- 
tutes the  gains,  profits,  or  income  specified  by  the  statute.  It  constitutes  and  can 
be  treated  merely  as  increase  of  capital.”  This  case  has  not  been  since  questioned 
or  modified. 

237G  The  Government  feels  the  impediment  of  the  case  and  attempts  to 
confine  its  ruling  to  the  exact  letter  of  the  Act  of  March  2,  1867,  and 
thereby  distinguish  that  act  from  the  act  of  1913  and  give  to  the  latter  some- 
thing of  retrospective  effect.  Opposed  to  this  there  is  a presumption,  resistless 
except  against  an  intention  imperatively  _ clear.  The  Government,  however, 
makes  its  view  depend  upon  disputable  differences  between  certain  words  of 
the  two  acts.  ^ It  urges  that  the  act  of  1913  makes  the  income  taxed  one  “arising 
or  accruing”  in  the  preceding  calendar  year,  while  the  act  of  1867  makes  the  in^ 
come  one  “derived.”  Granting  that  there  is  a shade  of  difference  between  the 
words,  it  cannot  be  granted  that  Congress  made  that  shade  a criterion  of  intention 
apd  committed  the  construction  of  its  legislation  to  the  disputes  of  purists.  Be- 
sides, the  contention  of  the  Government  does  not  reach  the  principle  of  Gray  v. 
Darlington,  w’hich  is  that  the  gradual  advance  in  the  value  of  property  during  a 
series  of  years  in  no  just  sense  can  be  ascribed  to  a particular  year,  not  therefore 
as  “arising  or  accruing,”  to  meet  the  challenge  of  the  words,  in  the  last  one  of  the 
years,  as  the  Government  contends,  and  taxable  as  income  for  that  year  oir  when 
turned  into  cash.  Indeed,  the  case  decides  that  such  advance  in  value  is  not 
irmome  at  all,  but  merely  increase  of  capital  and  not  subject  to  a tax  as  income. 
2377  We  concur,  therefore,  in  the  second  proposition  of  the  Circuit  Court  of 
Appeals  as  well  as  in  the  first  and  affirm  the  judgment. 

Mr.  Justice  Brandeis  and  Mr.  Justice  Clarke  concur  in  the  result. 


Peabody  vs.  Eisner. 

(247  U.  S.  347.) 

2378  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  ol 
Charles  A.  Peabody  v.  Mark  Eisner,  as  collector  of  internal  revenue,  is 

published  for  the  information  of  internal-revenue  officers  and  others  concerned 
(T.  D.  2732,  June  11,  1918.) 

(June  3,  1918.) 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

2379  This  case  arose  under  the  Federal  Income  Tax  Act  of  October  3,  1913 
(Ch.  16,  38  Stat.  114,  166).  The  controversy  is  over  the  first  cause  of 

action  set  up  by  plaintiff  in  error  in  a suit  against  the  collector  for  the  recovery 
of  an  additional  tax  exacted  in  respect  of  a certain  dividend  received  by  plaintiff 
in  the  year  1914,  the  facts  being  as  follows:  On  and  prior  to  March  1,  1913, 
and  thenceforward  until  payment  of  the  dividend  in  question,  petitioner  was 
owner  of  1,100  shares  (out  of  a total  of  2,000,000  shares  outstanding)  of  common 
stock  of  the  Union  Pacific  Railroad  Company,  of  the  par  value  of  $100  each 


INC.  421 


TAX 


SUPREME  COURT  DECISIONS. 


and  during  the  same  period  the  company  had  large  holdings  of  the  common  and 
preferred  stocks  of  the  Baltimore  & Ohio  Railroad  Company.  On  March  2, 
1914,  the  Union  Pacific  declared  and  paid  an  extra  dividend  upon  each  share  of 
its  common  stock,  amounting  to  $3  in  cash,  $12  in  par  value  of  preferred  stock 
of  the  Baltimore  & Ohio,  and  $22.50  in  par  value  of  the  common  stock  of  the 
same  company;  the  result  being  that  petitioner  received  as  his  dividend  upon  his 
holdings  of  Union  Pacific  common  stock  $3,300  in  cash,  132  shares  of  Baltimore 
& Ohio  preferred  and  247i^  shares  of  Baltimore  & Ohio  common  stock.  In  his 
income  return  for  1914  he  included  as  taxable  income  $4.12  per  share  of  this 
dividend,  or  $4,532  in  all,  and  paid  his  tax  upon  the  basis  of  this  return.  After- 
wards he  was  subject  to  additional  assessment  upon  a valuation  of  the  balance 
of  his  dividend,  and  this,  having  been  paid  under  protest,  is  the  subject  of  the 
present  suit,  the  theory  of  which  is  that  the  entire  earnings,  income,  and  profits 
from  all  sources  realized  by  the  Union  Pacific  Railroad  Company  from  March 
1,  1913,  to  March  2,  1914,  remaining  after  the  payment  of  prior  charges  did  not 
exceed  $4.12  per  share  of  the  Union  Pacific  common  stock,  and  that  the  cash  and 
Baltimore  & Ohio  stock,  disposed  of  in  the  extra  dividend  (so  far  as  they  ex- 
ceeded the  value  of  $4.12  per  share  of  Union  Pacific)  did  not  constitute  a gain, 
profit,  or  income  of  the  Union  Pacific,  and  therefore  did  not  constitute  a gain, 
profit,  or  income  of  the  plaintiff  arising  or  accruing  either  in  or  for  the  year  1914 
or  for  any  period  subsequent  to  March  1,  1913,  the  date  when  the  Income  Tax 
Law  took  effect.  The  District  Court  overruled  this  contention  upon  the  au- 
thority of  Southern  Pacific  Co.  v.  Lowe,  Collector,  238  Fed.  Rep.  847,  and  Towne 
V.  Eisner,  Collector,  242  Fed.  Rep.  702.  The  latter  case  has  since  been  reversed 
(245  U.  S.  418),  but  only  upon  the  ground  that  it  related  to  a stock  dividend 
which  in  fact  took  nothing  from  the  property  of  the  corporation  and  added  noth- 
ing to  the  interest  of  the  shareholder,  but  merely  changed  the  evidence  which 
represented  that  interest.  Southern  Pacific  Co.  v.  Lowe,  Collector,  has  been 
reversed  this  day,  post  112380,  but  only  upon  the  ground  that  the  Central  Pacific 
Railway  Company,  which  paid  the  dividend,  and  the  Southern  Pacific  Company, 
which  received  it,  were  in  substance  identical  corporations  because  of  the  com- 
plete ownership  and  control  which  the  latter  possessed  over  the  former  as 
stockholder  and  in  other  capacities,  so  that  while  the  two  companies  were  sep- 
arate legal  entities,  yet  in  fact  and  for  all  practical  purposes  the  former  was  but 
a part  of  the  latter,  acting  merely  as  its  agent  and  subject  in  all  things  to  its 
direction  and  control;  and  for  the  further  reason  that  the  funds  represented  by 
the  dividend  were  in  the  actual  possession  and  control  of  the  Southern  Pacific 
Company  as  well  before  as  after  the  declaration  of  the  dividend.  In  this  case 
the  plaintiff  in  error  stands  in  the  position  of  the  ordinary  stockholder,  whose 
interest  in  the  accumulated  earnings  and  surplus  of  the  company  are  not  the 
same  before  as  after  the  declaration  of  a dividend;  his  right  being  merely^ to 
have  the  assets  devoted  to  the  proper  business  of  the  corporation  and  to  receive 
from  the  current  earnings  or  accumulated  surplus  such  dividends  as  the  directors 
in  their  discretion  may  declare;  and  without  right  or  power  on  his  part  to 
control  that  discretion,  fit  hardly  is  necessary  to  say  that  this  case  is  not 
ruled  by  our  decision  in  Towne  v.  Eisner,  since  the^  dividend  of  Baltimore^  & 
Ohio  shares  was  not  a stock  dividend  but  a distribution  in  specie  of  a portion 
of  the  assets  of  the  Union  Pacific,  and  is  to  be  governed  for  all  present  pur- 
poses by  the  same  rule  applicable  to  the  distribution  of  a like  value  in  money. 
It  is  controlled  by  Lynch,  Collector,  v.  Hornby,  this  day  decided,  ante,  1[2337. 

Judgment  Affirmed. 


Southern  Pacific  Company  vs.  Lowe. 

(247  U.  S.  330.) 

2380  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case 
of  Southern  Pacific  Co.  v.  John  Z.  Lowe,  Jr.,  as  collector  of  internal 

revenue,  is  published  for  the  information  of  internal-revenue  officers  and  others 
concerned.  (T.  D.  2730,  June  11,  1918.) 

(June  3,  1918.) 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

2381  This  case  presents  a question  arising  under  the  Federal  Income  Tax  Act 
of  October  3,  1913  (Ch.  16,  38  Stat.  114,  166).  Suit  was  brought  by 

plaintiff  in  error  against  the  Collector  to  recover  taxes  assessed  against  it  and 
paid  under  protest.  There  were  two  causes  of  action,  of  which  only  the  second 
went  to  trial,  it  having  been  stipulated  that  the  trial  of  the^  other  might  be 
postponed  until  the  final  determination  of  this  one.  So  far  as  it  is  presented  to 
us,  the  suit  is  an  effort  to  recover  a tax  imposed  upon  certain  dividends  upon 


INC. 


422  TAX 


SUPREME  COURT  DECISIONS. 


stock  in  form  received  by  the  plaintiff  from  another  corporation  in  the  early 
part  of  the  year  1914,  and  alleged  by  the  plaintiff  to  have  been  paid  out  of  a 
surplus  accumulated  not  only  prior  to  the  effective  date  of  the  Act  but  pnor 
to  the  adoption  of  the  Sixteenth  Amendment  to  the  Constitution  of  the  United 
States  The  District  Court  directed  a verdict  and  judgment  in  favor  of  the 
Collector,  238  Fed.  Rep.  847,  and  the  case  comes  here  by  direct  writ  of  error 
under  Sec.  238,  Judicial  Code,  because  of  the  constitutional  question.  That  our 
jurisdiction  was  properly  invoked  is  settled  by  Tov/ne  v.  Eisner,  245  U.  S.  418,  425. 

2382  The  case  was  submitted  at  the  same  time  with  several  other  cases  arising 
under  the  same  Act  and  decided  this  day,  viz..  Lynch,  Collector,  v.  Tur- 

rish,  ante,  112351,  Lynch,  Collector,  v.  Hornby,  ante,  112337,  and  Peabody  v.  Eisner, 

Collector,  ante,  1[2378.  . i n 

2383  The  material  facts  are  as  follows:  Prior  to  January  1,  1913,  and  at  all 
times  material  to  the  case,  plaintiff,  a corporation  organized  under  the 

laws  of  the  State  of  Kentucky,  owned  all  the  capital  stock  of  the  Central  Pacific 
Railway  Company,  a corporation  of  the  State  of  Utah,  including  the  stock 
registered  in  the  names  of  the  directors.*  This  situation  existed  continuously 
from  the  incorporation  of  the  Railway  Company  in  the  year  1899.  That  com- 
pany is  the  successor  of  the  Central  Pacific  Railroad  Company  and  acquired  all 
of  its  properties,  which  constitute  a part  of  a large  system  of  railways  owned 
or  controlled  by  the  Southern  Pacific  Company.  The  latter  company,  besides 
being  sole  stockholder,  was  in  the  actual  physical  possession  of^  the  railroads 
and  all  other  assets  of  the  Railway  Company,  and  in  charge  of  its  operations, 
which  were  conducted  in  accordance  with  the  terms  of  a lease  made  by  the 
predecessor  company  to  the  Southern  Pacific  and  assumed  by  the  Railway  Com- 
pany, the  effect  of  which  was  that  the  Southern  Pacific  should  pay  to  the  lessor 
company  $10,000  per  annum  for  organization  expenses,  should  operate  the  rail- 
roads, branches,  and  leased  lines  belonging  to  the  lessor,  and  account  annually 
for  the  net  earnings,  and  if  these  exceeded  6 per  cent  on  the  existing  capital 
stock  of  the  lessor  the  lessee  should  retain  to  itself  one-half  of  the  excess;  ad- 
vances by  the  lessee  for  account  of  the  lessor  were  to  bear  lawful  interest  and 
the  lessor  was  to  be  entitled  at  any  time  and  from  time  to  time  to  refund  to  it- 
self its  advances  and  interest  out  of  any  net  earnings  which  might  be  in  its  hands. 
The  provisions  of  the  lease  were  observed  by  both  corporations  for  bookkeeping 
purposes.  The  Southern  Pacific  acted  as  cashier  and  banker  for  the  entire 
system;  the  Central  Pacific  kept  no  bank  account,  its  earnings  being  deposited 
with  the  bank  account  of  the  Southern  Pacific;  and  if  the  Central  Pacific  needed 
money  for  additions  and  betterments  or  for  making  up  of  a deficit  of  current 
earnings,  the  necessary  funds  were  advanced  by  the  Southern  Pacific.  As  a 
result  of  these  operations  and  of  the  conversion  of  certain  capital  assets  of  the 
Central  Pacific  Company,  that  company  showed  upon  its  books  a large  surplus 
accumulated  prior  to  January  1,  1913,  principally  in  the  form  of  a debit  against 
the  Southern  Pacific,  which  at  the  same  time,  as  sole  stockholder,  was  entitled 
to  any  and  all  dividends  that  might  be  declared,  and  being  in  control  of  the 
board  of  directors  was  able  to  and  did  control  the  dividend  policy.  The  divi- 
dends in  question,  were  declared  and  paid  during  the  first  six  months  of  the 
year  1914  out  of  this  surplus  of  the  Central  Pacific  accumulated  prior  to  January 
1,  1913;  but  the  payment  was  only  constructive,  being  carried  into  effect  by 
bookkeeping  entries  which  simply  reduced  the  apparent  surplus  of  the  Central 
Pacific  and  reduced  the  apparent  indebtedness  of  the  Southern  Pacific  to  the 
Central  Pacific  by  precisely  the  amount  of  the  dividends. 

2384  The  question  is  whether  the  dividends  received  under  these  circumstances 
and  in  this  manner  by  the  Southern  Pacific  Company  were  taxable  as 

income  of  that  company  under  the  Income  Tax  Act  of  191Tt 

2385  The  Act  provides  in  Section  II,  Paragraph  A,  Subdivision  1 (38  Stat. 
166):  “That  there  shall  be  levied,  assessed,  collected  and  paid  annually 

upon  the  entire  net  income  arising  or  accruing  from  all  sources  in  the  preceding 


♦There  was  another  question,  concerning  a dividend  paid  by  the  Reward  Oil 
Company,  whose  stock  likewise  was  owned  by  the  Southern  Pacific  Company,  but 
the  contention  of  plaintiff  in  error  respecting  this  item  has  been  abandoned. 

tin  addition,  a question  was  made  in  the  District  Court  as  to  a special  divi- 
dend declared  by  the  Central  Pacific  out  of  the  proceeds  of  sale  of  certain  land 
on  Long  Island,  taken  in  satisfaction  of  a debt  and  sold  in  December,  1913.  As 
to  this,  however,  no  argument  is  submitted  by  plaintiff  in  error,  the  facts  are 
not  clear,  and  we  pass  it  without  consideration. 


INC. 


423  TAX 


SUPREME  COURT  DECISIONS. 

calendar  year”  to  every  person  residing  in  the  United  States  a tax  of  1 per 
centum  oer  annum  with  exceptions  not  now  material.  By  Paragraph  G (a) 

^386  PitlrprovidedZ  Paragraph  G (b),  as  to  domestic  corporations,  that 
such  neHLome  shall  be  ascertained  by  deducting  from  the  gross  amount 
of  the  income  of  the  corporation  (1)  ordinary  and  necessary  expenses  paid  within 
the  year  in  the  maintenance  and  operation  of  its  business  and  properties, 

\ns  ^rentals  and  the  like;  (2)  losses  sustained  within  the  year  and  not  com- 
oensated  by  insurance  or  otherwise,  including  a reasonable  allowance  for  depre- 
wear  and  tear  of  property,  if  any,  and  in  the  case  of  mines  a 
certain  allowance  for  depletion  of  ores  and  other  natural  deposits;  (3)  interest 
aSued  and  paid  within  the  year  upon  indebtedness  of  the  corporation,  wi  hin 
nresmibed  limits;  (4)  national  and  state  taxes  paid.  It  will  be  observed  that 
moneys  received  as  dividends  upon  the  stock  of  other  corporations  are  not 
deducted  as  they  are  in  computing  the  income  of  mdividuals  for  the  puipose  of 
the  norr;iaT  tax ^ this  Act  (p.  167), , and  as  they  were  "^^P^^ing  ^ 
income  of  the  corporation  under  the  Excise  Tax  Act  of  August  5,  1909  (Ch.  6, 

a387^^‘By  piragraph^G  (c),  the  tax  upon  corporations  is  to  be  coinputed  upon 
the  entire  net  income  accrued  within  each  calendar  y^r,  but  the 

year  1913  only  upon  the  net  income  accrued  from  March  1 to  December  31,  to 
brascerta^ned  by  taking  five-sixths  of  the  entire  net  income  for  the  calendar 

2388  The  purpose  to  refrain  from  taxing  income  that  accrued  prior  to  March 
1 1913  and  to -exclude  from  consideration  in  making  the  computation 

anv  income  that  accrued  in  a preceding  calendar  year  is  made  plain  by  the 
provision  last  referred  to;  indeed,  the  Sixteenth  Amendment,  under  which  for 
?hrfirst  t me  Congress  was  authorized  to  tax  income  from  property  without 
the  tax  among  the  States  according  to  population,  received  the 

Tirolhers  Co.  and  Hays,  Collector,  v.  Gauley  Mountain  CoM  Co.,  decided  May 
20  1918)  the  broad  contention  submitted  in  behalf  of  the  Governnien^t  that  all 
receipts-everything  that  comes  in-are  income  within  the  proper  definition  of 
th^t^m  “groL  income,”  and  that  the  entire  proceeds  of  a conversion  of  capital 
assets  in  whatever  form  and  under  whatever  circumstances  accomplished,  should 
be  treated  as  gross  income.  Certainly  the  term  “income”  has  no  broader  mean- 
inVin  the  1913  Act  than  in  that  of  1909  (see  Stratton’s  Independence  v.  Howbert, 
731  11  S 399  416  417),  and  for  the  present  purpose  we  assume  there  is  no  dif- 
ference in  its  meaning  as  used  in  the  two  acts.  This  being  so,  we  are  bound 
t7  consider  accumulations  that  accrued  to  a corporation  prior  to  January  1, 
1913  as  being  capital,  not  income,  for  the  purposes  of  the  Act.  And  we  per- 
ceiv4  no  adequate  ground  for  a distinction,  in  this  regard,  between  an  accumu- 
latTon  of  surplus  earnings,  and  the  increment  due  to  an  appreciation  in  value  of 

23W**  That  the  dividends  in  question  were  paid  out  of  a surplus  that  accrued 
to  the  Central  Pacific  prior  to  January  1,  1913,  is  undisputed;  and  we 
deem  it  to  be  equally  clear  that  this  surplus  accrued  to  the  Southern  Pacific 
Company  prior  to  that  date,  in  every  substantial  sense  pertinent  to  the  present 
inquiry,  and  hence  underwent  nothing  more  than  a change  of  form  when  t e 

WeTTnmtsfthis  upon  the  view  that  for  the  purposes  of  the  Act  of  1913 
stockholders  in  the  ordinary  case  have  the  same  interest  in  the  accumu- 
lated earnings  of  the  company  before  as  after  the  declaration  of  dividends.  T^ 
act  is  quite  different  in  this  respect  from  the  Income  Tax  Act  of  June  30,  ISM 
rrh  173  13  Stat  223,  281,  282),  under  which  this  court  held,^  in  Collector  v. 
Hubbard’,  12  Wall.  1,  16,  that  an  individual  was  taxable  upon  his  proportion  of 
the  earnings  of  the  coporation  although  not  declared  as  dividends.  That  de- 
cision was  based  upon  the  very  special  language  of  a clause  of  Sec.  117  of  the 
Act.  (13  Stat.  282)  that  “the  gains  and  profits  of  all  companies,  whether  incor- 


INC. 


424  TAX 


SUPREME  COURT  DECISIONS. 

entitled  to  the  o^trary  deaf^  with  dividends  as  a particular  item  of 

jectmg  them  to  the  f.^duated  surtaxes  only  individual  share- 

condusio^’in^the  Jfefent'c^el/on  th/view  that  it  was  the 
^ ouroose  and  intent  of  Congress,  while  taxing  the  entire  net  income 

p^e^?fnci|3o9  S 

capacSies  While  the  two  companies  were  separate  legal  entities, 

;rti.‘ri:.'‘SS'  srs  ■ » »j»;. 

Ste?  thf  declaration  of  the  dividends.  The  fact  that  the  books  were  kept  in 
atter  nrovisions  of  the  lease,  so  that  these  funds  appeared  upon 

accordance  w ^nHehtedness  of  the  lessee  to  the  lessor,  cannot  be  controlling, 

the  identity  between  lessor  and  lessee.  Aside  from  the  inter- 

"stroTcrlditL's  and  is  nothing  to  suggest  that  the  interes^ 

of  either  were  concerned  in  the  disposition  of  the  surplus  of 

4.U  Parifir  was  entitled  to  dispose  of  the  matter  as  it  saw  nt.  ihere 

is^no  question  of  there  being  a surplus  to  warrant  the  dividends  at  the  time  they 
were  made,  hence  any  speculation  as.  to  w.hat  might  have  happened  in  case  of 
fnnnrial  reverses  that  did  not  occur  is  beside  the  mark.  .... 

.^iVs  ^-es  not  ‘"tmfa-^cfo1<^r£d^^^^^^ 

Gib^bonry'^rUhL^^m  see  Humphreys'  v.  McKissock  140 

that  was  accumulated  prior  to  January  1,  1913;  it  does  not  appear  that  any  other 
fair  ^erclsrof  discretion  was  open;  and  the  complete  ownership  and  righi  ot 
control  of  the  Southern  Pacific  and  at  all  times  material  makes  it  a matter  of  iiidif 
feren«  whether  the  vote  was  at  one  time  or  another.  Under  the  circumstances, 
the  entire  matter  of  the  declaration  and  paympt  of  the  diYclends  was  a papei 
transaction  to  bring  the  books  into  accord  with  the  acknowledged  rights  of  the 
Somhern  Pacific:  and  so  far  as  the  dividends  represented  the  surplus  of  the  Cen- 


»“For  the  purpose  of  this  additional  tax  the  taxable  income  of  any  individ- 
ual shall  embrace  Ae  share  to  which  he  would  be  entitled  of  the  gams  and  profits, 
H divided  or*  distributed,  whether  divided  or  distributed  or  not,  of  all  corpora- 
tions ioimt-stock  companies,  or  associations  however  created  or  organized,  formed 
o?  fraudulently  availed  of  for  the  purpose  of  preventmg  the  imposition  of  sueh 
tax  through  the  medium  of  permitting  such  gams  and  profits  to  accumulate  in- 
stead of  being  divided  or  distributed;  and  the  fact  that  any  such  corporation 
stead  01  be^  holding  company,  or  that  the  gams  and  Profits  are  permitted 

to  accumulate  beyond  the  reasonable  needs  of  business  shall  be  prima  facie 
evidence  of  a fraudulent  purpose  to  escape  such  tax;  but  the  fact  that  the 
gains  and  profits  are  in  any  case  permitted  to  accumulate  and  become  surplus 
shall  not  be  construed  as  evidence  of  a purpose  to  escape  the  said  tax  m such 

Sse  unless  the  Secretary  of  the  Treasury  shall  “--yfy  ‘;‘%°rs?a“t  ® 166 

accumulation  is  unreasonable  for  the  purposes  of  the  business.  (38  Stat.  166, 

167.) 


INC  B25  TAX 


SUPREME  COURT  DECISIONS. 


tral  Pacific  that  accumulated  prior  to  January  1,  1913,  they  were  not  taxable  as  in- 
come of  the  Southern  Pacific  within  the  true  intent  and  meaning  of  the  Act  of 

1913.  , 

2394  The  case  turns  upon  its  very  peculiar  facts,  and  is  distinguishable  from 
others  in  which  the  question  of  the  identity  of  a controlling  stock- 
holder with  his  corporation  has  been  raised.  Pullman  Car  Co.  v.  Missouri 
Pacific  Co.,  115  U.  S.  587,  596;  Peterson  v.  Chicago,  Rock  Island  & Pacific  Ry., 

205  U.  S.  364,  391.  , ^ , 

Judgment  reversed,  and  the  cause 
remanded  for  further  proceedings  in 
conformity  with  this  opinion. 

Mr.  Justice  Clarke  dissents. 


Gulf  Oil  Corporation  vs.  Lewcllyn. 

(248  U.  S.  71.) 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

2395  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case  of 
the  Gulf  Oil  Corporation,  petitioner,  v.  C.  G.  Lewellyn,  Collector  of 

Internal  Revenue  for  the  23d  District  of  Pennsylvania,  is  published  for  the  in- 
formation of  Internal  Revenue  officers  and  others  concerned.  (T.  D.  2783,  Jan. 

7.  1919.)  . , . j 

2396  This  is  a suit  to  recover  a tax  levied  upon  certain  dividends  as  income, 
under  the  Act  of  October  3,  1913,  c.  16,  Section  II.  38  Stat.  114,  166.  The 

District  Court  gave  judgment  for  the  plaintiff,  242  Fed.  Rep.  709,  but  this  judg- 
ment was  reversed  by  the  Circuit  Court  of  Appeals.  245  Fed.  Rep.  1.  158  C.  C. 
A 1. 

2397  The  facts  may  be  abridged  from  the  findings  below  as  follows:  The  peti- 

tioner was  a holding  company  owning  all  the  stock  in  the  other  corpora- 
tions concerned  except  the  qualifying  shares  held  by  directors.  These  companies 
with  others  constituted  a single  enterprise,  carried  on  by  the  petitioner,  of  pro- 
ducing, buying,  transporting,  refining  and  selling  oil.  The  subsidiary  companies 
had  retained  their  earnings,  although  making  some  loans  inter  se,  and  all  their 
funds  were  invested  in  properties  or  actually  required  to  carry  on  the  business, 
so  that  the  debtor  companies  had  no  money  available  to  pay  their  debts.  In 
January,  1913,  the  petitioner  decided  to  take  over  the  previously  accumulated 
earnings  and  surplus  and  did  so  in  that  year  by  votes  of  the  companies  that  it 
controlled.  But,  disregarding  the  forms  gone  through,  the  result  was  merely 
that  the  petitioner  became  the  holder  of  the  debts  previously  due  from  one  of 
its  companies  to  another.  It  was  no  richer  than  before,  but  its  property  now 
was  represented  by  stock  in  and  debts  due  from  its  subsidiaries,  whereas  form- 
erly it  was  represented  by  the  stock  alone,  the  change  being  effected  by  entries 
upon  the  respective  companies’  books.  The  earnings  thus  transferred  had  been 
accumulated  and  had  been  used  as  capital  before  the  taxing  year.  Lynch  v. 
Turrish,  247  U.  S.  221,  228  [1[2351].  . , ^ 

2398  We  are  of  opinion  that  the  decision  of  the  District  Court  was  right,  it 

is  true  that  the  petitioner  and  its  subsidiaries  were  distinct  beings  in  con- 
templation of  law,  but  the  facts  that  they  were  related  as  parts  of  one  enterprise, 
all  owned  by  the  petitioner,  that  the  debts  were  all  enterprise  debts  to  members, 
and  that  the  dividend  represented  earnings  that  had  been  made  in  former  years 
and  that  practically  had  been  converted  into  capital,  unite  to  convince  us  that  the 
transaction  should  be  regarded  as  bookkeeping  rather  than  as  ‘dividends  declared 
and  paid  in  the  ordinary  course  by  a corporation.’  Lynch  v.  Hornby,  247  U.  S. 
339,  346  [112337].  The  petitioner  did  not  itself  do  the  business  of  its  subsidi- 
aries and  have  possession  of  their  property  as  in  Southern  Pacific  Co.  v.  Lowe, 

247  U S.  330  [112380],  but  the  principle  of  that  case  must  be  taken  t^  cover  this. 

By  Section  H,  G,  (c)  38  Stat.  174,  and  S,  id.  202,  the  tax  from  January  1 to 
February  28,  1913,  is  levied  as  a special  excise  tax,  but  in  view  of  our  decision 
that  the  dividends  here  concerned  were  not  income  it  is  unnecessary  to  discuss 
the  further  question  that  has  been  raised  under  the  latter  clause  as  to  the  effect 
of  the  fact  that  excise  taxes  upon  the  subsidiary  corporations  had  been  paid. 


Alvah  Crocker  et  al..  Trustees  vs.  Malley. 

(249  U.  S.  223.) 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

2399  The  appended  decision  of  the  United  States  Supreme  Court  in  the  case 
of  Alvah  Crocker  et  al..  Trustees,  v.  John  F.  Malley,  Collector  of  In- 


INC. 


426  TAX 


SUPREME  COURT  DECISIONS. 


ternal  Revenue  Is  published  for  the  information  of  internal  revenue  officers  and 
others  concerned.  (T.  D.  2816,  April  2,  1919.) 

2400  This  is  an  action  to  recover  taxes  paid  under  protest  to  the  Collector 
of  Internal  Revenue  by  the  petitioners,  the  plaintiffs.  The  taxes  were  as- 
sessed to  the  plaintiffs  as  a joint-stock  association  within  the  meaning  of  the  In- 
come Tax  Act  of  October  3,  1913,  c.  16,  Section  II,  G.  (a),  38  Stat  114,  166,  172, 
and  were  levied  in  respect  of  dividends  received  from  a corporation  that  itself 
was  taxable  upon  its  net  income.  The  plaintiffs  say  that  they  were  not  an  asso- 
ciation but  simply  trustees,  and  subject  onl}^  to  the  duties  imposed  upon  fidu- 
ciaries by  Section  II,  D.  The  Circuit  Court  of  Appeals  decided  that  the  plain- 
tiffs, together,  it  would  seem,  with  those  for  whose  benefit  they  held  the  prop- 
erty, were  an  association,  and  ordered  judgment  for  the  defendant,  reversing 
the  judgment  of  the  District  Court.  250  Fed.  Rep.  817. 

2401  The  facts  are  these.  A Maine  paper  manufacturing  corporation  with 
eight  shareholders  had  its  mills  on  the  Nashua  River  in  Massachusetts 

and  owned  outlying  land  to  protect  the  river  from  pollution.^  In  1912  a corpora- 
tion was  formed  in  Massachusetts.  The  Maine  corporation  conveyed  to  it 
seven  mills  and  let  to  it  an  eighth  that  was  in  process  of  construction,  together 
with  the  outlying  lands  and  tenements,  on  a long  lease,  receiving  the  stock  of 
the  Massachusetts  corporation  in  return.  The  Maine  corporation  then  transferred 
to  the  plaintiffs  as  trustees  the  fee  of  the  property  subject  to  lease,  left  the 
Massachusetts  stock  in  their  hands,  and  was  dissolved.  By  the  declaration  of 
trust  the  plaintiffs  declared  that  they  held  the  real  estate  and  all  other  property 
at  any  time  received  by  them  thereunder,  subject  to  the  provisions  thereof,  ‘for 
the  benefit  of  the  cestui  que  trusts  (who  shall  be  trust  beneficiaries  only,  without 
partnership,  associate  or  other  relation  whatever  inter  sese)’  upon  trust  to  con- 
vert the  same  into  money  and  distribute  the  net  proceeds  to  the  persons  then 
holding  the  trustees’  receipt  certificates — the  time  of  distribution  being  left  to 
the  discretion  of  the  trustees,  but  not  to  be  postponed  beyond  the  end  of  twenty 
years  after  the  death  of  specified  persons  then  living.  In  the  meantime  the 
trustees  were  to  have  the  powers  of  owners.  They  were  to  distribute  what  they 
determined  to  be  fairly  distributable  net  income  according  to  the  interests  of  the 
cestui  que  trusts  but  could  apply  any  funds  in  their  hands  for  the  repair  or  de- 
velopment of  the  property  held  by  them,  or  the  acquisition  of  other  property, 
pending  conversion  and  distribution.  The  trust  was  explained  to  be  because  of  the 
determination  of  the  Maine  corporation  to  dissolve  without  waiting  for  the  final 
cash  sale  of  its  real  estate  and  was  declared  to  be  for  the  benefit  of  the  eight 
shareholders  of  the  Maine  Company  who  were  to  receive  certificates  subject  to 
transfer  and  subdivision.  Then  followed  a more  detailed  statement  of  the  power 
of  the  trustees  and  provision  for  their  compensation,  not  exceeding  one  per  cent, 
of  the  gross  income  unless  with  the  written  consent  of  a majority  in  interest  of 
the  cestui  que  trusts.  A similar  consent  was  required  for  the  filling  of  a vacancy 
among  the  trustees,  and  for  a modification  of  the  terms  of  the  trust.  In  no  other 
matter  had  the  beneficiaries  any  control.  The  title  of  the  trust  was  fixed  for 
convenience  as  The  Massachusetts  [sic:  in  fact — Wachusett]  Realty  Trust. 

2402  The  declaration  of  trust  on  its  face  is  an  ordinary  real  estate  trust  of 
the  kind  familiar  in  Massachusetts,  unless  in  the  particular  that  the 

trustees’  receipt  provides  that  the  holder  has  no  interest  in  any  specific  property 
and  that  it  purports  only  to  declare  the  holder  entitled  to  a certain  fraction 
of  the  net  proceeds  of  the  property  when  converted  into  cash  ‘and  meantime 
to  income’.  The  only  property  expressly  mentioned  is  the  real  estate  not  trans- 
ferred to  the  Massachusetts  corporation.  Although  the  trustees  in  fact  have  held 
the  stock  of  that  corporation  and  have  collected  dividends  upon  it,  their  doing 
so  is  not  contemplated  in  terms  by  the  instrument.  It  does  not  appear  very 
clearly  that  the  eight  Maine  shareholders  might  have  demanded  it  had  they 
been  so  minded.  The  function  of  the  trustees  is  not  to  manage  the  mills  but 
simply  to  collect  the  rents  and  income  of  such  property  as  may  be  in  their  hands, 
with  a large  discretion  in  the  application  of  it,  but  with  a recognition  that  the  re- 
ceipt holders  are  entitled  to  it  subject  to  the  exercise  of  the  powers  confided  to 
the  trustees.  In  fact,  the  whole  income,  less  taxes  and  similar  expenses,  has 
been  paid  over  in  due  proportion  to  the  holders  of  the  receipts. 

2403  There  can  be  little  doubt  that  in  Massachusetts  this  arrangement  would 
be  held  to  create  a trust  and  nothing  more.  ‘The  certificate  holders 

. . . are  in  no  way  associated  together  nor  is  there  any  provision  in  the 

[instrument]  for  any  meeting  to  be  held  by  them.  The  only  act  which  (under 
the  [declaration  of]  trust)  they  can  do  is  to  consent  to  an  alteration  . . . 
of  the  trust’  and  to  the  other  matters  that  we  have  mentioned.  They  are 


INC.  427  TAX 


SUPREME  COURT  DECISIONS. 


confined  to  giving  or  withholding  assent,  and  the  giving  or  withholding  it  ‘is  not 
to  be  had  in  a meeting  but  is  to  be  given  by  them  individually’.  ‘The  sole  right 
of  the  cestui  que  trust  is  to  have  the  property  administered  in  their  interest  by 
the  trustees,  who  are  the  masters,  to  receive  income  while  the  trust  lasts,  and 
their  share  of  the  corpus  when  the  trust  comes  to  an  end’.  Williams  v.  Milton, 
215  Mass.  1,  10,  11;  ibid.  8.  The  question  is  whether  a different  view  is  required 
by  the  terms  of  the  present  act.  As  by  D.  above  referred  to  trustees  and  associ- 
ations acting  in  a fiduciary  capacity  have  the  exemption  that  individual  stock- 
holders have  from  taxation  upon  dividends  of  a corporation  that  itself  pays  an 
income  tax,  and  as  the  plaintiffs  undeniably  are  trustees,  if  they  arc  to^  be  sub- 
jected to  a double  liability  the  language  of  the  statute  must  make  the  intention 
clear.  Gould  v.  Gould,  245  U.  S.  151,  153  [112306].  United  States  v.  Isham,  17 

Wall.  496,  504.  , , , . . 

2404  The  requirement  of  G.  (a)  is  that  the  normal  tax  thereinbefore  imposed 
upon  individuals  shall  be  paid  upon  the  entire  net  income  accruing  from 

all  sources  during  the  preceding  year  “to  every  corporation,  joint-stock  com- 
pany or  association,  and  every  insurance  company,  organized  in  the  ^United 
States,  no  matter  how  created  or  organized,  not  including  partnerships.”  The 
trust  that  has  been  described  would  not  fall  under  any  familiar  conception  of  a 
ioint-stock  association,  whether  formed  under  a statute  or  not.  Smith  v. 
Anderson,  15  Ch.  D.  247,  273,  274,  277,  282.  Eliot  v.  Freeman,  220  U.  S.  178,  186. 
If  we  assume  that  the  words  ‘no  matter  how  created  or  organized’  apply  to  ‘as- 
sociation’ and  not  only  to  ‘insurance  company’,  still  it  would  be  a wide  departure 
from  normal  usage  to  call  the  beneficiaries  here  a joint-stock  association  when 
they  are  admitted  not  to  be  partners  in  any  sense,  and  when  they  have  no  joint 
action  or  interest  and  no  control  over  the  fund.  On  the  other  hand  the  trustees 
by  themselves  cannot  be  a joint-stock  association  within  the  meaning^  of  the 
act  unless  all  trustees  with  discretionary  powers  are  such,  and  the  special  pro- 
vision for  trustees  in  D.  is  to  be  made  meaningless.  We  perceive  no  ground 
for  grouping  the  two — beneficiaries  and  trustees — together,  in  order  to  turn  them 
into  an  association,  by  uniting  their  contrasted  functions  and  powers,  although 
they  are  in  no  proper  sense  associated.  It  seems  to  be  an  unnatural  perversion 
of  a well-known  institution  of  the  law. 

2405  We  do  not  see  either  that  the  result  is  affected  by  any  technical  analysis 
of  the  individual  receipt  holders’  rights  in  the  income  received  by  the 

trustees.  The  description  most  in  accord  with  what  has  been  the  practice  would 
be  that,  as  the  receipts  declare,  the  holders,  until  distribution  of  the  capital, 
were  entitled  to  the  income  of  the  fund  subject  to  an  unexercised  power  in  the 
trustees  in  their  reasonable  discretion  to  divert  it  to  the  improvement^  of  the 
capital.  But  even  if  it  were  said  that  the  receipt  holders  were  not  entitled  to 
the  income  as  such  until  they  got  it,  we  do  not  discern  how  that  would  turn 
them  into  a joint-stock  company.  Moreover  the  receipt  holders  did  get  it  and 
the  question  is  what  portion  it  was  the  duty  of  the  trustees  to  withhold. 

2406  We  presume  that  the  taxation  of  corporations  and  joint-stock  companies 
upon  dividends  of  corporations  that  themselves  pay  the  income  tax  was 

for  the  purpose  of  discouraging  combinations  of  the  kind  now  in  disfavor,  by 
which  a corporation  holds  controlling  interests  in  other  corporations  which  in 
their  turn  may  control  others,  and  so  on,  and  in  this  way  concentrates  a power 
that  is  disapproved.  There  is  nothing  of  that  sort  here.  Upon  the  whole  case 
we  are  of  opinion  that  the  statute  fails  to  show  a clear  intent  to  subject  the 
dividends  on  the  Massachusetts  corporation’s  stock  to  the  extra  tax  imposed  by 
G.  (a). 

2407  Our  view  upon  the  main  question  opens  a second  one  upon  which  the 
Circuit  Court  of  Appeals  did  not  have  to  pass.  The  District  Court  while 

it  found  for  the  plaintiffs,  ruled  that  the  defendant  was  entitled  to  retain  out  of 
the  sum  received  by  him  the  amount  of  the  tax  that  they  should  have  paid  as 
trustees.  To  this  the  plaintiffs  took  a cross  writ  of  error  to  the^  Circuit  Court 
of  Appeals.  There  can  be  no  question  that  although  the  plaintiffs  escape  the 
larger  liability,  there  was  probable  cause  for  the  defendant’s  act.  The  Com- 
missioner of  Internal  Revenue  rejected  the  plaintiff’s  claim,  and  the  statute  does 
not  leave  the  matter  clear.  The  recovery  therefore  will  be  from  the  United 
States.  Rev.  Sts.  Sec.  989.  The  plaintiffs,  as  they  themselves  alleged  in  their 
claim,  were  the  persons  taxed,  whether  they  were  called  an  association  or  trustees. 
They  were  taxed  too  much.  If  the  United  States  retains  from  the  amount  re- 
ceived by  it  the  amount  that  it  should  have  received,  it  cannot  recover  that  sum 
in  a subsequent  suit. 

Judgment  of  the  Circuit  Court  of  Appeals  reversed. 

Judgment  of  the  District  Court  Affirmed. 

INC.  428  TAX 


SUPREME  COURT  DECISIONS. 


DeGanay  vs.  Led^rer. 

(250  U.  S.  376.) 

Mr.  Justice  Day  delivered  the  opinion  of  the  Court. 

2408  The  appended  opinion  of  the  United  States  Supreme  Court  in  the  case  of 
Emily  R.  DeGanay  v.  Lederer,  Collector,  is  published  for  the  information 

of^mternal  revenue  officers  and  others  concerned.  (T.  D.  2876,  dated  June  25, 

2409  The  Act  of  October  3,  1913,  c.  16,  sec.  2a,  subdivision  1,  38  Stat.  166, 
provides: 

“That  there  shall  be  levied,  assessed,  collected  and  paid  annually  upon  the 
entire  net  income  arising  or  accruing  from  all  sources  in  the  preceding  calendar 
year  to  every  citizen  of  the  United  States,  whether  residing  at  home  or  abroad, 
and  to  every  person  residing  in  the  United  States,  though  not  a citizen  thereof, 
a_  tax  of  1 per  centum  per  annum  upon  such  income,  except  as  hereinafter  pro- 
vided; and  a like  tax  shall  be  assessed,  levied,  collected,  and  paid  annually  upon 
the  entire  net  income  from  all  property  owned  and  of  every  business,  trade,  or 
profession  carried  on  in  the  United  States  by  persons  residing  elsewhere.” 

2410  Under  this  statutory  provision  a question  arose  as  to  the  taxability  of  in- 
come from  certain  securities  of  Emily  R.  DeGanay,  a citizen  and  resident 

of  France.  The  District  Court  of  the  United  States  for  the  Eastern  District  of 
Pennsylvania  held  the  income  from  the  securities  taxable.  239  Fed.  568  [{[2195, 
Income  Tax  Service— 1917].  The  case  is  here  upon  certificate  from  the  Circuit 
Court  of  Appeals,  from  which  it  appears:  That  Emily  R.  DeGanay  is  a citizen  of 
France,  and  resides  in  that  country.  That  her  father  was  an  American  citizen 
domiciled  in  Pennsylvania,  and  died  in  1885,  having  devised  one-fourth  of  his 
residuary  estate,  consisting  of  real  property,  to  the  Pennsylvania  Company  for 
Insurance  on  Lives  and  Granting  Annuities,  in  trust  to  pay  the  net  income  thereof 
to  her.  She  also  inherited  from  her  father  a large  amount  of  personal  property  in 
her  own  right  free  from  any  trust.  This  personal  property  is  invested  in  stocks 
and  bonds  of  corporations  organized  under  laws  of  the  United  States  and  in  bonds 
and  mortgages  secured  upon  property  in  Pennsylvania.  Since  1885  the  Pennsyl- 
vania Company  has  been  acting  as  her  agent  under  power  of  attorney,  and  has 
invested  and  reinvested  her  property,  and  has  collected  and  remitted  to  her  the 
net  income  therefrom.  The  certificates  of  stocks,  bonds  and  mortgages  had 
been  and  were  in  1913  in  the  Company’s  possession  in  its  offices  in  Philadelphia 
The  Company  made  a return  of  the  income  collected  for  the  plaintiff  for  the 
year  1913  both  from  her  real  estate,  which  is  not  in  controversy  here,  and  her  net 
income  from  corporate  stocks  and  bonds  and  the  bonds  and  mortgages  held  by 
her  in  her  own  right.  The  tax  was  paid  under  protest  and  recovery  was  sought 
by  the  proper  action. 

2411  The  question  certified  is  limited  to  the  net  income  collected  by  virtue  of 
the  power  of  attorney  from  the  personal  property  owned  by  the  plaintiff 

in  her  own  right. 

2412  The  power  of  attorney,  which  is  attached  to  the  certificate,  authorizes 
the  agent: 

“To  sell,  assign,  transfer  any  stocks,  bonds,  loans,  or  other  securities  now 
standing^  or  that  may  hereafter  stand  in  my  name  on  the  books  of  any  and  all 
corporations  national,  state,  municipal  or  private,  to  enter  satisfaction  upon 
the  record  of  any  indenture  or  mortgage  now  or  hereafter  in  my  name,  or  to 
sell  and  assign  the  same  and  to  transfer  policies  of  insurance,  and  the  proceeds 
also  any  other  moneys  to  invest  and  reinvest  in  such  securities  as  they  may 
in  their  discretion  deem  safe  and  judicious  to  hold  for  my  account;  to  collect 
and  receipt  for  all  interest  and  dividends,  loans,  stocks,  or  other  securities 
now  or  hereafter  belonging  to  me,  to  endorse  checks  payable  to  my  order  and 
to  make  or  enter  into  any  agreement  or  agreements  they  may  deem  necessary 
and  best  for  my  interest  in  the  management  of  my  business  and  affairs  also 
to  represent  me  and  in  my  behalf,  to  vote  and  act  for  me  at  all  meetings  con- 
nected with  any  company  in  which  I may  own  stocks  or  bonds  or  be  inter- 
ested in  any  way  whatever,  with  power  also  as  attorney  or  attorneys  under  it 
for  that  purpose  to  make  and  substitute,  and  to  do  all  lawful  acts  requisite  for 
effecting  the  premises,  hereby  ratifying  and  confirming  all  the  said  attorney  or 
substitute  or  substitutes  shall  do  therein  by  virtue  of  these,  presents  ” 

2413  The  question  certified  is:  “If  an  alien  non-resident’ owns  stocks  bonds 
and  mortgages  secured  upon  property  in  the  United  States  or  payable 

by  persons  or  corporations  there  domiciled;  and  if  the  income  therefrom  is 
collected  for  and  remitted  to  such  non-resident  by  an  agent  domiciled  in  the 
United  States;  and  if  the  agent  has  physical  possession  of  the  certificates  of 


INC  429  TAX 


SUPREME  COURT  DECISIONS. 


stock,  the  bonds  and  the  mortgages;  is  such  income  subject  to  an  income  tax 
under  the  Act  of  October  3,  1913?” 

2414  The  question  submitted  comes  to  this:  “Is  the  income  from  the  stock, 
bonds  and  mortgages,  held  by  the  Pennsylvania  Company,  derived  from 

property  owned  in  the  United  States?  A learned  argument  is  made  to  the 
effect  that  the  stock  certificates,  bonds,  and  mortgages  are  not  property,  that 
they  are  but  evidences  of  the  ownership  of  interests  which  are  property;  that 
the  property,  in  a legal  sense,  represented  by  the  securities,  would  exist  if  the 
physical  evidences  thereof  were  destroyed.’  But  we  are  of  opinion  that  these 
refinements  are  not  decisive  of  the  congressional  intent  in  using  the  term 
“property”  in  this  statute.  Unless  the  contrary  appears,  statutory  words  pe 
presumed  to  be  used  in  their  ordinary  and  usual  sense,  and  with  the  meaning 
commonly  attributable  to  them.  To  the  general  understanding  and  with  the 
common  meaning  usually  attached  to  such  descriptive  terms,  bonds,  mortgages, 
and  certificates  of  stock  are  regarded  as  property.  By  state  and  federal  stat- 
utes they  are  often  treated  as  property,  not  as  mere  evidences  of  the  interest 
which  they  represent.  In  Blackstone  v.  Miller,  188  U.  S.  189,  206,  this  court 
held  that  a deposit  by  a citizen  of  Illinois  in  a trust  company  in  the  city  of 
New  York  was  subject  to  the  transfer  tax  of  the  State  of  New  York  and  said: 
“There  is  no  conflict  between  our  views  and  the  point  decided  in  the  case 
reported  under  the  name  of  State  Tax  on  Foreign  Held  Bonds,  15  Wall.  300. 
The  taxation  in  that  case  was  on  the  interest  on  bonds  held  out  of  the  State. 
Bonds  and  negotiable  instruments  are  more  than  merely  evidences  of  debt.  The 
debt  is  inseparable  from  the  paper  which  declares  and  constitutes  it,  by  a tradi- 
tion which  comes  down  from  more  archaic  conditions.  Bacon  v.  Hooker,  177 
Mass.  335,  337.” 

2415  The  Court  of  Appeals  of  New  York  recognizing  the  same  principle, 
treated  such  instruments  as  property  in  People  ex  rel,  Jeflferson  v.  Smith, 

88  N.  Y.  576,  585:  ^ 

“It  is  clear  from  the  statutes  referred  to  and  the  authorities  cited  and  from 
the  understanding  of  business  men  in  commercial  transactions,  as  well  as  of 
jurists  and  legislators,  that  mortgages,  bonds,  bills  and  notes  have  for  many 
purposes  come  to  be  regarded  as  property  and  not  as  the  mere  evidences  of 
debts,  and  that  they  may  thus  have  a situs  at  the  place  where  they  are  found 
like  other  visible,  tangible  chattels.” 

2416  We  have  no  doubt  that  the  securities  herein  involved,  are  property.  Are 
they  property  within  the  United  States?  It  is  insisted  that  the  maxim 

mohilia  sequuntur  personam  applies  in  this  instance,  and  that  the  situs  of  the 
property  was  at  the  domicile  of  the  owner  in  France.  But  this  court  has  fre- 
quently declared  that  the  maxim,  a fiction  at  most,  must  yield  to  the  facts  and 
circumstances  of  cases  which  require  it;  and  the  notes,  bonds  and  mortgages  may 
acquire  a situs  at  a place  other  than  the  domicile  of  the  owner,  and  be  there 
reached  by  the  taxing  authority.  . It  is  only  necessary  to  refer  to  some  of  the  de- 
cisions of  this  court.  New  Orleans  v.  Stempel,  175  U.  S.  309;  Bristol  v.  Wash- 
ington County,  177  U.  S.  133;  Blackstone  v.  Miller,  supra;  State  Board  of  As- 
sessors V.  Comptoir  National  d’Escompte,  191  U.  S.  388;  Carstairs  v.  Cochran, 
193  U.  S.  10;  Scottish  Union  & National  Ins.  Co.  v.  Bowland,  196  U.  S.  611; 
Wheeler  v.  New  York,  233  U.  S.  434,  439;  Iowa  v.  Slimmer,  248  U.  S.  115,  120. 
Shares  of  stock  in  national  banks,  this  court  has  held,  for  the  purpose  of  taxation 
may  be  separated  from  the  domicile  of  the  owner,  and  taxed  at  the  place  where 
held.  Tappan  v.  Merchants’  National  Bank,  19  Wall.  490. 

2417  In  the  case  under  consideration  the  stocks  and  bonds  were  those  of 
corporations  organized  under  the  laws  of  the  United  States,  and  the 

bonds  and  mortgages  were  secured  upon  property  in  Pennsylvania.  The  cer- 
tificates of  stock,  the  bonds  and  mortgages  were  in  the  Pennsylvania  Company’s 
offices  in  Philadelphia.  Not  only  is  this  so,  but  the  stocks,  bonds  and  mortgages 
were  held  under  a power  of  attorney  which  gave  authority  to  the  agent  to  sell, 
assign,  or  transfer  any  of  them,  and  to  invest  and  reinvest  the  proceeds  of  such 
sales  as  it  might  deem  best  in  the  management  of  the  business  and  aflfairs  of  the 
principal.  It  is  difficult  to  conceive  how  property  could  be  more  completely 
localized  in  the  United  States.  There  can  be  no  question  of  the  power  of  Con- 
gress to  tax  the  income  from  such  securities.  Thus  situated  and  held,  and  with 
the  authority  given  to  the  local  agent  over  them,  we  think  the  income  derived  is 
clearly  from  property  within  the  United  States  within  the  meaning  of  Con- 
gress as  expressed  in  the  statute  under  consideration.  It  follows  that  the  ques- 
tion certified  by  the  Circuit  Court  of  Appeals  must  be  answered  in  the  affirmative. 

So  ordered. 

Mr.  Justice  McReynolds  took  no  part  in  this  case. 

INC.  430  TAX 


SUPREME  COURT  DECISIONS. 

2418  Law  ^469.  General  Effective  Date  of  the  Revenue  Act  of  1918  of 

which  Title  II  Relates  to  ‘Tncome  Tax.”— *‘Sec.  1409. 

That  unless  otherwise  herein  specially  provided,  this  Act  shall  take  effect 
on  the  day  following  its  passage  [i.  e.,  approval  by  the  President].” 

2419  Approved  by  the  President,  February  24,  1919,  at  6.55  P.  M. 


2420  por  1f2420  see  page  433. 


INC.  431 


TAX 


On  the  foregoing  pages  is  printed  the  1913-1919  compilation. 


Part  II— Current  1920  matters,  begins  on  page  433. 
All  official  matters,  issued  and  made  avail- 
able on  and  after  December  22,  1919, 
will  be  found  in  Part  II. 


INC  432  TAX 


12-6-20. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 

In  these  tables  are  shown  the  locations  within  this  book  by  paragraph  num- 
bers of  all  matters  printed  herein,  that  appeared  in  our  1919  Service. 

Any  rUulation.  part  of  a regulation  letter  or  other  many  contained  m our 
1919  Service  not  found  in  the  subiomed  tables  was  repealed,  amended,  super- 
seded,  or  otherwise  annulled,  or  was  repeated  in  a subsequent  regulation  which 
has  been  cited  as  being  the  latest  ruling. 

^TICLES  OF  REGULATIONS  NO.  4S,  REVISED,  AS  AMENDED. 

(Revised  to  1(3017  herein:  Complete  to  December  6,  1920.) 


Article  Paragraph 

1 474 

2 481 

3'.; 511 

4 512 

11  483 

12  486 

13;:;::: 488 

21  771 

22  780 

23;::::: 783 

24  788 

25::;; 799 

26 801;  A,  2763 

31  810,817,869 

32  873 

33  889;  A,  2650 

34  890 

35  891 

36  892 

37  893 

38  896 

39  911 

40  912 

41  913 

42  914;  A,  2965 

43  931 

44  932 

45! 936 

46  937 

47  938 

48!. 939;  A,  2899 

49  941 

50  942 

51  943 

52  945 

53  946 

54  947 

71  1110 

72*  1114 

73*  1129 


Article 

Paragraph 

74  . . . . 

1135 

75 

1136 

76  . . . . 

1137 

77  

1139 

78 

1140 

79  

1142 

80 

1144 

81  1157 

82  1158 


83  ... 

1162 

84 

1166 

85  . . . . 

1167 

86 

1176 

87 

1177 

88 1178 


91 1545 


92 

1546 

92-A. , . 

1547 

93 

1550 

101 

1198 

1 09 

1199 

103 

1200 

104 

1201 

105 

1210 

106 

1214 

107 

1219 

108 

1226 

109 

. . .1231;  A,  2900 

1 10 

897 

111 

792 

191 

1236 

122. . . . 

1243 

131 

1253 

1 39 

1254 

133.... 

1262 

1 34 

1264 

141. .. . 

1305;  A,  2507 

1 42 

1306 

143- , . 

...  1 307 

Imcomt  Ttx. 
Fin<i«r  Fage  1. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


Revised  to  ^3017  herein:  Complete  to  December  6,  1920. 
Article  Paragraph 

144  1308 

145  898 


151  1318 

152  1319 

153  1320 

154  1323 

161  1330 

162  1331 

163  1332 

164  1348;  A,  2901 

165  1350 

166  1359;  A,  2894 

167  1361 

168  1362 

169  1363 

170  1371 

171  899 

181  1385 

182  1386 

183  1387 

184  1388 

185  1393 

186  1394 

187  1395 

188  1396 

201  1407 

202  1408 

203  1409 

204  1410 

205  1411 

206  1412 

207  1413 

208  1414 

209  1415 

210  1416 

211  1417;  A,  2902 

212  1418 

213  1419 

214  1420;  A,  2874 

215  1422 

216  1423 

217  1424 

218  1425 

219  1426 

220  1427 

220-A 1428 


Article  Paragraph 

221  1429 

222  1430 

223  1431 

224  1432 

225  1433 

226  1434 

227  1438 

228  1439;  A,  2945 

229  1440;  A,  2946 

230  1441;  A,  2948 

231  1442;  A,  2949 

232  1443 

233  1444;  A,  2951 

234  1445;  A,  2952 

235  x446;  A,  2953 

236  (New) 2954 

237  (New) 2959 

251..  1448;  A,  2499,  2516, 
2666 

261  1477 

262  1478 

263  1479 

264  1480 

265  1481 

266  1482 

267  1484 

268  1485 

271 1568 

291  1186 

292  1187 

293  1190 

294  1197;  A,  2704 

301  1516 

302  1522 

303  1523 

304  1525 

305  1526 

306  1571 

307  1572;  A,  2505 

311  1575 

312  518 

312-A 519 

313  521 

314  522 

315  523 

316  1577 


Income  Tax. 
Finder  Page  2. 


12-6-20. 


. D.  AND  SPECIAL  MATTER  FINDER, 


Revised  to  ^3017  herein:  Complete  to  December  6,  1920. 


Article 

Paragraph 

Article 

Paragraph 

321 

551,  553 

381 

1290 

322 

566 

382 

1292 

323 

572 

383 

, . . . '.1293 

324 

609 

384 

1294 

325 

632 

385  (New). 27 11 

; A,  2892 

326 

610 

327 

633 

401 . . , 

1770 

328 

596 

402 

674, 1773 

329 

624 

403 

702 

330 

599 

404 

1579 

405 

1777 

331 

600 

406 

1789 

332 

611 

407 

1787 

333 

634 

334 

612 

411 

560 

335 

635 

412 

561 

341 

654 

421 

684 

342 

642 

422 

703 

343 

638 

423 

700 

344 

643 

424 

701 

345 

649 

425 

705 

346 

668 

347  (New). 

2563 

431 

1862 

351 

501 

441 

1810 

352 

506 

442 

699 

353 

507 

443 

1849 

444 

1851 

361 1592, 1618, 1626, 

445 

1852 

1628, 1645 

446 

1854 

362 

1596 

447 

1820 

363 524,1593,  1594, 

448 

1815 

1595, 1647 

363-A 

1650 

451 

1866 

364 

1659 

365 

1695 

501 

717 

366 

1697 

502 

718 

367 

. 1700;  A,  2500 

503 

720 

368 

.1704;  A,  2703 

504 

738 

369 

1706 

370 

1709 

511 

754 

512 

755 

371 

1711 

513 

756 

372 

.1714 

514 

757 

373 

1710 

515 

758 

374 

1667 

516 

759 

375 

. 1699; A,  2503 

517 

760 

376 

1722 

518 

764 

519 

765 

520 

766 

Income  Tax 
Finder  Page  3, 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


Revised  to  113017  herein:  Complete  to  December  6,  1920. 

Article  Paragraph  Article  Paragraph 


521  767 

522  768 

531 772 

541  809 

54 1(a)  (New) 2876 

542  949 

543  950 

544  951 

545  966 

546  967 

547  968 

548  985 

549  987;  A,  2873 

550  1018 

561 1181 

562... 1227 

563  1244 

564  1238 

565  1280 

566 1256 

567. 1207 

568  992 

569  993 

570  995 

571  998 

572  1000 

573 1035 

581  1191 

582  1192 

591 1041,1533 

601 1619 


637 1828 

638 1832 

651 1816 

70 1 -f  1 Relate  to  Excess  Profits 
801 -+  }Tax  Exclusively.  See 
901-1'  jWar  Tax  Service. 

1001  1883,  2007,  2009, 

2018 

1002  1888 

1003  2014 

1004  1901 

1005  1887 

1006  2015 

1007  2019 

1008  2070 

1009  2071 

1010  2072 

1011  1928 

1012  2030 

1013  2074 

1021 2103 

1031  2115,2117 

1032  2119 

1033  2120 

1034  2123 

1035  2126 

1036  2133 

1037  2165,  2179 

1038  2210 

1041 1903 


611 1042, 1301 

621  1780 

622  1786 

623  1002 

624  597 

625  1044 

626  1863 

631 1826 

632  1827 

633  1838 

634  1842 

635  1823 

636  1845 


1051 1763 

1061 1765 

1071  1736 

1072  1738 

1073  1743 

1074  1744 

1075  1748 

1076  1746 

1077  1750 

1078  1751;  A,  2750 

1078(a)  (New)  2751 

1079  1752 

1080  1754 


Income  Tax 
Pa£f»*  4. 


12-6-20. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


Revised  to  ^3017  herein:  Complete  to  December  6,  1920. 


Article  Paragraph 

inOI  (Superseded,  ^2427,  10^7 

and  112450) 

1092  (Superseded,  112456)  1970 

1093  (Superseded,  112473)  1974 


1094 1975,2069 

1101 1988 

1111 1758 

1121 533 

1131  543 

1132  544 

1133  545 

1501  471,473,729 

1502  730 

1503  731 

1504  732 

1505  734 

1506  735 

1507  736 

1508  983 

1509  1010,1553 

1510  579 

1521  671 

1522  672 

1523  583 

1524  584 

1525  585 

1526  586 

1527  587 

1528  588 

1529  589 

1530  590 

1531  591 

1532..... 592 

1533 782,796,  1623 


Article 

Paragrap 

1548 

867 

1549 

868 

1561 

1058 

1562 

1074 

1563 

.1077;  A,  2506 

1564 

1078 

1565 

1079 

1566 

1080 

1567 

1085 

1568 

.1087;  A,  2479 

1569 

1088 

1570 

1089 

1581 

1091 

1582 

1092 

1583 

1093 

1584 

.1094;  A,  2834 

1585 

1095 

1585(a)  (New) 2692 

1585(b)  (New) ^^706 

1588  (New). 

2877 

1601 

1106 

1602 

1107 

1603 

1108 

1621 

621 

1622 

622 

1623 

623 

1624 

625 

1625 

626 

1641 

631 

1642  (Revoked,  112884)  860 

1701 

2221 

1702 

2222 

1711 

1999 

1541  815,816 

1542  823 

1543  827 

1544  828 

1545  (Revoked,  1[2884)  849 

1546  (Revoked,  1[2884)  8 5 9 

1547  865;  A,  2885 


1721 2090 

1731* 2092 

1732* 2093 

1733  2100 

1734  2101 

*Aniended  and  Supplemented,  1f2508. 
1800 2228 


See  next  page  for  finder  tables  of  other  matters  in  the  compilation. 

Income  Tai 
Find  er  Pa?e  5 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


TREASURY  DECISIONS. 
NOTE.— For  Reg.  No.  45,  see  Finder.Page  1. 


Treasury  Paragraph 

Decisions  Numbers 

T.  D.  1903. .1701,  1702 
T.  D.  1926. .1688 
T.  D.  1932. .1868 
T.  D.  1949. .1805 
T.  D.  1956.. 1805 
T.  D.  1962. .1977 
T.  D.  1976.. 1682 
T.  D.  1986.. 1703 
T.  D.  1995. .2022 
T.  D.  20C5. .1064,  1343 
T.  D.  2022. .1661 
T.  D.  2077. .1344 
T.  D.  2079. .879 

T.  D.  2090.  .Synopsis — see  below 

T.  D.  2135.  .Synopsis — see  below 

T.  D.  2137.  .Synopsis — see  below 

T.  D.  2152.  .Synopsis — see  below 

T.  D.  2161. .1021 

T.  D.  2166.. 2043 

T.  D.  2174. .1801 

T.  D.  2185. .960 

T.  D.  2198. .1258 

T.  D.  2210. .1206 

T.  D.  2226. .2109 

T.  D.  2235. .1791 

T.  D.  2238. .1794 

T.  D.  2258. .1664 

T.  D.  2262. .1218 

T.  D.  2290. .2260 

T.  D.  2293. .1796 

T.  D.  2300. .2290 

T.  D.  2301. .2166 

T.  D.  2302. .2295 

T.  D.  2303. .2297 

T.  D.  2341. .2111 

T.  D.  2343. .1355 

T.  D.  2394. .2201 

T.  D.  2396. .2127 

T.  D.  2475.. 727,  1205 

T.  D.  2494. .687 

T.  D.  2507. .2203 

T.  D.  2512.  .829 

T.  D.  2631.. 955 


Treasury  Paragraph 

Decisions  Numbers 

T.  D.  2634. .2313 
T.  D.  2686. .905 
T,  D.  2688. .2136 
T.  D.  2693. .1737 
T.  D.  2697. .2050 
T.  D.  2726. .2329 
T.  D.  2730. .2380 
T.  D.  2731.. 2337 
T.  D.  2732. .2373 
T.  D.  2740. .2317 
T.  D.  2762. .1159 
T.  D.  2783. .2395 
T.  D.  2816. .2399 
T.  D.  2831.  .Reg.  45,  Rev. 

T.  D.  2836. . 1152  • 

T.  D.  2843. .1168 

T.  D.  2844. .1852 

T.  D.  2847.. 1460 

T.  D.  2849. . 1435 

T.  D.  2857.. 1149 

T.  D.  2859. . 1388 

T.  D.  2865.. 1150 

T.  D.  2869. .519,  1547 

T.  D.  2871.  .2133,  2153 

T.  D.  2873.. 783 

T.  D.  2874. .2104 

T.  D.  2876. .2408 

T.  D.  2899. .988 

T.  D.  2903. .1980 

T.  D.  2907. .2094 

T.  D.  2916. . 1445,  1446 

T.  D.  2920. .1650 

T.  D.  2922. .1572 

T.  D.  2923.. 1691 

T.  D.  2924. .1080,  1085 

T.  D.  2925.. 1505 

T.  D.  2929.. 1332,  2351 

T.  D.  2933.. 1265 

T.  D.  2935.. 1849 

T.  D.  2937.. 1262 

T.  D.  2943. .735 

T.  D.  2951.. 1789 

T.  D.  2956. . 1427,  1428,  1429 


T.  D.  2090  (A  SYNOPSIS  OF  DECISIONS  ISSUED  DECEMBER  14,  1914.) 
(The  references  are  to  paragraph  numbers.) 


American  wife.  .513 

Interest  coupons  for  funding  bonds. . 1674 
Retirement  of  bonds.  .1675 
Privately  printed  forms. . 1687 
Surtax:  husband  and  wife.  .490 
Income  received  through  fiduciaries  . .492 
Dividends  received  through  fiduciaries.  .494 
Salaries  paid  by  exempt  corporations.  .878 
Premium  on  fidelity  bond.  . 1202 
Notary’s  seal.  . 1800 

Corporation’s  principal  place  of  business.  .1817 
Commissions  paid  salesmen.  .1223 
Commissions  to  real  estate  agents.  .1224 

* Income  Tax. 

Finder  Page  6. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


T.|D.  2135  (A  SYNOPSIS  OF  DECISIONS  ISSUED  JANUARY  23,  1915) 

(The  references  are  to  paragraph  numbers.) 

Citizenship.  .514 

Appointment  of  paying  agent.  . 1655 
Filing  of  return  by  paying  agent.  . 1657 
Corporations  availed  of  to  avoid  surtax.  .502 
Rental  payments  other  than  in  cash.  .940 
Trustee’s  services.  .874 
Accident  expenses.  . 1127 

T.  D.  2137  (SYNOPSIS  OF  DECISIONS  ISSUED  JANUARY  30,  1915) 

Surtax:  husband  and  wife.  .491 
Private  bank  owned  by  individual.  .894 
Dividends  paid  on  insurance  policies.  .1118 
Insurance  agent’s  commissions.  .888 

Corporations  formed  to  hold  property  to  avoid  partitioning.  .724 
Corporations  owned  by  exempt  corporations.  .725 
Private  bank  having  corporate  organization.  .844 
Cost  of  real  estate.  . 1065 

Foreign  corporations  doing  business  by  agents.  . 1019 

T.  D.  2152  (SYNOPSIS  OF  DECISIONS  ISSUED  FEBRUARY  12,  1915) 

Income  from  private  banks.  .842 
Bonuses . . 876 

Corporations  subject  to  tax.  .721 
Depreciation:  stocks  and  bonds.  . 1345 
Income  taxes  to  other  countries.  .475 


REGULATIONS  NO.  33 
(January  5,  1914) 

Article  and  Paragraph 
Numbers 

116. .  1024 

117. .  1225 

126. .  1322 

146. .  1351 

185. . 493 


Article  and  Paragraph 
Numbers 

14. . 570 

22. .  1799 

38.  . 1653,  1654,  1656 
57.  . 1760,  1761 

83. .  1048 


Article  and 
Paragraph 
Number 


REGULATIONS  NO.  33,  REVISED 
(Tanuary  2>  1918) 


Our 

Paragraph 

Number 


Article  and  Our 

Paragraph  Paragraph 

Number  Number 


4— ARTICLE 

15. . 903 

16. . 904 

41. . 1075 

46. . 1119 

55. . 886 

56. . 887 

62. . 1552 

63. .  1059 
8— ARTICLE 

93. . 1321 

110. .  1203 
14— ARTICLE 

151. . 704 

154..  495 
26— ARTICLE 

182. .  1771 
30— ARTICLE 

213. . 568 


38— ARTICLE 

243. . 2039 

244. . 2039 

245. . 2229 

41—  ARTICLE 

252. . 2021 

42—  ARTICLE 

253 . .  2037 
52— ARTICLE 

286. . 2066 
61— ARTICLE 

304. .  1783 
81— ARTICLE 

336. .  1624 
89— ARTICLE 

350. .  1026 
104— ARTICLE 

371 . . 910 


Income  Tax. 
Finder  Page  7. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


REGULATIONS  NO  33, 


Our 

Paragraph  ' Paragraph 
Number  Number 

115— ARTICLE 

386. . 1327 

138—  ARTICLE 

443..  1217 

139—  ARTICLE 

444. . 1222 

144—  ARTICLE 

452. .  1204 

145—  ARTICLE 

453..  1193 
454.  .1193 

149—  ARTICLE 

461. . 954 

150—  ARTICLE 

462. . 957 
463.-957 

464. . 957 

152—  ARTICLE 

467. . 961 

468. . 961 

469. . 961 

470. . 961 

153—  ARTICLE 

471 . .  1309 

162—  ARTICLE 

485. . 1352 

163—  ARTICLE 

488. . 1349 

165—  ARTICLE 

491 . .  1360 

166—  ARTICLE 

492. . 1374 

493. . 1374 

178— ARTICLE 

556. .  1372 


REVISED— Concluded. 

Article  and  Our 

Paragraph  . Paragraph 

Number  Number 

179— ARTICLE 

557.  .1373 

188—  ARTICLE 

573..  . 1239 

574. . 1239 

575..  1239 

576..  1239 

189—  ARTICLE 

577..  902 

199— ARTICLE 

593..  1724 

201— ARTICLE 

602..  1723 

203— ARTICLE 

608..  1819 

205—  ARTICLE 

612. . 1818 

206—  ARTICLE 

613..  1784 

221— ARTICLE 

638..  2038 

227— ARTICLE 

647 . .  1969 

229— ARTICLE 

651. . 1979 

233—  ARTICLE 

658. . 2041 

659. . 2042 

660. . 2061 

234—  ARTICLE 

661. . 2067 

245— ARTICLE 

7 13..  1003 


# 

t 

(• 


1918  INCOME-TAX  PRIMER 

86.. 1455 

SPECIAL  LETTERS  AND  TELEGRAMS  . 

Numbers 

Tanuarv  7 1914— To  the  Central  Trust  Company  of  New  York. ..  1665,  1666 

ian^ary  li  1914-To  Frederick  L.  Allen.. ; , 

March  18  1914 — To  Diplomatic  and  Consular  Officers ^ 

March  5;  1914-To  Robert  Lynn  Cox  1662 

fs:  company. 

2^:  e'C^ion-Trun  : :: 

1:  ■ •■•••••■. ...... 

March  25,  1915— To  Carey,  Piper  & Hall ! . . .658 

October  19,  1915— To  Bowers  and  Sands • • ^^77 

January  5,  1916-To  White  & Case  

January  11,  1916 — To  Herbert  M.  Teets . . 1676 

April  11,  1916— To  a Subscriber 

Income  Tax. 

Finder  Page  8. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


June 

July  , : : 

November 

November 

December 

December 

December 

December 

February, 

February 

March 

March 

April 

June 

October 

October 

November 

November 

November 

November 

November 

December 

February 

February 

March 

March 

March 

March 

March 

April 

April 

April 

May 

May 

May 

May 

July 

October 

November 

November 

November 

November 

January 

January 

March 

March 

March 

March 

March 

April 

April 

April 

April 

April 

April 

April 

April 

April 

April 


SPECIAL  LETTERS  AND  TELEGRAMS—  Continued. 

Paragraph 

Numbers 

6,  ,1916;: — To  The  Corporation  Trust  Company 1036 

is,  1916— To  The  Corporation  Trust  Company 1023 

1,  1916— To. The  Central  Trust  Company  of  New  York 1012 

21,  .1916^To  The  Corporation  Trust  Company. 1060 

6,  1916-^To  The  Corporation  Trust  Company  (Bonds  pur- 
chased by  trustee) .1680 

6,  1916— To  The  Corporation  Trust  Company  (Foreign  ex- 

empt  corporations) 1014 

6,  1916 — To  The  Corporation  Trust  Company,  (non-resident 

alien  partnerships) 1555 

28,  1916— To  The  Corporation  Trust  Company. ' 706 


3,  1917 
8,  1917- 
3,  1917- 

10,  1917 

11,  1917- 
22,  1917- 

8,  1917- 
25,  1917- 

10,  1917 

13, 

19, 

21, 

30, 

24, 

11, 

18, 

14, 

22, 

25, 

26, 

28, 

17, 

20, 

30, 

.14,. 

20, 


To  Ropes,  Gray,  Boyden  & Perkins 686 

ToW.  W.  Bacon 111:5 

■To  a Subscriber 1072 

-To  a Subscriber 1073 

■To  a Subscriber 965 

To  Renefick,  Cooke,  Mitchell  & Bass  (in  part) , . 872 

■To  Lee,  Higginson  & Company 1156 

■To  Palmer  & Series 1741 

To  Lee,  Higginson  & Company 1051 

1917-^To  Sackett,  Chapman  & Stevens 1658 

1917— To  Harris,  Forbes  & Company 1237 

1917-^To  Simpson,  Thatcher  & Bartlett 1651 

1917— To  Greenbaum,  Wolff  & Ernst 1220^ 

1917- 7-To  Thie  Corporation  Trust  Company 1449’ 

1918—  To  Lee,  Higginson  & Company 1663 

1918 — To  S.  W.  Straus  & Co 1643 

1918— To  The  Corporation  Trust  Company. .864 

1918 — To  The  Corporation  Trust  Company 1774 

1918 — To  Lee,  Higginson  & Company . 1776 

1918' — To  The  Columbia  Trust  Company 1670 

1918' — ;To  The  Corporation  Trust  Company 1740 

1918— To  Henry  W.  Beal 1580 

19i8^To  Brower,  Brower  & Brower 102f8 

1918-;-^To  Certified  Audit  Company  of  America 875' 

1918 — To  Hornblower  and  Weeks 824 

1918 — To  First  National  Bank,  Cleveland,  Ohio 1673 

23,  1918 — To  The  Corporation  Trust  Company 554 

27,  1918' — To  Arthur  Young  & Company .825 

12,  1918 — To  E.  G.  Shorrock  & Co 1358 

1,  1918 — To  The  Corporation  Trust  Company  (in  part) 1554 

2,  1918 — To  Herbert  J.  Lyall 2132 

12,  1918- — To  Ropes,  Gray,  Boyden  & Perkins 840' 

26,  1918, — To  E.  G.  Shorrock  & Go 909 

28,  1918 — To  The  Corporation  Trust  Company 1759 

3,  1919— To  Clark  J.  Milliron. 115'5 

8,  1919 — To  The  Corporation  Trust  Company. . 1263 

5,  1919 — To  The  Corporation  Trust  Company . . . 1712 

14,  1919 — Official  announcement. 2216 

24,  1919 — To  Bonbright  & Company 17 15’ 

25,  1919— To  Chas.  H.  Hubbell 1154 

29,  1919^To  H.  C.  Hopson . .2134 

1,  1919 — To  The  Corporation  Trust  Company 510 

7,  1919 — To  Southern  Pacific  Co 1660* 

9,  1919 — To  The  Corporation  Trust  Company 508. 

11,  1919 — To  The  Corporation  Trust  Company 1841 

13,  1919 — To  The  Corporation  Trust  Company 1160' 

14,  1919 — To  Official  Statement 1146 

15,  1919 — To  Collins  & Corbin 1170' 

17,  1919 — To  The  Corporation  Trust  Company 1839 

19,  1919— To  H.  C.  Hopson 1853 

22,  1919 — To  Hughes,  Rounds,  Schurman  & Dwight 1612 

Income  Tax. 

Finder  Page  9. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


April 

April 

April 

May 

May 

May 

May 

May 

May 

May 

May 

May 

May 

June 

June 

June 

June 

June 

June 

June 

June 

June 

Tune 

July 

July 

July 

July 

July 

July 

August 
August 
August 
August 
August 
August 
August 
' September 
‘September 
September 
:September 
September 
iSeptember 
September 
October 
October 
^October 
October 
■October 
November 
November 
November 


SPECIAL  LETTERS  AND  TELEGRAMS— Concluded. 

Paragraph 

Numbers 

23,  1919 — Official  Announcement 1146 

23^  1919 — To  a Subscriber 1846 

26^,  1919 — 'To  Greenbaum,  WolfF  & Ernst 930 

T 1919 — To  The  Corporation  Trust  Company 1573 

2’  1919 — To  The  Corporation  Trust  Company 871 

(>,  1919 — To  Alexander  John  Lindsay 1772 

b’  1919 — To  Alexander  John  Lindsay 484 

13,  1919 — To  Oppenheim,  Collins  & Co 509 

20,  1919 — 'To  Cleveland  Trust  Co 1833 

21,  1919 — To  The  Corporation  Trust  Company 527,  1713 

23,  1919 — ^To  Equitable  Trust  Co 1620 

26,  1919— To  W.  B.  Reed 1597 

31,  1919 — To  Douglas,  Armitage  & McCann 685 

2,  1919 — To  The  Corporation  Trust  Company 1739 

2,  1919— To  Farmers  Loan  & Trust  Co 1633 

3,  1919 — Opinion  of  Attorney  General 1929 

7,  1919 — To  The  Corporation  Trust  Company 1255 

9,  1919 — To  The  Corporation  Trust  Company 1382 

9,  1919 — To  The  Corporation  Trust  Company 1517 

12,  1919 — ^To  National  Coal  Association 1606 

21,  1919 — To  Levi  Cooke 1553 

24,  1919 — To  The  Southern  Pacific  Co 1668 

28,  1919 — To  The  Corporation  Trust  Company 1096 

9,  1919 — To  National  Coal  Association • • -525 

9,  1919 — To  The  Corporation  Trust  Company See  915 

10,  1919 — To  The  Corporation  Trust  Company See  915 

22,  1919 — To  Guaranty  Trust  Company 

22,  1919— To  The  Corporation  Trust  Company 1063 

26,  1919— To  The  Corporation  Trust  Company  1621 

6,  1919 — To  The  Corporation  Trust  Company 915 

6,  1919 — To  National  Coal  Association 1608 

6,  1919 — To  Guaranty  Trust  Co 1483 

14,  1919— To  Ropes,  Gray,  Boyden  & Perkins 1459 

1919 — Official  Announcement 2223 

19,  1919 — To  Levi  Cooke... 1540 

26,  1919 — Statemxent  by  Bureau  of  Internal  Revenue 2230 

8,  1919 — To  A.  Iselin  & Co 1631 

13,  1919 — To  Northwestern  Trust  Co 870 

18,  1919 — To  Boissevain  & Co 1705 

20,  1919 — To  Ship  Owners  Association  of  the  Pacific  Coast.520,528, 1548 

23’  1919 — To  Guaranty  Trust  Co . 1632 

27,  1919 — To  Announcement  by  Commissioner 2224 

29,  1919 — To  The  Chase  National  Bank 1694 

6,  1919 — To  William  R.  Conklin. ’• -657 

9,  1919 — To  Ernst  & Ernst 2181 

13,  1919— To  The  Equitable  Trust  Co • ■ ■ • • 656 

16,  1919 — To  Baker  & Baker • • 1081,  1086 

24,  1919 — To  The  Corporation  Trust  Company 969 

5,  1919 — To  K.  Sheridan  Hayes -627 

18,  1919— To  The  Corporation  Trust  Company.  . 2420 

20  1919 — To  The  Corporation  Trust  Company 1696 


Income  Tax. 
Finder  Paje  10. 


T.  D.  AND  SPECIAL  MATTER  FINDER. 


February 

January 

February 

March 

June 

July 

October 

November 

November 

January 

February 

June 

March 

June 

July 

August 


DEPARTMENT  LETTERS  TO  COLLECTORS. 

Paragraph 

10,  1914— To  Collectors ^““I'soS 

16,  1915— Mimeograph  letter  No.  1148  to  Collectors.  1991 

9,  1915  Mimeograph  letter  No.  1160  to  Collectors  . 1989 

24,  1915— Mimeograph  letter  No.  1192  to  Collectors ..  .*.'.‘.2058  2062 

22,  1915  Mimeograph  letter  No.  1232  to  Collectors * 1994 

8,  1915— Mimeograph  letter  No.  1242 ’ 1669 

1915 — Mimeograph  letter  No.  1271 ’ ’ ] [ 895 

1917—  Mimeograph  letter  to  Collectors  No.  1663*.  *. .' .’  .'  . ! i635 

Mimeograph  letter  No.  1675  to  Collectors.  . . 1904  1937 

1918 —  Statement  to  Collectors Qt;n 

1918— IT— CLS.  Mim.  1795 9100 

25,  1918 — To  Internal  Revenue  Agents 1364 

13,  1919— IT— Mim.  No.  2077...  ^ .*.*.' !.*;.*  .* 9?t 

2,  1919— Mimeograph  letter  No.  2143 1629 

18,  1919 — Mimeograph  letter  No.  2195 2075 

8,  1919 — Mimeograph  letter  No.  2221 1829 


SPECIAL  MATTERS. 

July,  1917— Oral  word  to  The  Corporation  Trust  Company.  Re- 

receipt  by  mail  of  Form  17 

Second  Liberty  Loan  Act  (Sec.  7,  as  amended) . . . ’.  ’. '.  '.  ’. 

Act  Supplementing  Second  Liberty  Pond  Act  (Sec.  1) 

rourth  Liberty  Loan  Act  (Sec.  3,  as  amended). . . . 

Victory  Liberty  Loan  Act  (Sec.  2) 

Victory  Liberty  Loan  Act  (Sec.  4) 

Surtax  rates  for  1913,  1914,  and  1915 ] 

Surtax  rates  for  1916  and  1917 !......!..*.* 

Executive  Order:  Inspection  of  Returns 

Sample  Letter:  Offers  in  Compromise 

Section  1408,  Revenue  Act  of  1918 

Art.  715,  Reg.  45,  Rev 

Questions  and  answers  about  inventory  losses  (April  17  1919) 

Circular^appended  to  T.  D.  2836 /••••. 

Sixteenth  Amendment  to  the  Constitution !..*!!!!!! 

Section  3165  Revised  Statutes. .*..'..*!.'.* 

Section  3167  Revised  Statutes 

Section  3172  Revised  Statutes * 

Section  3173  Revised  Statutes [ ] 

Section  3176  Revised  Statutes \ 

Section  3184  Revised  Statutes 

Section  3220  Revised  Statutes 

Section  3224  Revised  Statutes .......*.' 

Section  3225  Revised  Statutes 

Section  3226  Revised  Statutes 

Section  3227  Revised  Statutes [ 

Section  3228  Revised  Statutes 

Section  3229  Revised  Statutes 


Proof  of 

2028 

1140 

1142 

1551 

1144 

1551 

861 

862 

1957 

1944 

580 

489 

1486 

1153 

2269 

1790 

1976 

1867 

1981 

. . 1847,  1889 

2020 

2116 

2164 

2176 

2177 

2178 

2180 

1931 


CASES. 

See  Supplementary  Page  107  at  the  back  of  the  book. 

For  running  table  of  contents  of  current  matter  see  Supplementary 
Page  109  at  the  back  of  the  book. 


Income  Tax. 
Finder  Page  1 1. 


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1913-1920 

INCOME  TAX  SERVICE 

■ l:  n 1/  II  II  i(>'  j 

PART  II. 


..1 


a 

2420  Proceeds  of  Insurance  Policies  Paid  to  Partnerships  on  Death 
1114  of  the  Insured  Are  Exempt. — Receipt  is  acknowledged  of  your 

. letter  dated  October  30,  1919,  relative  to  the  meaning  of  Article 

72  [111114]  of  Regulations  45.^  HYou  call  attention  to  the  fact  that 
Article  72  of  the  preliminary  edition  of  Regulations  45  provided  that  ‘‘upon 
the  death  of  an  insured  the  proceeds  of  his  life  insurance  policies,  whether 
paid  to  his  estate  or  to  individual  beneficiaries  (but  not  if  paid  to  a corpo- 
ration or  partnership),  are  excluded  from  the  gross  income  of  the  beneficiary” 
and  that  the  same  provision  is  contained  in  Article  72  of  the  final  edition  of 
the  regulations,  with  the  exception  of  the  clause  “(but  not  if  paid  to  a cor- 
poration or  partnership)”  being  omitted  and  the  words  “directly  or  in  trust” 
substituted  therefdr.  You  also  point  out  that  Article  541  [1f809]  of  the 
regulations  establishes  the  status  of  the  proceeds  of  life  insurance  policies 
paid  upon  the  death  of  the  insured  to  corporation  beneficiaries,  but  that 
nowhere  in  the  regulations  is  a definite  statement  to  the  effect  that  such 
proceeds  paid  to  a partnership  are  or  are  not  to  be  reported  in  the  gross 
income  of  ^the  partnership.  ^ You  ask  whether,  under  the  circumstances^, 
the  term  “individual  beneficiaries”  as  used  in  Article  72  of  the  final  edition 
of  Regulations  45  also  means  partnership  beneficiaries.  Ifin  reply,  you  are 
advised  that  paragraph  (1)  of  Section  213  (b)  of  the  Revenue  Act  of  1918 
specifically  provides  that  the  term  “gross  income”  does  not  include  the  pro- 
ceeds of  life  insurance  policies  paid  upon  the  death  of  the  insured  to  individual 
beneficiaries  or  to  the  estates  of  the  insured.  Section  218  of  the  Act  provides 
that  in  computing  the  net  income  of  each  member  of  a partnership  “there 
shall  be  included  his  distributive  share,  whether  distributed  or  not,  of  the 
net  income  of  the  partnership  for  the  taxable  year.  * * * The  net  income 

of  the  partnership  shall  be  computed  in  the  same  manner  and  on  the  same 
basis  as  provided  in  Secdon  212,  except  that  the  deduction  provided  in  para- 
graph (11)  of  subdivision  (a)  of  Section  214  shall  not  be  allowed.”  In 
Section  212  it  is  specified  “that  the  term  ‘net  income’  means  the  gross  income 
as  defined  in  Section  213,  less  the  deductions  allowed  by  Section  214.”  These 
provisions  of  the  Revenue  Act  of  1918  do  not  require  that  the  proceeds  of 
life  Insurance  policies  paid  upon  the  death  of  the  insured  to  a partnership 
be  reported  in  the  gross  income  of  the  partnership.  In  other  words,  the 
phrase  “Individual  beneficiaries”  as  used  In  that  Act  is  held  to  Include  partner- 
ship beneficiaries.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Commissioner  Daniel  C.  Roper,  and  dated  November  18^  1919.) 

[The  foregoing  was  omitted  from  the  compilation  In  error.) 


INC. 


433  TAX 


(T.  D.  2960.) 

Jackson  V.  Smietanka  {U.  S.  District  Courts  December^  1919.) 

When  income  taxable.  i , • -j 

A taxpayer  who  keeps  no  books  of  account,  and  to  whom  is  paid,  upon 
the  termination  of  services  extending  over  a period  of  years,  a lump  sum  in 
amount  not  previously  agreed  upon,  as  compensation  for  such  services,  must 
return  as  income  in  the  year  in  which  received,  the  entire  amount  so  paid 
him,  even  when  such  payment  is  accompanied  by  a statement  proportion- 
ing the  compensation  over  the  years  in  which  the  services  were  rendered. 

2421  The  appended  decision  of  the  United  States  District  Court  for  the 
631  Eastern  Division  of  the  Northern  District  of  Illinois,  in  the  case  of 
778  Jackson  v.  Smietanka,  is  published  not  as  a ruling  of  the  Treasury 
807  Department,  but  for  the  information  of  internal  revenue  officers  and 
others  concerned.  (T.  D.  2960,  signed  by  Commissioner  Daniel  C. 
Roper,  and  dated  January  7,  1920.) 


IN  THE  UNITED  STATES  DISTRICT  COURT 
EASTERN  DIVISION  OF 
NORTHERN  DISTRICT  OF  ILLINOIS 
(Decided  December,  1919.) 

William  J.  Jackson  vs.  Julius  F.  Smietanka,  Collector  of  the  United 
States  Internal  Revenue,  First  District  of  Illinois.  (No.  33109.) 

2422  Page,  Circuit  Judge:  This  is  a demurrer  to  the  declaration.  The 
sole  question  involved  in  this  case  is,  was  plaintiff  erroneously  taxed 

under  the  Revenue  Law  of  1918,  or  should  he  have  been  taxed  under  the 
several  laws  of  the  years  1913  to  1918,  as  plaintiff  contends,  on  an  income 

received  as  follows:  , o r?  ^ 

2423  Plaintiff  was  on  May  27,  1913,  appointed  a receiver  of  the  C.  & E.  1. 
R.  R.  Co.  and  served  until  April  27, 1918,  for  which  he  received,  under 

the  order  of  the  District  Court  dated  August  4, 1913,  $2,000  per  month  com- 
mencing July,  1913,  to  be  received  on  account,  with  the  liberty  on  his  dis- 
charge to  apply  for  further  compensation.  When  he  resigned  a general  order 
was  entered,  on  April  27,  1918,  allowing  him  an  additional  compensation  of 
$100,000.  That  general  order  was  amended  by  order  of  April  22,  1919,  as 
follows : 

‘‘That  said  services  of  said  William  J.  Jackson  as  receiver  were  ren- 
dered continuously  from  May  27,  1913,  to  and  including  April  27,  1918,  and 
the  compensation  therefor  now  allowed  was  earned  and  accrued  as  follows: 

In  the  year  1913— $12,144.85,  in  the  year  1914— $20,334.26,  in  the  year 
1915--$20,334.26,  in  the  year  1916— $20,334.26,  in  the  year  1917— $20,- 
344.26,  in  the  year  1918— $6,518.11.”  That  amendment  was  entered  as  of 
April  27,  1918.  The  petition  for  the  amended  order  was  filed  and  the  order 
made  long  after  the  tax  was  assessed.  The  Government  was  not  a party 

thereto.  . 

2424  Plaintiff  cites  Sec.  206  [^628]  of  the  Revenue  Law  of  1918  as  a basis 
628  for  his  contention,  and  says,  “If  that  section  cannot  reasonably  be 
631  applied  to  such  a case  as  that  of  plaintiff,  we  ask  to  what  sort  of  a 

case  it  does  apply.”  Art.  1641  [1[63l]  of  Treasury  Department  Regu- 
lations 45,  under  the  Revenue  Act  of  1918,  says  that  Sec.  206  refers  to  other 
and  wholly  different  matters,  and  this  interpretation  is  supported,  and  in  the 

434  TAX 


INC. 


1-18-20. 


opinion  of  the  court  conclusively,  by  Secs.  201  and  205  of  the  same  act,  in 
the  former  of  which  direct  reference  is  made  to  said  Sec.  206. 

2425  After  specifying  in  detail  what  the  gross  income  includes.  Sec.  213 

778  ^ [1[807]  provides: 

807  ^ “The  amount  of  all  such  items  shall  be  included  in  the  gross 

873  i income  for  the  taxable  year  in  which  received  by  the  taxpayer,  unless, 
945  I under  methods  of  accounting  permitted  under  subdivision  (b)  of 
Section  212,  any  such  amounts  are  to  be  properly  accounted  for  as 
of  a different  period.” 

Subdivision  (b)  of  Sec.  212  [1[778]  provides: 

“The  net  income  shall  be  computed  upon  the  basis  of  taxpayer’s  annual 
accounting  period  * * * in  accordance  with  the  method  of  accounting 

regularly  employed  In  keeping  the  books  of  such  taxpayer.” 

Plaintiff  kept  no  books,  so  that  clause  does  not  apply.  It  further  pro- 
vides [1f779]  that: 

“If  no  such  method  of  accounting  has  been  so  employed  or  If  the  method 
employed  does  not  clearly  reflect  the  income,  the  computation  shall  be  made 
upon  such  basis  and  in  such  manner  as  in  the  opinion  of  the  Commissioner 
does  clearly  reflect  the  income 

The  only  language  which  might  apply  to  plaintiff  is, 

“If  no  such  method  of  accounting  has  been  so  employed  * * * com- 

putation shall  be  made  upon  such  basis  and  in  such  manner  as  in  the  opinion 
of  the  Commissioner  does  clearly  reflect  the  income.” 

This  seems  to  leave  the  burden  upon  the  plaintiff  here  to  show  that  the 
method  of  accounting  Insisted  upon  by  him  has  been  prescribed  as  a basis 
by  the  Commissioner. 

Art.  52  [1[945]  of  Regulations  45  provides: 

“Gains,  profits  and  income  are  to  be  Included  In  the  gross  income  for 
the  taxable  year  In  which  they  are  received  by  the  taxpayer,  unless  they  are 
included  when  they  accrue  to  him  In  accordance  with  the  approved  method 
of  accounting  followed  by  him.” 

Art.  32  [1[873]  of  said  Regulations  45  states: 

“Where  no  determination  of  compensation  Is  had  until  the  completion 
of  the  services,  the  amount  received  Is  Income  for  the  calendarjyear  of  its 
determination.” 

2426  The  demurrer  Is  sustained.  (Opinion  appended  to  T.  D.  2960,  [1[2421].) 


(T.  D.  2961.) 

2427  Inspection  of  returns. — Section  2 of  the  Tariff  Act  of  October  3, 
1955  1913,  imposes  an  Income  tax  on  Individuals,  corporations,  joint- 

stock  companies  or  associations,  and  Insurance  companies,  and  para- 
graph G (d)  of  said  section  provides: 

“When  the  assessment  shall  be  made,  as  provided  In  this  section, 
the  returns,  together  with  any  corrections  thereof  which  may'^have  been 
made  by  the  Commissioner,  shall  be  filed  in  the  office  of  the  Commissioner 
of  Internal  Revenue  and  shall  constitute  public  records  and  be  open  to 
inspection  as  such:  Provided^  That  any  and  all  such  returns  shall  be  open 
to  inspection  only  upon  the  order  of  the  President,  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and 
approved  by  the  President:  * * * /» 


INC.  435 


TAX 


2428  Title  I of  the  Revenue  Act  of  1916  imposes  an  income  tax  on  individ- 
uals, corporations,  joint-stock  companies  or  associations,  and  insure 

ance  companies,  and  Section  14  (b)  of  said  Title  provides: 

“When  the  assessment  shall  be  made,  as  provided  in  this  Title, 
the  returns,  together  with  any  corrections  thereof  which  may  have 
been  made  by  the  Commissioner,  shall  be  filed  in  the  office  of  the  Com- 
missioner of  Internal  Revenue  and  shall  constitute  public  records  and 
be  open  to  inspection  as  such:  Provided^  That  any  and  all  such  returns 
shall  be  open  to  inspection  only  upon  order  of  the  President,  under 
rules  and  regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury 
and  approved  by  the  President:  * * * yj 

2429  Title  II  of  the  Revenue  Act  of  1917  imposes  a war  excess-profits 
tax  on  individuals,  partnerships,  corporations,  joint-stock  companies 

or  associations,  and  insurance  companies,  and  Section  212  of  said  Title 

provides: 

“That  all  administrative,  special,  and  general  provisions  of  law,  in- 
cluding the  laws  in  relation  to  the  assessment,  remission,  collection,  and 
refund  of  internal  revenue  taxes  not  heretofore  specifically  repealed, 
and  not  inconsistent  with  the  provisions  of  this  title  are  hereby  extended 
and  made  applicable  to  all  the  provisions  of  this  title  and  to  the  tax 
herein  imposed,  and  all  provisions  of  Title  I of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  relating 
to  returns  and  payment  of  the  tax  therein  imposed,  including  penalties, 
are  hereby  made  applicable  to  the  tax  imposed  by  this  title.” 

2430  Title  II  of  the  Revenue  Act  of  1918  imposes  an  income  tax  on  indi- 
viduals, associations,  joint-stock  companies  and  insurance  companies, 

and  Section  257  of  said  Title  provides: 

“That  returns  upon  which  the  tax  has  been  determined  by  the 
Commissioner  shall  constitute  public  records;  but  they  shall  be  open 
to  inspection  only  upon  order  of  the  President  and  under  rules  and 

regulations  prescribed  by  the  Secretary  and  approved  by  the  President: 

* ♦ * » 

2431  Title  III  of  the  Revenue  Act  of  1918  Imposes  a war-profits  and  excess 
profits  tax  on  corporations,  associations,  joint-stock  companies  and 

insurance  companies,  in  addition  to  other  taxes  imposed  by  the  Act,  and 

Section  336  of  said  Title  provides: 

“That  every  corporation,  not  exempt  under  Section  304,  shall  make 
a return  for  the  purposes  of  this  title.  Such  returns  shall  be  made, 
and  the  taxes  imposed  by  this  title  shall  be  paid,  at  the  same  times  and 
places,  in  the  same  manner,  and  subject  to  the  same  conditions,  as  is 
provided  in  the  case  of  returns  and  payment  of  income  tax  by  corpora- 
tions for  the  purposes  of  Title  II,  and  all  the  provisions  of  that  title 
not  inapplicable  including  penalties,  are  hereby  made  applicable  to  the 
taxes  imposed  by  this  title.” 

2432  Section  1000,  Title  X,  of  the  Revenue  Act  of  1918  Imposes  on 
corporations  a special  excise  tax  with  respect  to  carrying  on  or  doing 

business,  and  subdivision  (d)  of  said  section  provides: 

“Section  257  shall  apply  to  all  returns  filed  with  the  Commissioner 
for  purposes  of  the  tax  imposed  by  this  section.” 

2433  Pursuant  to  these  provisions  of  law  the  President  orders  that  returns 
of  individuals,  partnerships,  associations,  joint-stock  companies,  and 

insurance  companies  filed  under  the  provisions  of  Section  2 of  the  Tariff 

Act  of  October  3,  1913,  Title  I of  the  Revenue  Act  of  1916,  Title  II,  of  the 

Revenue  Act  of  1917,  and  Titles  II  and  III  and  Section  1000,  Title  X,  of 

INC.  436  TAX 


1-13.20. 


the  Revenue  Act  of  1918  or  under  laws  hereafter  enacted  in  substitution  or 
amendment  of  the  income  tax  or  capital  stock  tax  provisions  thereof  and  not 
inconsistent  herewith  shall  be  open  to  inspection  in  accordance  and  upon 
compliance  with  the  following  rules  and  regulations: 

2434  1.  These  regulations  deal  only  with  inspection  or  returns,  as  the 
statutes  expressly  require  the  approval  of  the  President  of  regula- 
tions on  this  subject.  Other  uses  to  which  returns  may  be  lawfully  put, 
without  action  by  the  President,  are  not  covered  by  these  regulations. 

2435  2.  The  word  “corporation”  when  used  alone  herein  «hall,  unless  other- 
wise indicated,  include  corporations,  associations,  joint-stock  com- 
panies, and  insurance  companies.  The  word  “return”  when  so  used  shall, 
unless  otherwise  indicated,  include  income  and  profits  tax  returns;  and  also 
^special  excise  tax  returns  of  corporations  filed  pursuant  to  Section  1000, 
Title  X,  of  the  Revenue  Act  of  1918. 

2436  3.  Written  statements  filed  with  he  Commissioner  of  Internal 
Revenue  designed  to  be  supplemental  to  and  to  become  a part  of  tax 

returns  shall  be  subject  to  the  same  rules  and  regulations  as  to  inspection 
as  are  the  tax  returns  themselves. 

' 2437  4.  Except  as  hereinafter  specifically  provided,  the  Commissioner 

of  Internal  Revenue  may,  in  his  discretion,  upon  written  application 
setting  forth  fully  the  reasons  for  the  request,  grant  permission  for  the 
inspection  of  returns  in  accordance  with  these  regulations.  The  appli- 
cation will  be  considered  by  the  Commissioner  and  a decision  reached  by  him 
whether  the  applicant  has  met  the  conditions  imposed  by  these  regulations 
and  whether  the  reasons  advanced  for  permission  to  inspect  are  sufficient  to 
permit  the  inspection.  Such  written  application  is  not  required  of  the 
officers  and  employees  of  the  Treasury  Department  whose  official  duties 
require  inspection  of  a return,  or  of  the  Solicitor  of  Internal  Revenue. 

2438  5.  The  return  of  an  individual  shall  be  open  to  inspection  as  follows: 
(a)  By  the  officers  and  employees  of  the  Treasury  Department  whose 

official  duties  require  such  inspection  and  by  the  Solicitor  of  Internal  Revenue; 
(b)  by  the  person  who  made  the  return,  or  by  his  duly  constituted  attorney- 
in-fact;  (c)  by  the  administrator,  executor  or  trustee  of  the  taxpayer’s 
estate,  or  by  the  duly  constituted  attorney-in-fact  of  such  administrator, 
executor  or  trustee,  where  the  maker  of  the  return  has  died;  and  (d)  in  the 
discretion  of  the  Commissioner  of  Internal  Revenue,  by  one  of  the  heirs  at 
law  or  next  of  kin  of  such  deceased  person  upon  showing  that  he  has  a material 
interest  which  will  be  affected  by  information  contained  in  the  return. 

2439  6.  A joint  return  of  a husband  and  wife  shall  be  open  to  inspection 
(a)  by  the  officers  and  employees  of  the  Treasury  Department  whose 

official  duties  require  such  inspection,  and  by  the  Solicitor  of  Internal  Rev- 
'•enue;  and  (b)  by  either  spouse  for  whom  the  return  was^made,^or  his  or  her 
duly  constituted  attorney,  upon  satisfactory  evidence  of  such  relationship 
being  furnished. 

2440  7.  The  return  of  a partnership  shall  be  open  to  inspection  (a)  by 
the  officers  and  employees  of  the  Treasury  Department  whose  official 

duties  require  such  inspection  and  by  the  Solicitor  of  Internal  Revenue; 
and  (b)  by  anv  individual  (or  his  duly  constituted  attorney-in-fact,  or  legal 
representative)  who  was  a member  of  such  partnership  during  any  part  of  the 
time  covered  by  the  return,  upon  satisfactory  evidence  of  such  fact  being 
• furnished. 

2441  8.  The  return  of  a corporation  shall  be  open  to  inspection  (a)  by  the 
officers  and  employees  of  the  Treasury  Department  whose  official 

duties  require  such  inspection  and  by  the  Solicitor  of  Internal  Revenue; 

INC.  ^2>7  TAX 


(b)  upon  satisfactory  evidence  of  identity  and  official  position,  by  the  presi- 
dent, vice-president,  secretary  or  treasurer  of  such  corporation  or  if  none, 
its  principal  officer;  and  (c)  by  a stockholder  of  such  corporation  as  provided 
in  paragraph  9 hereof. 

2442  9.  A stockholder  of  record  owning  one  per  centum  or  more  of  the 
stock  of  the  outstanding  stock  of  a corporation  may  be  permitted 

to  inspect  its  return.  Such  permission  will  only  be  granted  upon  an  appli- 
cation in  writing  to  the  Commissioner  of  Internal  Revenue  accompanied  by 
an  affidavit  showing  applicant’s  address,  the  name  of  the  corporation,  the 
period  of  time  covered  by  the  return  he  desires  to  inspect,  and  a certificate 
from  the  officials  of  the  corporation  or  other  satisfactory  evidence  showing  the 
amount  of  the  corporation’s  outstanding  capital  stock,  the  number  of  shares 
owned  by  the  applicant,  the  date  when  such  stock  was  acquired,  and  satis- 
factory proof  of  identity.  This  privilege  of  inspection  is  personal  and  will 
be  granted  only  to  the  stockholder.  This  rule  has  no  application  to  the 
return  of  a corporation  filed  pursuant  to  the  Revenue  Act  of  1918;  specific 
provision,  independent  of  Presidential  regulation,  being  made  in  that  act  for 
inspection  by  a stockholder  of  a return  of  a corporation  filed  thereunder 
(second  proviso  of  Section  257). 

2443  10.  When  the  head  of  an  executive  department  (other  than  the 
Treasury  Department)  or  of  any  other  United  States  Government 

establishment,  desires  to  inspect  or  to  have  some  other  officer  or  employee 
of  his  branch  of  the  service  inspect  a return  in  connection  with  some  matter 
officially  before  him,  the  inspection  may,  in  the  discretion  of  the  Secretary 
of  the  Treasury,  be  permitted  upon  written  application  to  him  by  the  head  of 
such  executive  department  of  other  Government  establishment.  The 
application  must  be  signed  by  such  head  and  must  show  in  detail  why  the 
inspection  is  desired,  the  name  and  address  of  the  taxpayer  who  made  the 
return,  and  the  name  and  official  designation  of  the  one  it  is  desired  shall  in- 
spect the  return.  When  the  head  of  a bureau  or  office  in  the  Treasury 
Department,  not  a part  of  the  Internal  Revenue  Bureau,  desires  to  inspect 
a return  in  connection  with  some  matter  officially  before  him,  other  than  an 
income,  profits  tax  or  corporation  excise  tax  matter,  the  inspection  may, 
in  the  discretion  of  the  Secretary,  be  permitted  upon  written  application  to 
him  by  the  head  of  such  bureau  or  office  showing  in  detail  why  the  inspection 
is  desired.  The  reasons  submitted  for  permission  to  inspect  as  provided  in 
this  paragraph  shall  be  considered  by  the  Secretary  and  a decision  reached 
by  him  whether  the  reasons  are  sufficient  to  permit  the  inspection. 

2444  11.  When  it  becomes  necessary  for  the  Department  to  furnish 
returns  or  copies  thereof  for  use  in  legal  proceedings,  inspection  of 

such  returns  or  copies  that  necessarily  results  from  such  use  is  permitted. 

2445  12.  Except  as  provided  in  paragraph  11  returns  may  be  inspected 
only  in  the  office  of  the  Commissioner  of  Internal  Revenue,  Wash- 
ington, District  of  Columbia. 

2446  13.  A person  who,  under  these  regulations,  is  permitted  to  inspect 
a return  may  make  and  take  copy  thereof  or  a memorandum  of 

data  contained  therein. 

2447  14.  By  Section  3167  R.  S.  [^[1976],  as  amended  by  the  Revenue 
Act  of  1918,  it  is  made  a misdemeanor  for  any  person  to  print  or 

publish  in  any  manner  whatever  not  provided  by  law  any  income  return, 
or  any  part  thereof  or  source  of  income,  profits,  losses,  or  expenditures  appear- 
ing in  any  income  return,  which  misdemeanor  is  punishable  by  a fine  not 
exceeding  $1,000  or  by  Imprisonment  not  exceeding  one  year,  or  both,  at  the 
discretion  of  the  Court,  and  if  the  offender  be  an  officer  or  employee  of  the 
United  States,  by  dismissal  from  office  or  discharge  from  employment. 

INC.  438  TAX 


1-18-20. 


2448  15.  All  former  regulations  bearing  on  the  subject  of  inspection  of 

returns  are  hereby  superseded. 

2449^  16..  These  regulations  shall  remain  in  force  until  expressly  withdrawn 
or  overruled.  (T.  D.  2961,  signed  by  Carter  Glass,  Secretary  of  the 
Treasury  and  approved  by  President  Wilson,  January  7,  1920.) 


(T.  D.  2962.) 

2450  Regulations  Governing  the  Furnishing  of  Copies  of  Income  Returns; 
1955  the  Giving  to  State  Officials  Access  to  Income  Returns  of  Corpo- 

1969  rations,  Associations,  Joint-Stock  Companies  and  Insurance  Com- 

1970  panies;  the  Examination  by  a Stockholder  of  the  Annual  Income 
1972  Returns  of  a Corporation.— 1.  Furnishing  of  copies  of  income  return^. 

No  specific  provision  is  made  in  the  statutes  for  furnishinK  ^ copy  of 
an  income  return  to  any  one.  Authority  to  permit  inspection  does  not  carry 
with  it  authority  to  furnish  a copy.  Implied  authority  to  furnish  a copy  is 
contained  in  several  provisions  of  law  constituting  returns  public  records, 
and  ip  Sections  161  and  251  R.  S.,  which  confer  upon  the  Secretary  of  the 
T'reasury  broad  power  to  make  rules  and  regulations  concerning  ‘‘custody, 
use  and  preservation  of  the  records,  papers  and  property”  of  the  Department 
and  the  enforcement  of  the  Internal  Revenue  laws.  Because  of  the  pro- 
visions contained  in  Section  3167  R.  S.,  as  amended  by  the  Revenue  Act  of 
1918,  making  it  unlawful  for  any  officer  or  employee  of  the  United  States 
^‘to  divulge  or  to  make  known  in  any  manner  whatever  not  provided  by  law 
to  any  person  * * * the  amount  or  source  of  income,  profits,  losses, 

expenditures,  or  any  particular  thereof,  set  forth  or  disclosed  in  any  income 
return,  or  to  permit  any  income  return  or  copy  thereof  or  any  book  containing 
any  abstract  or  particulars  thereof  to  be  seen  or  examined  by  any  person  except 
as  provided  by  law;”  and  also  unlawful  “for  any  person  to  print  or  publish 
in  any  manner  whatever  not  provided  by  law  any  income  return,  or  any  part 
thereof  or  source  of  income,  profits,  losses,  or  expenditures  appearing  in  any 
income  return;”,  a copy  of  an  income  return  cannot  be  furnished,  except  as 
provided  by  law,  to  any  one  except  the  person  or  persons  who  made  the  return. 
Furnishing  the  maker  with  a copy  of  his  return  is  not  a divulging  of  informa- 
tion contained  therein  to  any  person,  within  the  meaning  of  Section  3167 
R.  S.,  as  amended.  There  are  numerous  provisions  in  the  Statutes  constiuit- 
ing  the  doing  or  failure  to  do  certain  things  offenses  against  the  United 
States,  and  providing  for  collecting  unpaid  taxes  by  suits  in  court  and  for 
bringing  suits  to  recover  taxes  and  penalties  wrongfully  collected.  These 
provisions  would  be  of  no  avail  were  it  held  that  the  returns  themselves,  or 
certified  copies  thereof  provided  for  in  Section  882  R.  S.,  could^  not  be  used 
by  the  Government  as  evidence  in  such  litigation  or  in  preparation  for  same. 
Manifestly  Congress  did  not,  when  it  enacted  Section  3167  R.  S.,  intend  to 
defeat  prosecutions  and  suits  in  court  for  which  it  has  specifically  provided. 
24.51  Incorpe  returns  filed  with  the  Department  are  public  records  of  the 
Department,  and  public  records  in  the  Treasury  Department  are  of 
right  available  as  evidence  in  litigation  in  court  unless  there  Is  some  statute 
making  it  unlawful  to  use  them  as  such  (Winn  v.  Patterson,  9 Pet.  663,  677; 
Evanston  v.  Gunn,  99  U.  S.  660;  17  Cyc.  306;  Williams  v.  Conger,  125 

U.  S.  397,  410;.  Iron  Silver  Min.  Co.  v.  Campbell,  135  U.  S.  286,  298;  Oakes 

V.  U.  S.;  174  U.  S.  778;  Texas,  etc.,  Ry.  Co.  v.  Swearingen,  196  U.  S.  51,  60). 
As  therefore  the  use  of  income  returns  or  copies  thereof  in  connection  with 
litigation  in  court,  where  the  United  States  Government  is  interested  in  the 

INC.  439  TAX 


result,  is  provided  for  by  law,  such  returns  or  copies  may  be  furnished  for 
such  use  without  a violation  of  the  provisions  of  Section  3167  R.  S.,  as 
amended. 

2452  The  following  rules  and  regulations  are  therefore  prescribed: 

2453  1.  The  original  income  return  of  an  individual,  partnership,  corpo- 
ration, association,  joint-stock  company,-  insurance  company,  or 

fiduciary,  or  a copy  thereof  may  be  furnished  by  the  Commissioner  of  Internal 
Revenue  to  a United  States  Attorney  for  use  as  evidence  before  a United 
States  grand  jury  or  in  litigation  in  any  court,  where  the  United  States  is 
interested  in  the  result,  or  for  use  in  the  preparation  for  such  litigation,  or  to 
any  attorney  connected  with  the  Department  of  Justice  designated  by  the 
Attorney  General  to  handle  such  matters  if  and  when  the  Attorney  General 
states  to  the  Commissioner  in  writing  that  such  attorney  is  so  designated. 
When  an  income  return  or  copy  thereof  is  thus  furnished,  it  must  be  limited 
in  use  to  the  purpose  for  which  it  is  furnished  and  is  under  no  conditions  to 
be  made  public  except  where  publicity  necessarily  results  from  such  use. 
In  case  the  original  return  is  necessary,  it  shall  be  placed  in  evidence  by  the 
Commissioner  of  Internal  Revenue  or  by  some  other  officer  or  employee  of 
the  Internal  Revenue  Bureau  designated  by  the  Commissioner  for  that 
purpose,  and  after  it  has  been  placed  in  evidence  it  shall  be  returned  to  the 
files  in  the  Office  of  the  Commissioner  in  Washington.  An  original  return 
will  be  furnished  only  in  exceptional  cases  and  then  only  when  it  is  made  to 
appear  that  the  ends  of  justice  may  otherwise  be  defeated.  Neither  the 
original  nor  a copy  of  an  income  return  desired  for  use  in  litigation  in  court 
where  the  United  States  Government  is  not  interested  in  the  result  and  where 
such  use  might  result  in  making  public  the  information  contained  therein 
will  be  furnished,  except  as  otherwise  provided  in  the  next  succeeding 
paragraph. 

2454  2.  A copy  of  an  income  return  may  be  furnished  by  the  Commissioner 
of  Internal  Revenue  to  the  person  who  made  the  return  or  to  his  duly 

constituted  attorney,  or  if  the  person  is  deceased,  to  his  executor  or  adminis- 
trator; or  if  the  entity  is  in  the  hands  of  a receiver,  trustee  in  bankruptcy, 
guardian  or  similar  legal  custodian,  to  the  receiver,  trustee  or  other  similar 
Custodian -Upon  written  application  for  same  accompanied  by  satisfactory 
evidence  that  the  applicant  comes  within  this  provision.’  “The  person  who 
made  the  return”  as  herein  used  refers  in  the  case  of  an  individual  return  to 
the  individual  whose  return  is  desired,  and  in  the  case  of  a return  of  a corpo- 
ration, association,  joint-stock  company,  insurance  company  or  fiduciary 
to  the  corporation,  association,  joint-stock  company  or  fiduciary,  a copy  of 
whose,  return  is  desired.  A corporation  may  also  'designate  by  proper  action 
of  its  Bpard  of  Directors  the  officer  or  individual  to  whom  a copy  of  a return 
made  by  the  corporation  may  be  furnished,  and  upon  sufficient  evidence  of 
such  action  and  of  the  identity  of  the  officer  or  individual,  a copy  may  be 
furnished  to  such  person.  A copy  of  a partnership,  income  return  will  bei 
furnished  to  the  partners  only  in  case  all  the  partners  join  in  the  request 
therefor,  it  matters  not  what  particular  partner  or  officer  of  the  partnership 
made  the  return.  If  the  partnership,  has  been  dissolved  the  members'  sur- 
viving may  be  furnished  a copy  if  all  the  members  surviving  join  in  the 
request.  . 

2455  3.  All  former  regulations  bearing  on  the  subjects  herein  covered  are 

hereby  superseded.  : 

2456  II.  Givin?^  to  state  officials  access  to  income  returns  of  corporations, 
associations,  joint-stock  companies,  and  insurance  companies.  Section 

2 of  the  Tariff  Act  of  October  3,  1913,  imposes  an  income  tax  on  corp.-^ rations, 

INC.  440  TAX 


% 


% 


1-13-20. 


joint-stock  companies  or  associations  and  insurance  companies,  and  requires 
them  to  file  income  returns.  Paragraph  G (d)  of  said  Section  provides  among 
other  things: 

“That  the  proper  officers  of  any  State  imposing  a general  income 
tax  may,  upon  the  request  of  the  governor  thereof,  have  access  to  said 
returns  or  to  an  abstract  thereof,  showing  the  name  and  income  of  each 
..  such  corporation,  joint-stock  company,  association,  or  insurance  com- 
pany, at  such  times  and  in  such  manner  as  the  Secretary  of  the  Treasury 
may  prescribe.’’ 

2457  Title  I of  the  Revenue  Act  of  1916  imposes  an  income  tax  on  corpo- 
rations, joint-stock  companies  or  associations,  and  insurance  companies 

and  requires  them  to  file  income  returns.  Section  14  (b)  of  said  Title  provides 
among  other  things: 

“That  the  proper  officers  of  any  State  imposing  a general  income 
tax  may,  upon  the  request  of  the  governor  thereof,  have  access  to  said 
returns  or  to  an  abstract  thereof,  showing  the  name  and  income  of  each 
such  corporation,  joint-stock  company  or  association,  or  insurance 
company,  at  such  time  and  in  such  manner  as  the  Secretary  of  the 
Treasury  may  prescribe.” 

2458  Title  II  of  the  Revenue  Act  of  1917  imposes  a war  excess-profits  tax 
on  corporation,  joint-stock  companies  or  associations,  and  insurance 

companies  and  Section  212  of  said  Title  provides: 

“That  all  administrative,  special,  and  general  provisions  of  law,  in- 
cluding the  laws  in  relation  to  the  assessment,  remission,  collection, 
and  refund  of  internal-revenue  taxes  not  heretofore  specifically  repealed, 
and  not  inconsistent  with  the  provisions  of  this  title  are  hereby  extended 
and  made  applicable  to  all  the  provisions  of  this  title  and  to  the  tax 
herein  iniposed,  and  all  provisions  of  Title  I of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  relating 
to  returns  and  payment  of  the  tax  therein  imposed,  including  penalties, 
are  hereby  made  applicable  to  the  tax  imposed  by  this  title.” 

2459  Title  II  of  the  Revenue  Act  of  1918  imposes  an  income  tax  on  cor- 
porations, associations,  joint-stock  companies,  and  insurance  com- 
panies and  requires  them  to  file  income  returns.  Section  257  of  said  Title 
provides  among  other  things: 

“That  the  proper  officers  of  any  State  imposing  an  income  tax  may, 
upon  the  request  of  the  governor  thereof,  have  access  to  the  returns  of 
any  corporation,  or  to  an  abstract  thereof  showing  the  name  and  income 
of  the  corporation,  at  such  times  and  in  such  manner  as  the  Secretary 
may  prescribe.” 

2460  Section  1 of  Title  I of  said  Revenue  Act  of  1918  provides: 

“That  when  used  in  this  Act  * * * term  ‘corporation’ 

includes  associations,  joint-stock  companies,  and  insurance  companies.” 

2461  Title  III  of  the  Revenue  Act  of  1918  imposes  a war-profits  and 
excess-profits  tax  on  corporations,  associations,  joint-stock  com- 
panies, and  insurance  companies,  in  addition  to  other  taxes  Imposed  by  the 
Act,  and  Section  336  of  said  title  provides: 

“That  every  corporation,  not  exempt  under  section  304,  shall  make  a 
return  for  the  purposes  of  this  title.  Such  returns  shall  be  made,  and 
the  taxes  imposed  by  this  title  shall  be  paid,  at  the  same  times  and 
places, ^ in  the  same  manner,  and  subject  to  the  sqme  conditions,  as 
is  provided  in  the  case  of  returns  and  payment  of  income  tax  by  corpora- 
tions for  the  purposes  of  Title  II,  and  all  the  provisions  of  that  title 


INC.  441 


TAX 


not  inapplicable,  including  penalties,  are  hereby  made  applicable  to  the  , 
taxes  imposed  by  this  title.” 

2462  Section  1000,  Title  X,  of  the  Revenue  Act  of  1918  imposes  on  cor- 
porations a special  excise  tax  with  respect  to  carrying  on  or  doih^ 

business,  and  subdivision  (d)  of  said  section  provides: 

“Section  257  shall  apply  to  all  returns  filed  with  the  Commissioner 
for  purposes  of  the  tax  imposed  by  this  section.” 

2463  Pursuant  to  the  authority  contained  in  these  provisions  of  law  or 
under  laws  heretofore  enacted  in  substitution  or  amendment  thereof 

and  not  inconsistent  herewith  the  following  rules  and  regulations  are  pre- 
scribed. 

2464  1.  The  proper  officers  of  a state  Imposing  an  Income  tax  are  entitled 
as  of  right  upon  the  request  of  its  governor  to  have  access  to  the 

Income  and  profits  tax  returns  of  a corporation,  association,  joint-stock  com- 
pany or  insurance  company  or  to  an  abstract  thereof  showing  Its  name  and 
income.  Proper  officers  In  this  connection  are  only  those  officers  of  the  state 
who  are  charged  with  the  enforcement  of  the  state  income  tax  law  and  who 
are  to  use  the  information  gained  by  the  access  only  In  connection  with  such 
enforcement. 

2465  2.  The  request  or  application  of  the  governor  must  be  in  writing 
Tgned  by  him  under  the  seal  of  his  state  and^must  show: 

(a)  That  the  state  imposes  an  Income  tax. 

(b)  The  name  and  address  of  the  corporation,  association,  joint-stoch 
company,  or  insurance  company  making  the  returns  to  which  access  is 
desired. 

(c)  Why  access  Is  desired. 

(d)  The  names  and  official  positions  of  the  officers  deslgnate4  to  have 
the  access. 

(e)  That  such  designated  officers  are  charged  with  the  enforcement  of 
the  state  Income  tax  law. 

(f)  That  the  Information  to  be  gained  by  the  access  is  to  be  used  only 
in  connection  with  such  enforcement. 

2466  3.  The  request  or  application  of  the  governor  may  be  ^addressed 
either  to  the  Secretary  of  the  Treasury  or  to  the  Commissioner  of 

Internal  Revenue  but  should  be  transmitted  to  the  Commissioner  who  will 
set  a convenient  time  for  the  access  to  the  returns  (or  to  an  abstract  thereof 
as  he  may  determine). 

2467  4.  Access  shall  be  given  only  In  the  office  of  the  Commissioner  of 
Internal  Revenue  in  Washington. 

2468  5.  The  officers  designated  by  the  governor  will  not  be  permitted  to 
name  another  person  or  persons  to  examine  the  returns  (or  abstracts) 

for  them. 

2469  6.  The  officers  designated  will  be  given  access  only  to  the  returns  of 
those  corporations,  associations,  joint-stock  companies,  or  insurance 

companies  organized  or  doing  business  In  their  state. 

2470  7.  The  officers  designated  may  have  access  to  lists  furnished  to 
supplement  and  become  a part  of  the  returns  to  which  they  are 

given  access. 

2471  8.  The  proper  officers,  as  defined  In  paragraph  1,  may  have  access  to 
the  capital  stock  tax  returns  filed  under  the  provisions  of  Section  1000 

of  the  Revenue  Act  of  1918  under  the  same  conditions  prescribed  In  the  pre- 
ceding paragraph  for  access  to  the  income  and  profits  tax  returns  of  corpora- 
tions, associations,  joint-stock  companies,  and  Insurance  companies.  This 
right  does  not  extend  to  the  examination  of  capital  stock  tax  returns  filed 
pursuant  to  prior  acts  of  Congress. 

INC  442  TAX 


1-14-20. 


2472  9.  All  former  regulations  bearing  on  the  subjects  herein  covered  are 
hereby  superseded. 

2473  III.  Examination  by  a stockholder  of  the  a.nnual  income  returns  of 
a corporation  made  pursuant  to  Titles  II  and  III  and  Section  1000, 

Title  X,  of  the  Revenue  Act  of  1918.  Title  II  of  the  Revenue  Act  of  1918 
imposes  an  income  tax  on  corporations  and  requires  them  to  file  income 
returns.  Section  257  of  said  title  provides  among  other  things: 

“That  all  bona  fide  stockholders  of  record  owning  1 per  centum  or 
more  of  the  outstanding  stock  of  any  corporation  shall,  upon  making  re- 
quest of  the  Commissioner,  be  allowed  to  examine  the  annual  income  re- 
turns of  such  corporation  and  of  its  subsidiaries.  Any  stockholder  who 
pursuant  to  the  provisions  of  this  section  is  allowed  to  examine  the 
return  of  any  corporation,  and  who  makes  known  in  any  manner  whatever 
not  provided  by  law  the  amount  or  source  of  income,  profits,  losses,  ex- 
penditures, or  any  particular  thereof,  set  forth  or  disclosed  in  any  such 
return,  shall  be  guilty  of  a misdemeanor  and  be  punished  by  a fine  not 
exceeding  $1,000,  or  by  imprisonment  not  exceeding  one  year,  or  both.” 

2474  Title  III  of  the  Revenue  Act  of  1918  imposes  a war-profits  and  excess- 
profits  tax  on  corporations,  in  addition  to  other  taxes  imposed  by  the 

Act,  and  Section  336  of  said  title  provides: 

“That  every  corporation,  not  exempt  under  section  304,  shall  make  a 
return  for  the  purposes  of  this  title.  Such  returns  shall  be  made,  and 
the  taxes  imposed  by  this  title  shall  be  paid,  at  the  same  times  and 
places,  in  the  same  manner,  and  subject  to  the  same  conditions,  as  is 
provided  in  the  case  of  returns  and  payment  of  income  tax  by  corporations 
for  the  purposes  of  Title  II,  and  all  the  provisions  of  that  title  not 
- inapplicable,  including  penalties,  are  hereby  made  applicable  to  the  taxes 
imposed  by  this  title.” 

2475  Section  1000,  Title  X,  of  the  Revenue  Act  of  1918  imposes  on  corpora- 
tions a special  excise  tax  with  respect  to  carrying  on  or  doing  business, 

and  subdivision  (d)  of  said  section  provides: 

“Section  257  shall  apply  to  all  returns  filed  with  the  Commissioner 
for  purposes  of  the  tax  imposed  by  this  section.” 

2476  Pursuant  to  these  provisions  of  law  and  any  other  laws  that  may  be 
hereafter  enacted  in  substitution  or  amendment  thereof  and  not  in- 
consistent herewith,  a bona  fide  stockholder  of  record  owning  1 per  centum 
or  more  of  the  outstanding  stock  of  a corporation  shall  be  entitled  as  of  right, 
upon  making  request  of  the  Commissioner  of  Internal  Revenue,  to  examine 
the  annual  income  returns  of  such  corporation  and  of  its  subsidiaries  made 
under  Titles  II  and  II  of  the  Revenue  Act  of  1918,  and  all  returns  of  corpo- 
rations filed  for  purposes  of  the  tax  imposed  by  Section  1000,  Title  X,  of  said 
act.  His  request  for  permission  to  examine  such  returns  must  be  made  in 
writing  and  must  be  in  the  form  of  an  affidavit  showing  his  address,  the  name 
of  the  corporation,  the  period  of  time  covered  by  the  return  he  desires  to 
inspect,  the  amount  of  the  corporation’s  outstanding  capital  stock,  the  number 
of  shares  owned  by  him,  the  date  when  he  acquired  them  and  whether  he  has 
the  beneficial  as  well  as  the  record  title  to  such  shares.  It  must  also  show 
that  he  has  not  acquired  his  shares  for  the  purpose  of  the  examination  of  the 
income  returns  of  the  corporation.  If  he  has  acquired  them  for  this  purpose 
he  is  not  a bona  fide  stockholder  within  the  meaning  of  the  statute.  The 
application  must  be  supported  by  satisfactory  evidence  showing  that  the 
applicant  is  a bona  fide  stockholder  of  record  of  the  required  amount  of 
stock  of  the  corporation.  The  supporting  evidence  may  be  partly  in  the  form 


INC.  443  TAX 


of  a certificate  signed  by  the  president  or  vice-president  of  the  corporation, 
and  countersigned  by  the  secretary  under  the  corporate  seal.  Upon  being 
satisfied  from  the  evidence  presented  that  the  applicant  has  fully  met  these 
conditions  the  Commissioner  will  grant  the  permission  to  examine  the  returns 
and  set  a convenient  time  for  the  examination  in  the  office  of  the  Com- 
missioner. This  privilege  is  personal  and  will  be  granted  only  to  the  stock- 
holder who  cannot  delegate  it  to  another. 

2477  All  former  regulations  bearing  on  this  subject  are  hereby  supepeded. 

2478  IV.  Inspection  of  Returns  in  all  other  cases  is  governed  by  Presidential 
2427  order  and  regulations  [112427],  to  which  reference  is  made.  (T.  D. 

2962,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  January 
7,  1920.) 


(T.  D.  2963.) 

Amendment  of  Article  1568  of  Regulations  45. 

2479  Determination  of  gain  or  loss  from  subsequent  sale  of  stock  and 
1087  securities  received  in  exchange  on  reorganization,  merger,  or  con- 
solidation.— Article  1568  of  Regulations  45  is  hereby  amended  to 
read  as  follows: 

“Art.  1568.  Determination  of  gain  or  loss  from  subsequent  sale.— The 
new  stock  and  securities  received  as  described  in  the  preceding  article  [Art. 
1567,  111085]  take  the  place  of  the  old  stock  and  securities.  For  the  purpose, 
therefore,  of  ascertaining  the  gain  derived  or 'loss  sustained  from  the  sub- 
sequent sale  of  any  stock  of  A or  of  the  consolidated  corporation,  so  received, 
the  original  cost  to  the  taxpayer  or  the  fair  market  value  as  of  March  1,  1913, 
of  the  stock  of  B or  A in  respect  of  which  the  new  stock  was  issued,  less  any 
untaxed  distribution  made  to  the  taxpayer  by  A out  of  the  former  capital  or 
surplus  of  B,  or  by  the  consolidated  corporation  out  of  the  former  capital  or 
surplus  of  A or  B,  is  the  basis  for  determining  the  amount  of  such  gain  or  loss. 
When  securities  of  a single  class  are  exchanged  for  new  securities  of  the  same 
total  par  value  but  of  different  classes,  for  purposes  of  determining  profit 
or  loss  on  subsequent  sale  of  any  of  the  new  securities,  the  proportion  of 
original  cost  (or  value  as  of  March  1,  1913)  to  be  allocated  to  each  class  of 
new  securities  is  that  proportion  which  the  market  value  of  the  particular 
class  bears  to  the  market  value  of  all  securities  received  on  the  date  of  the 
exchange.  For  example,  if  100  shares  of  common  stock  par  value  $100  are 
exchanged  for  50  shares  of  preferred  and  50  shares  of  common  each  of  $100 
par  value,  and  the  cost  of  the  old  stock  was  $250  per  share,  or  $25,000,  but 
the  market  value  of  the  preferred  on  the  date  of  exchange  was  $110  per  share, 
or  $5,500  for  the  50  shares,  and  the  market  value  of  the  common  was  $440 
per  share,  or  $22,000  for  the  50  shares  of  common,  one-fifth  of  the  original  cost, 
or  $5,000,  would  be  regarded  as  the  cost  of  the  preferred  and  four-fifths,  or 
$20,000,  as  the  cost  of  the  common.  Similarly,  the  cost  after  reorganization, 
merger  or  consolidation  of  the  assets  of  A or  of  the  consolidated  corporation 
is  the  sum  of  the  cost  (or  the  fair  market  value  as  of  March  1,  1913)  of  the 
assets  of  A and  of  B for  the  purpose  of  ascertaining  the  gain  or  loss  upon  a 
subsequent  sale.  The  new  invested  capital  of  A or  of^  the  consolidated 
corporation  is  to  be  determined  as  if  A and  B were  rendering  a consolidated 
return  as  affiliated  corporations.  See  sections  240  and  326  of  the  statute 
and  articles  631-638  [for  consolidated  returns,  beginning  at  111826]  and 
864-869  [for  invested  capital  of  affiliated  corporations  for  excess-profits  tax 
purposes — War  Tax  Service].”  (T.  D.  2963,  signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  January  12,  1920.) 

INC.  444  TAX 


1-24-20. 


2480  Taxable  and  exempt  status  of  War  Finance  Corporation  Bond  in- 
1133  terest. — War  Finance  Corporation  bonds  are  issued  under  the 
1138  authority  of  the  Act  of  April  5,  1918,  which  provides  that  the  interest 

on  the  amount  of  such  bonds,  the  principal  of  which  does  not  exceed 
$5,000,  shall  be  exempt  from  normal  taxes,  surtaxes,  excess  profits  and  war 
profits  taxes,  and  that  the  interest  received  by  a taxpayer,  independent  of  the 
amount  of  his  holdings,  is  exempt  from  normal  Federal  tax  [which  includes 
the  income  tax  on  corporations].  (Official  announcement  by  the  Bureau 
of  Internal  Revenue,  April  5,  1919.) 

2481  [Comment:  Section  16  of  the  Act  of  April  5,  1918  (The  War  Finance 
Corporation  Act)  reads  in  part  as  follows:] 

“Sec.  16.  That  any  and  all  bonds  issued  by  the  Corporation  shall  be 
exempt,  both  as  to  principal  and  interest,  from  all  taxation  now  or 
hereafter  imposed  by  the  United  States,  any  State,  or  any  of  the  pos- 
sessions of  the  United  States,  or  by  any  local  taxing  authority,  except 
(a)  estate  or  inheritance  taxes,  and  (b)  graduated  additional  income 
taxes,  commonly  known  as  surtaxes,  and  excess-profits  and  war-profits 
taxes,  now  or  hereafter  imposed  by  the  United  States,  upon  the  income 
or  profits  of  individuals,  partnerships,  corporations,  or  associations. 
The  interest  on  an  amount  of  such  bonds  the  principal  of  which  does  not 
exceed  in  the  aggregate  $5,000,  owned  by  any  individual,  partnership, 
corporation,  or  association,  shall  be  exempt  from  the  taxes  referred  to 
in  clause  (b).”  [Comment:  Any  exemption  provided  by  the  above  is 
distinct  from  and  in  addition  to  any  exemption  applicable  to  interest  on 
Liberty  Bonds,  Victory  Notes,  Treasury  Certificates  of  Indebtedness, 
War  Savings  Certificates,  and  other  United  States  Government  obli- 
gations.] 


2482  Dividends  received  from  foreign  corporations  sub'ect  to  income  tax 

1325  are  exempt  from  the  tax  on  corporations  as  well  as  from  normal  tax 
1514  on  individuals. — Receipt  is  acknowledged  of  your  letter  of  October 
1517’  31,  1919,  in  which  you  refer  to  a letter  which  this  office  addressed  to 

" The  Corporation  Trust  Company  on  June  9,  1919,  appearing  at  page 
474  of  The  Corporation  Trust  Company’s  1919  Income  Tax  Service  [111517  of 
the  1920  Service],  and  request  to  be  advised  if  the  ruling  contained  in  that 
letter  applies  to  a domestic  corporation  as  well  as  an  individual  owning  stock 
in  and  receiving  dividends  from  a foreign  corporation.  In  the  letter  referred 
to  it  was  held  that: 

“Article  301  of  the  Regulations  contemplates  that  the  normal  tax 
imposed  by  Section  210  of  the  Act  does  not  apply  to  dividends,  regardless 
of  the  amount  of  such  dividends,  received  from  a foreign  corporation 
taxable  upon  income  from  sources  within  the  United  States,  however 
small  such  income  may  be.” 

2483  The  above  ruling  applies  to  both  individuals  and  corporations. 
Accordingly,  dividends  received  from  a foreign  corporation  taxable 

on  its  net  income  from  sources  within  the  United  States,  however  small  such 
income  may  be,  are  not  subject  to  normal  tax  in  the  hands  of  the  recipient 
domestic  corporation.  (Letter  to  a subscriber,  signed  by  J.  H.  Callan, 
Assistant  to  the  Commissioner,  by  N.  T.  Johnson,  Head  of  Division,  and  dated 
November  21,  1919.) 


NC. 


445  TAX 


2484  Excise  taxes  on  sales  imposed  on  the  manufacturer,  producer  or 
1254  importer,  not  deductible  by  consumers. — May  war  excise  taxes 
imposed  by  section  900  be  deducted  by  individual  purchaser  in  computing 
net  income  for  taxable  year.  Automobile  companies  are  notifying  individual 
purchasers  that  they  may  deduct  amount  of  tax  which  is  levied  on  account 
of  sale  of  automobile.  Wire  reply  collect.  (Answer.)  Excise  taxes  im- 
posed under  section^900  upon^^manufa'cturer,  producers  or  importers  not 
deductible  by  individual  purcha/ser  in  computing  net  income.  (Telegram  of 
inquiry  from  The  Cleveland  Trust  Company,  Cleveland,  Ohio,  and  the  reply 
thereto  signed  by  George  V.  Newton,  Acting  Assistant  to  the  Commissioner, 
and  dated  January  7,  1920.) 


2485  Manner  of  determining  gain  or  loss  on  the  assignment  of  a life 
1177  insurance  policy  to  the  writing  company, — Receipt  is  acknowledged 

of  your  letter  of  October  4,  1919,  asking  this  office  to  reconsider  the 
case  presented  in  your  letter  of  September  5,  1919,  in  regard  to  Policy 
No. , issued  by  your  Company  on  the  life  of . 

2486  It  is  your  opinion  that  the  amount  of  $360,  representing  a part  of  the 

premiums  paid  by  Mr. previous  to  March  1,  1913,  but 

not  included  in  the  cash  surrender  value  of  the  policy  as  of  that  date,  should 
for  income  tax  purposes  be  an  allowable  deduction  from  the  amount  re- 
ceived by  the  insured  at  the  maturity  of  the  policy  instead  of  a gain  over  the 
value  of  the  policy  since  March  1 , 19 13,  as  is  held  in  office  letter  of  September  19 
by  using  as  the  basis  for  ascertaining  the  gain  or  loss  the  cash  surrender  value 
of  the  policy  as  of  March  1,  1913,  the  date  upon  which  the  income  tax  law 
became  effective.  In  this  connection,  you  are  advised  that  the  expressed 
intent  of  the  law  in  other  sections,  for  the  purpose  of  determining  the  gain  or 
loss  sustained  from  the  disposition  of  property  real,  personal  or  mixed  is  that 
the  basis  in  the  case  of  property  acquirecl  before  March  1,  1913,  shall  be  the 
fair  market  price  or  value  of  such  property  as  of  that  date,  the  value  to  be 
used  when  referring  to  an  insurance  policy  being  explicitly  stated  in  Article 
87  [If  1177]  of  Regulations  45,  as  its  cash  surrender  value  as  of  that  date. 

2487  In  view  of  the  foregoing  statement,  you  are  advised  that  this  office 
holds  that  the  first  method  presented  in  office  letter  of  September  19, 

1919,  is  the  correct  method  for  determining  the  gain  or  profit  resulting  from 
the  disposition  of  a life  insurance  policy  which  was  acquired  prior  to  March  1, 
1913,  where  the  insured  transfers  the  policy  and  his  rights  thereunder  to 
another  than  the  insurance  company  which  wrote  the  policy  in  consideration 
of  a stated  price. 

2488  However,  Section  213j1flll3]  of  the  Revenue  Act  of  1918  provides 
that 

“The  amount  received  by  the  insured  as  a return  of  premium  or 
premiums  paid  by  him  under  life  insurance,  endowment,  or  annuity 
contracts,  either  during  the  term  or  at  the  maturity  of  the  term  men- 
tioned in  the  contract  or  upon  surrender  of  the  contract,” 
is  exempt  from  the  Federal  income  tax.  Therefore,  this  office  further  holds 
that  where,  as  in  the  case  of  Mr.  , the  insured  sur- 

rendered his  policy  and  all  his  rights  thereunder  to  the  insurance  company 
which  wrote  the  policy,  the  aggregate  amount  of  premiums  paid  during  the 
period  the  policy  was  held,  or  the  cash  surrender  value  of  the  policy  as  of 
March  1,  1913,  whichever  is  the  greater  in  amount,  is  to  be  taken  as  the 
basis  in  computing  the  amount  of  profit  derived  therefrom,  and  the  differ- 
ence between  such  aggregate  amount  or  cash  surrender  value  and  the  amount 
received  upon  surrender  is  the  amount  to  be  returned  as  income  for  the  year 
during  which  the  cancellation  took  place.  (Letter  to  The  Provident  Life  and 
Trust  Company  of  Philadelphia,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  January  5,  1920.) 

INC. 


446  TAX 


2-5-20. 

2489  A discussion  of  “reasonable  allowance  for  salaries.”— Receipt  i» 
1208  s ckcowledged  of  your  letter  of  November  29,  1919,  inquiring  whether 
or  not  the  Department  has  arrived  at  any  general  conclusion  witB 
respect  to  salaries  of  executives  which  may  be  properly  deducted  in  determin- 

ing  tax  liability.  ^ 

2480  In  reply  you  are  advised  that  the  probien 
compensation  for  personal  services  is  one 

are  few  general  rules  which  can  be  laid  down  as  gi 
factors  are  involved,  among  them  being  the  character  and  amount  ot  respon-  . 
sibility,  ease  or  difficulty  of  the  work  itself,  tirne  required,  working  conditions, 
future  prospects,  living  conditions  of  the  locality,  individual  ability,  technical 
training,  profitableness  to  the  employer  of  the  services  rendered,  and  the 
number  of  available  persons  capable  of  performing  the  duties  of  the  position. 

248 1 A very  comprehensive  study  of  the  returns  of  various  classes  ot  cor- 
porations has  been  made  by  the  Department  and  has  been  reduced  to  a 

chart  of  statistical  curves  showing  the  average  relationship  of  deductions 
for  officers’  compensation  to  gross  income,  to  total  deductions,  and  to  net 
income  plus  compensation  to  officers.  In  cases  where  the  salaries  may  be 
properly  questioned,  the  chart  is  used  as  a guide,  but  the  precise  results  oi 
the  study  are  not  applied  in  such  cases  because  of  the  varying  circumstances^, 
surrounding  the  determination  of  the  salaries.  These  circumstances  arc 
given  full  weight  in  the  consideration  of  each  particular  case. 

2492  Th«  test  of  deductibility  in  the  case  of  compensation  payments  Is 
whether  they  are  reasonable  and  are  in  fact  payments  purely  for 

services. 

2493  Cases  in  which  the  compensation  paid  is  not  in  fact  the  purchase 
price  of  the  services  rendered  are  likely  to  occur  (1)  where  a corpo- 
ration has  few  stockholders,  practically  all  of  whom  draw  salaries,  (2)  where 
salaried  employees  are  in  control  of  the  corporation  through  holding  directly 
or  indirectly  a majority  of  its  stock,  and  (3)  in  the  case  of  a large  corporation 
with  many  stockholders  where  the  salaried  employees  hold  a substantial; 
minority  of  its  stock.  In  such  cases  there  is  an  opportunity  for  the  officer®, 
unduly  to  inflate  their  salaries  or  to  pool  their  interests  in  such  a way  that 
part  of  the  compensation  is  not  in  fact  payment  for  services  rendered. 

2494  The  Department  will  question  such  salaries  when  they  are  excessive 
and  appear  to  have  relation  to  stockholdings,  or  to  have  been  made 

as  a result  of  the  pooling  of  the  interests  of  those  in  control  of  the  corporation.. 

2495  But  the  Department  does  not  question  compensation  which  is  paid  as 
the  result  of  open  bargaining,  or  as  the  result  of  bona  fide  contracts  and 

arrangements  entered  into  and  followed  prior  to  the  years  in  which  the 
tax  rates  have  been  exceedingly  high,  provided  such  payments  are  in  fact 
purely  for  services.  For  example — compensation  paid  in  1918,  which  is 
apparently  excessive,  but  which  was  paid  as  the  result  of  open  bargaining 
entered  into  and  followed  prior  to  1917,  will  not  be  questioned  by  the  De- 
partment. 

2496  When  on  the  audit  of  a return,  it  appears  that  salaries  are  excessive^ 
and  the  conditions  stated  in  the  previous  paragraph  do  not  exist,  the 

taxpayer  is  given  an  opportunity  of  presenting  facts  which  will  show  that 
the  amount  deducted  on  his  account  is  reasonable,  and  is  in  fact  the  pur- 
chase price  of  the  services.  Before  a decision  is  made,  the  facts  presented 
are  given  careful  consideration.  There  is  enclosed  a copy  of  Regulations. 
No.  45,  Articles  105  [^[1210]  and  106  [If  12 14]  of  which  bear  on  the  subject.. 
(Letter  to  Thomas  A.  Fernley,  Secretary-Treasurer,  The  National  WholesaJc: 
Dry  Goods  Association,  Philadelphia,  Pa.,  signed  by  G.  V.  Newton,  Acting 
Assistant  to  the  Commissioner,  by  N.  T.  Johnson,  H^^id  of  Division,  and 
dated  December  13,  1919.) 


. of  determining  reasonable 
of  difficulty,  in  that  therc> 
tides  to  a decision.  Many 


INC  447 


TAX 


2497  Returns  in  respect  of  money  and  other  property  of  enemies  surren- 
1699  dered  to  the  Alien  Property  Custodian. — Receipt  is  acknowledged  of 

1854  your  letter  dated  October  30,  1919,  stating  that  the Trust 

Company  is  attorney-in-fact  for  a nonresident  alien  client  who  is 
held  to  be  an  enemy  by  the  Alien  Property  Custodian.  On  August  22,  1918, 
the  Trust  Company  surrendered  to  the  Alien  Property  Custodian  all  money 
and  securities  in  its  possession  belonging  to  its  client.  Your  statement  is 
noted,  referring  to  Article  446  of  Regulations  45,  that  apparently  the  Trust 
Company  was  required  to  render  a return  at  the  time  the  money  and  securi- 
ties were  relinquished,  * * *.  ^In  reply,  you  are  advised  that  at  the 

time  the Trust  Company  turned  over  the  money  and  securities  of  its 

enemy  client  to  the  Alien  Property  Custodian,  the  provisions  of  Treasury 
Decision  2673,  dated  March  18,  1918,  were  in  force.  Under  that  decision,  it 
was  required  that  ‘‘All  persons  who  on  October  6,  1917,  had,  or  since  have 
had,  or  may  hereafter  have,  control  of  any  money  or  other  property  for  any 
enemy  or  ally  of  enemy,  or  who  on  October  6,  1917,  were,  or  since  have 
been,  or  may  hereafter  be,  indebted  to  any  enemy  or  ally  of  enemy,  shall 
hold  and  deliver  all  said  money  and  property  in  all  respects  subject  to  the 
provisions  of  the  Trading  with  the  Enemy  Act  and  to  the  order  of  the  Presi- 
dent of  the  United  States  and  of  the  Alien  Property  Custodian  thereunder, 
and  shall  in  due  course  file  returns  of  income  in  respect  of  all  said  money  and 
property  for  such  periods  as  may  elapse  or  have  elapsed  prior  to  the  actual 
delivery  of  said  money  and  property  to  the  Alien  Property  Custodian.” 
^This  decision  was  substantially  repeated  in  Article  446.  Neither  the  lan- 
guage of  the  original  ruling  nor  that  of  Article  446  can  be  so  construed  as  to 
require  the  filing  of  returns  at  the  time  of  surrendering  the  rnoney  and  prop- 
erty of  enemies  to  the  Alien  Property  Custodian.  But  as  indicated  in  the 
last  sentence  of  the  decision  given  above,  returns  of  income  are  to  be  filed  in 
due  course^  which  is  held  to  mean  by  the  next  regular  due  date  for  the  filing 
of  returns  of  income.  The  following  ruling  of  the  Alien  Property  Custodian 
under  Treasury  Decision  2673  is  approved  and  quoted  for  your  informa- 
tion, to  wit:  “Return  of  income  is  required  to  be  filed  in  due  course  in 
respect  of  all  money  or  other  property  for  such  part  of  the  year  1918,  or  any 
subsequent  year  as  may  elapse  prior  to  the  actual  delivery  of  the  money  or 
other  property  to  the  Alien  Property  Custodian,  but  no  withholding  or  the 
payment  of  any  taxes  is  required.”  (Letter  to  The  Corporation  Trust  Com- 
pany, signed  by  Commissioner  Daniel  C.  Roper,  and  dated  January  19, 
1920.) 


2498  Procedure  when  foreign  item  is  presented  without  ownership  cer- 
1704  tificate  and  owner  is  unknown. — In  case  foreign  item_  is  unaccom- 

1751  panied  by  certificate  and  owner  is  unknown,  affidavit  and  Form 

1001-A,  revised,  showing  name  and  address  of  payee  should  be 
executed  by  first  bank  unless  item  represents  interest  on  bonds  containing 
tax  free  covenant  issued  by  foreign  country  or  corporation  having  paying 
agent  in  U.  S.  in  which  case  affidavit  and  Form  1000,  revised,  should  be 
executed  by  first  bank  in  accordance  with  Article  368  [lfl704].  For  audit 
purposes  payee  will  be  considered  actual  owner.  (Telegram  to  the  Equitable 
Trust  Company,  New  York,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  January  20,  1920.) 


INC. 


448  TAX 


2.7-20. 


(T.  D.  2966.) 

[Matter  in  italics  is  new;  that  in  boldface  brackets  [ ] shows  old  matter  cut  out.] 

2499  Charitable  contributions:  Article  251,  Regulations  45,  amended. — 
1448  Article  251  of  Regulations  45  is  hereby  amended  to  read  as  follows: 

Article  251.  Charitable  contributions. — Contributions  or  gifts  with- 
in the  taxable  year  are  deductible  to  an  aggregate  amount  not  in  excess  of 
fifteen  per  cent  of  the  taxpayer’s  net  income  including  such  payments,  if 
made  (a)  to  corporations  or  associations  of  the  kind  exempted  from  tax  by 
sub-division  (6)  of  section  231  of  the  statute  or  (b)  to  the  special  fund  for 
vocational  rehabilitation  under  the  Vocational  Rehabilitation  Act  of  June 
27, 1918.  For  a discussion  of  what  corporations  and  associations  are  included 
within  (a)  see  article  517  [^[760].  A gift  to  a common  agency  (as  a war 
chest)  for  several  such  corporations  or  associations  is  treated  like  a gift 
direct  [directly]  to  them.  In  connection  with  claims  for  this  deduction 
there  shall  be  stated  on  returns  of  income  the  name  and  address  of  each  or- 
ganization to  which  a gift  was  made,  and  the  approximate  date  and  the  amount 
of  the  gift  in  each  case.  Where  the  gift  is  other  than  money,  the  basis  for 
calculation  of  the  amount  of  the  gift  shall  be  the  cost  of  the  property,  if  acquired 
after  February  28,  1913,  or  its  fair  market  value  as  of  March  1,  1913,  if  acquired 
prior  thereto,  after  deducting  from  such  cost  or  value  the  amount,  if  any,  which 
has  been  or  which  should  have  been  set  aside  and  deducted  in  the  current  year 
and  previous  years  from  gross  income  on  account  of  depreciation,  and  which 
has  not  been  paid  out  in  making  good  the  depreciation  sustained  [fair  market 
value  of  the  property  at  the  time  given].  A gift  of  real  estate  to  a city  to  be 
maintained  perpetually  as  a public  park  is  not  an  allowable  deduction.  This 
article  does  not  apply  to  gifts  by  partnerships,  estates  and  trusts,  or  cor- 
porations. See  sections  218  [for  partnerships,  1[552]  and  219  [for  estates 
and  trusts,  ^652]  of  the  statute  and  articles  561  and  562  [for  corporations 
1[1 181  and  ^1227].  (T.  D.  2966,  signed  by  J.  H.  Callan,  Acting  Commissioner 

of  Internal  Revenue,  and  dated  February  4,  1920.) 


(T.  D.  2967.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2500  Amending  Article  367,  Regulations  45,  concerning  the  use  of  sub- 
1700  stitute  certificates. — The  final  edition  of  Regulations  45  is  amended 
1702  by^^changing  Article  367  to  read  as  follows: 

Art.  367.  Use  of  substitute  certificates. — Resident  collecting  agents 
and  responsible  banks  and  bankers,  receiving  interest  coupons  for  collection 
with  ownership  certificates  attached,  may  present  the  coupons  with  the 
original  certificate  to  the  debtor  corporation  or  its  duly  authorized  with- 
holding agent  for  collection  or  may  detach  and  forward  the  original  certi- 
ficates directly  to  the  Commissioner,  provided  each  such  collecting  agent 
shall  substitute  for  such  original  certificates  its  own  certificates  (form  1058, 
(revised)  or  form  1059  (revised))  and  shall  keep  a complete  record  of  each  trans- 
action, showing  (a)  serial  number  of  item  received;  (b)  date  received; 
(c)  name  and  address  of  person  from  whom  received;  (d)  name  of  debtor 
corporation;  (e)  class  of  bonds  from  which  coupons  were  cut  (whether  con- 
taining a tax-free  covenant  or  not);  and  (f)  face  amount  of  coupons.  The 
original  certificate  for  which  the  certificate  of  the  collecting  agent  is  substituted 


INC. 


449 


TAX 


shall  he  indorsed^  preferably 
follows: 


with  a rubber  stamps  by  the  collecting  agent  as 
Owner^s  certificate  No 


{Name  of  collecting  agent) 


{Give  date  of  certificate.) 

The^fcounterpart  of  the  within  certificate  bearing  like  number  was^  attached 
to  the  coupons  within  mentioned  for  delivery  to  the  debtor  or  withholding  agent, 
by  whom  the  coupons  are  payable. 

For  the  purpose  of  identification  the  substitute  certificates  shall  be  numbered 
consecutively,  reverting  to  the  numeral  1 at  the  beginning  of  each  calendar 
year,  and  corresponding  numbers  given  the  original  certificates  of  ownership. 
The  use  of  substitute  certificates  by  collecting  agents,  banks  and  bankers 
is  not  permitted,  however,  in  the  case  of  ownership  certificates  presented 
with  coupons  for  collection  by  nonresident  alien  individuals,  partnerships 
or  corporations.  (T.  D.  2967,  signed  by  J.  H.  Callan,  Acting  Commissioner 
of  Internal  Revenue  and  dated  February  4,  1920.) 


2501  On  the  use  of  Form  1001-B  generally  and  its  use  for  prior  years 
1650  during  which  there  was  statutory  provision  for  personal  exemption 

to  nonresident  aliens. — Receipt  is  acknowledged  of  your  letter  of 

Januarv  8,  1920,  in  which  you  make  an  inquiry  on  behalf  of — , 

in  regard  to  Form  1001-B.  Mr. y desires  to  know  whether 

a nonresident  alien  in  making  out  Form  1001-B  is  required  only  to  repoit 
interest  received  during  the  year  from  coupons  maturing  during  that  year; 
also  whether  a nonresident  alien  should  file  Form  1001-B  for  every  year  in 
respect  of  which  he  has  received  interest  during  the  calendar  year. 

2502  In  reply  you  are  advised  that  the  purpose  of  Form  1001-B  is  to  pro- 
vide for  relief  of  domestic  corporations  which  have  assumed  payment 

of  income  tax  with  respect  to  tax-free  covenant  bonds  owned  by  nonresident 
aliens  who  are  entitled  to  credit  for  personal  exemption  and  dependents 
but  whose  incomes  from  sources  in  the  United  States  do  not  exceed  such 
credit  therefor.  A nonresident  alien  who  files  Form  1001-B,  should  report 
in  the  space  provided  for  that  purpose,  all  othey  incoine^  for  the  calendar 
year  last  ended,  from  sources  in  the  United  States  in  addition  to  the  in^rest 
due  during  that  year  from  coupons  maturing  during  the  year.  While  Form 
1001-B  was  intended,  primarily,  for  reporting  1919  income,  it  may  be  adopted 
for  reporting  any  interest  received  in  respect  of  the  years  1916  and  1918, 
in  which  case  a separate  form  should  be  filed  for  each  of  those  years,  in  respect 
of  which  the  nonresident  alien  has  received  interest  during  the  calendar  year. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  February  3,  1920.) 


INC. 


450  TAX 


2-11-20. 


(T.  D.  2969.) 

[Matter  in  italics  is  new;  that  in  hold  face  brackets  [ ] is  old  matter  cut  out,] 

2503  Ownership  Certificates — Alien  Property  Custodian:  Article  375, 
|I699  Regulations  45,  Amended. — ^Article  375,  Treasury  Department  Reg- 
2497  ulations  45,  is  hereby  amended  to  read  as  follows:  “Payments  made 
after  October  6,  1917,  to  the  alien  property  custodian  are  in  the  same 
category  as  payments  made  to  or  for  citizens  or  residents  of  the  United  States. 
Withholding  at  the  source  is  accordingly  unnecessary  except  in  the  case  of 
interest  payments  on  corporate  bonds  or  other  obligations  containing  a tax- 
free  covenant  where  no  exemption  is  claimed.  The  alien  property  custodian 
should  use  form  1000  (revised)  in  collecting  interest  on  bonds  containing  a 
tax-free  covenant  and  in  all  other  cases  should  use  form  1001  (revised), 
except  that  in  cases  in  which  the  alien  property  custodian  shalf  under  the  trad- 
ing with  the  enemy  act^  demand  payment  to  himself  of  interest  accrued  upon 
bonds  or  other  securities  not  yet  reduced  to  his  custody  {even  though  they  be  regis- 
tered in  the  name  of  an  enemy ^ ally  of  enemy,  or  his  agent  or  trustee),  the  cor- 
poration paying  such  income  to  the  alien  property  custodian  is  authorized  to 
accept  from  the  alien  property  custodian  ownership  certificates,  forms  1000  {re- 
vised) and  1001  {revised),  altered  by  the  substitution  {in  lieu  of  the  certificate 
required  thereon)  of  a certificate  that  the  alien  property  custodian  is  entitled  to 
the  interest  entered  therein  with  or  without  deduction  of  tax,  as  the  case  may  be. 
No  distinction  is  to  be  made  between  payments  directly  to  the  alien  prop- 
erty custodian  and  to  his  depositaries  and  between  interest  on  registered 
bonds  and  interest  on  coupon  bonds.  In  the  case  of  enemies  or  allies  of 
enemies  holding  a license  granted  under  the  provisions  of  the  Trading  with 
the  Enemy  Act,  withholding  is  required  as  in  the  case  of  any  nonresident 
alien  not  an  enemy  or  ally  of  enemy.  See  Article  446  [for  extension  of  time 
for  filing  returns  in  the  case  of  enemies.  If  1854].  (T.  D.  2969,  signed  by 

J.  H.  Callan,  Acting  Commissioner  of  Internal  Revenue,  and  dated  February 
4,  1920.) 


2504  Amended  returns  in  connection  with  changes  in  accounting  methods. 

784  — Reference  is  made  to  your  letter  of  January  16,  1920,  requesting 

advice  as  to  the  application  of  the  provisions  of  Treasury  Decision 
2873  [11783]  with  respect  to  the  filing  of  amended  returns  in  the  case  of 
taxpayers  who  change  their  method  of  accounting.  IfYou  are  advised  that 
Treasury  Decision  2873  contemplates  the  filing  of  statements  setting  forth 
any  changes  which  affect  the  returns  for  the  years  1916  and  1917.  Upon 
the  facts  in  each  particular  case  the  Commissioner  will  determine  whether  or 
not  it  is  necessary  to  file  amended  returns  for  any  prior  years.  (Letter  to 
The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  February  6,  1920.) 


INC.  451 


TAX 


(T.  D.  2970.) 

[Matter  in  italics  is  new;  that  in  hold  face  brackets  [ ] is  old  matter  cut  out.] 

2605  Amending  Article  307,  Regulations  45,  dealing  with  nonresident 
1572  alien  individual  entitled  to  personal  exemption  and  credit  for  depen- 
dents.— The  final  edition  of  Regulations  45  is  amended  by  changing 
Article  307  to  read  as  follows: 

Art.  307.  When  nonresident  alien  individual  entitled  to  personal  exemp- 
tion: (a)  The  following  is  an  incomplete  list  of  countries  which  either  impose 
no  income  tax  or  in  imposing  an  income  tax  allow  both  a personal  exemption 
and  a credit  for  dependents  which  satisfy  the  similar  credit  requirement  of 
the  statute:  Argentina;  Belgium;  Bolivia;  Bosnia;  Brazil;  Bukowina; 
Canada;  Carinthia;  Carniola;  China;  Chile;  Cuba;  Czechoslovakia, 
including  Bohemia,  Moravia  and  Slovakia;  Dalmatia;  Denmark;  Ecuador; 
Egypt;  France;  Galicia;  Goritz;  Gradisca;  Greece;  Guatemala;  Herze- 
govina; Istria;  Cowo-r  Luxemburg;  Mexico;  Montenegro;  Morocco, 

Newfoundland;  Nicaraugua;  Norway;  Panama;  Paraguay;  Persia;  Pern; 
Portugal;  Roumania;  Russia  (including  Poles  owing  allegiance  to  Russia); 
Slaxburg;  Santo  Domingo;  Serbia;  Siam;  Silesia;  Styria;  Spain;  Switzer- 
land; Trieste;  Tyrol;  Upper  Amstria;  Union  of  South  Africa;  Venezuela, 
(b)  The  following  is  an  incomplete  list  of  countries  which  in  imposing  an  in- 
come tax  allow  a personal  exemption  which  satisfies  the  similar  credit  require- 
ment of  the  statute,  but  do  not  allow  a credit  for  dependents:  Bachka; 
Banat  of  Temesvar;  Croatia;  Finland;  India;  Italy;  Salvador;  Slovonia; 
Transylvania,  (c)  The  following  is  an  incomplete  list  of  countries  which  in 
imposing  an  income  tax  do  not  allow  to  citizens  of  the  United  States  not 
residing  in  such  country  either  a personal  exemption  or  a credit  for  dependents 
and,  therefore,  fail  entirely  to  satisfy  the  similar  credit  requirement  of  the 
statute;  Australia;  Costa  Rica;  Great  Britain  and  Ireland;  Japan;  The 
Netherlands;  New  Zealand;  Sweden.  The  former  names  of  certain  of  these 
territories  are  here  used  for  convenience,  in  spite  of  an  actual  or  possible 
change  in  name  or  sovereignty.  A nonresident  alien  individual  who  is  a 
citizen  or  subject  of  any  country  in  the  first  list  is  entitled  for  the  purpose 
of  the  normal  tax  to  such  credit  for  a personal  exemption  and  for  dependents 
as  his  family  status  may  warrant.  If  he  is  a citizen  or  subject  of  any  country 
in  the  second  list  he  is  entitled  to  a credit  for  personal  exemption,  but  to 
none  for  dependents.  If  he  is  a citizen  or  subject  of  any  country  in  the 
third  list  he  is  not  entitled  to  credit  for  either  a personal  exemption  or  for 
dependents.  If  he  is  a citizen  or  subject  of  a country  which  is  in  none  of  the 
lists,  then  to  secure  credit  for  either  a personal  exemption  or  for  dependents 
he  must  prove  to  the  satisfaction  of  the  Commissioner  that  his  country  does 
not  impose  an  income  tax  or  that  in  imposing  an  income  tax  it  grants  the 
similar  credit  required  by  the  statute.  (T.  D.  2970,  signed  by  J.  H.  Callan, 
Acting  Commissioner  of  Internal  Revenue,  and  dated  February  4,  1920 
[released  February  10,  1920].) 


♦ 


(• 


m 


INC. 


452 


TAX 


2-13-20. 


(T.  D.  2971.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2506  Method  of  determining  gain  or  loss  on  exchange  of  property. — 
1077  Article  1563  of  Regulations  45,  amended. — Regulations  45  are  here- 
1081  by  amended  by  substituting  for  article  1563  as  it  now  stands  the  fol- 
lowing: 

Art.  1563.  Exchange  of  Property. — Gain  or  loss  arising  from  the  acquisi- 
tion and  subsequent  disposition  of  property  is  realized  when  as  the  result 
of  a transaction  between  the  owner  and  another  person  the  property  is  con- 
verted into  cash  or  into  property  (a)  that  is  essentially  different  from  the 
property  disposed  of  and  (b)  that  has  a market  value.  In  other  words,  both 
(a)  a change  in  substance  and  not  merely  in  form,  and  (b)  a change  into  the 
equivalent  of  cash,  are  required  to  complete  or  close  a transaction  from  which 
income  may  be  realized.  By  way  of  illustration,  if  a man  owning  ten  shares 
of  listed  stock  exchanges  his  stock  certificate  for  a voting  trust  certificate, 
no  income  is  realized,  because  the  conversion  is  merely  in  form;  or  if  he  ex- 
changes his  stock  for  stock  in  a small,  closely  held  corporation,  no  inconae 
is  realized  if  the  new  stock  has  no  market  value,  although  the  conversion  is 
more  than  formal;  but  if  he  exchanges  his  stock  for  a liberty  bond,  income 
may  be  realized,  because  the  conversion  is  into  independent  property  having 
a market  value.  ‘‘Market  value”  is  the  price  at  which  a seller  willing  to  sell 
at  a fair  price  and  a buyer  willing  to  buy  at  a fair  price ^ both  having  reasonable 
knowledge  of  the  facts,  will  trade.  Property  received  in  exchange  for  other  prop- 
erty has  no  “fair  market  value”  for  the  purpose  of  determining  gain  or  loss  result- 
ing from  such  exchange  when,  owing  to  the  condition  of  the  market,  there  can  be 
no  reasonable  expectation  that  the  owner  of  the  property,  though  wishing  to  sell 
and  any  person  wishing  to  buy  will  agree  upon  a price  at  which  to  trade  unless, 
one  or  the  other  is  under  some  peculiar  compulsion.  It  does  not  follow  that 
property  has  no  “fair  market  value”  merely  because  there  is  no  price  therefor 
established  by  public  sales  or  sales  in  the  ivay  of  ordinary  business.  The  prop- 
erty received  in  exchange  may  be  real  estate,  personal  property,  or  a chose 
in  action.  [The  exchange  of  a so-called  convertible  bond  for  stock  pursuant 
to  such  a privilege  granted  in  the  bond  will  produce  income  if  the  stock  re- 
ceived in  exchange  has  a fair  market  value  in  excess  of  the  cost  or  fair  market 
value  as  of  March  1,  1913,  of  the  bond.]  Where  the  owner  of  a bond  exercises 
the  right,  provided  for  in  the  bond,  of  converting  the  bond  into  stock  in  the  obligor 
corporation,  such  transaction  does  not  result  in  a realization  of  profit  or  loss,  the 
transaction  not  being  closed  for  purposes  of  income  taxation  until  such  stock  is 
sold.  (T.  D.  2971,  signed  by  J.  H.  Callan,  Acting  Commissioner  of  Internal 
Revenue,  and  dated  February  4,  1920  [released  February  10,  1920]. 


INC, 


453 


TAX 


(T.  D.  2972.) 

[Matter  in  italics  is  nm;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out,] 

2607  Amendment  to  Article  141  of  Regulations  45:  Losses —Article  141 
1305  of  Regulations  45  is  hereby  aniended  to  read  as  follows: 

Art  141.  Losses. — Losses  sustained  during  the  taxable  year  and  not 
compensated  for  by  insurance  or  otherwise  are  fully  deductible  (except  by 
nonrLident  aliens)^if  (a)  incurred  in  the  taxpayer  s trade  or  business,^ 
(b)  incurred  in  any  transaction  entered  into  for  profit>  ^ W 
hes,  storms,  shipwreck  or  other  casualty,  or  from  theft.  They  must  usually 
be  evidenced  by  closed  and  completed  transactions.  In  the  case  of  the  sale 
of  assets  the  loss  will  be  the  difference  between  the  cost 
ciation  sustained  since  acquisition,  or  the  fair  inarket 

1913  if  acquired  before  that  date,  less  depreciation  since  sustained,  and  the 
price  at  which  they  were  disposed  of.  See  section  202  of 
articles  39-46  [for  sale  of  certain  assets,  beginning  at  1[911]  and  1561  (for  l>=»sis 
for  determining  gain  or  loss  from  sale,  If  1058].  When  the  loss  is  claimed  through 
the  destruction  of  property  by  fire,  flood  or  other  casualty,  the  amount 
deductible  will  be  the  difference  between  the  [cost  of  the 
fair  market  value  oj  the  property  as  of  March  1,  1913,  ij  J 

date  or  if  acquired  on  or  after  that  date,  its  cost,  and  the  salvage  value  thereof,  alter 
deducting  from  [the]  such  cost,  or  such  value  as  of  March  1,  1913,  the  amount 
if  any,  which  hL  been  or  should  have  been  set  aside  and  deducted  in  he 
current  year  and  previous  years  from  gross  income  on  account  of  depreciation 
and  which  has  not  been  paid  out  in  making  good  the  depreciation  sustained. 
But  the  loss  should  be  reduced  by  the  amount  of  any  insurance  or  other 
compensation  received.  See  articles  49  [for  compensation  for  1°^,  1194  J 
and  50  [for  replacement  fund  for  loss,  1[942].  _ A _ loss  in  the  sale  of  an  indivi- 
dual’s residence  is  not  deductible.  Losses  in  illegal  transactions  are  not 
deductible.  Where  a person  gives  property  away,  or  is  divested  thereoj  Oy 
death,  no  realization  of  loss  results  therefrom.  (T.  D.  2972,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  February  7,  1920.) 


(T.  D.  2973.) 


2508  Instructions  relative  to  acceptance  of  Treasury  certificates  of  indebt- 

2092  edness  for  income  and  profits  taxes.  Collectors  of  Intel nal  Revenue 
are  authorized  and  directed  to  receive  at  par  United  States  d reasury 
certificates  of  indebtedness  of  Series  T 8,  dated  July  ’ 

dated  September  15,  1919,  Series  TM  3-1920,  dated  December  1 919, 

and  Series  TM  4-1920,^  dated  February  2,  1920,  all  maturing  Mai cn  15,^19-0, 
in  payment  of  income  and  profits  taxes  payable  on  March  15,  1920.  Collec- 
tors are  authorized  and  directed  to  receive  at  par,  Treasury  certificates  o! 
indebtedness  of  Series  TJ  1920,  dated  December  15,  1919, 

1920,  in  payment  of  income  and  profits  taxes  payable  on  Jone  15,  1^-  ^ 
Treasury  certificates  of  indebtedness  of  Series  T 10,  dated  September  15, 
1919,  maturing  September  15,  1920,  in  payment  of  income  and  profits  taxes 
payable  on  September  15,  1920;  and  Treasury  certific^es 
of  Series  TD  1920,  dated  January  2,  1920,  maturing  December  5,  L 2 , 
in  pavment  of  income  and  profits  taxes  payable  on  December  15,  192U. 
Collectors  are  further  authorized  and  directed  to  receive  at  par,  in  payment 
of  income  and  profits  taxes  payable  at  the  maturity  of  the  certificates, 
respectively,  Treasury  certificates  of  indebtedness  of  any  series  maturing 


INC. 


454  TAX 


2-1S-20. 


on  March  15,  June  15,  September  15,  or  December  15,  1920,  respectively, 
and  expressed  to  be  acceptable  in  payment  of  income  and  profits  taxes.  Col- 
lectors are  not  authorized  hereunder  to  receive  in  payment  of  income  or 
profits  taxes  any  Treasury  certificates  of  indebtedness  not  expressed  to  be 
acceptable  in  payment  of  income  and  profits  taxes,  or  maturing  on  a date 
other  than  the  date  on  which  the  taxes  are  payable.  Collectors  are  authorized 
to  receive  Treasury  certificates  of  indebtedness  which  are  acceptable  as  above 
provided  in  paym.ent  of  income  and  profits  taxes,  in  advance  of  the  respective 
dates  on  which  the  certificates  mature.  Treasury  certificates  acceptable 
in  payment  of  incom.e  and  profits  taxes  have  one  or  more  interest  coupons 
attached,  including  as  to  each  series  a coupon  payable  at  the  maturity  of 
of  the  certificates,  but  all  interest  coupons  must  in  each  case  be  detached  by 
the  taxpayer  and  collected  in  ordinary  course  when  due.  The  amount, 
at  par,  of  the  Treasury  certificates  of  indebtedness  presented  by  any  tax- 
payer in  payment  of  income  and  profits  taxes  must  not  exceed  the  amount  of 
the  taxes  to  be  paid  by  him,  and  collectors  shall  in  no  case  pay  interest  on 
the  certificates  or  accept  them  for  an  amount  other  or  greater  than  their 
face  value. 

2509  Deposits  of  Treasury  certificates  of  indebtedness  received  in  payment 
of  income  and  profits  taxes  must  be  made  by  collectors,  unless  other- 
wise specifically  instructed  by  the  Secretary  of  the  Treasury,  with  the  Federal 
Reserve  Bank  of  the  district  in  wliich  the  collector’s  head  office  is  located, 
or  in  case  such  head  office  is  located  in  the  same  city  with  a branch  Federal 
Reserve  Bank,  with  such  branch  Federal  Reserve  Bank.  Specific  instructions 
may  be  given  in  certain  instances  for  the  deposit  of  the  certificates  with 
Federal  Reserve  Banks  of  other  districts  and  branch  Federal  Reserve  Banks. 
The  term  “Federal  Reserve  Bank,”  where  it  appears  herein,  unless  otherwise 
indicated  by  the  context,  includes  branch  Federal  Reserve  Banks.  Treasury 
certificates  accepted  by  the  collector  prior  to  the  dates  when  the  certificates 
respectively  mature,  should  be  forwarded  by  the  collector  to  the  Federal 
Reserve  Bank  to  be  held  for  account  of  the  collector  until  the  date  of  matur- 
ity, and  for  deposit  on  such  date. 

2610  Collectors  of  internal  revenue  are  not  authorized,  unless  otherwise 
notified  by  the  Secretary  of  the  Treasury,  to  receive  in  payment  of 
income  or  profits  taxes  interim  receipts  issued  by  Federal  Reserve  Banks  in 
lieu  of  definitive  certificates  of  the  series  herein  described. 

251  1 Certificates  of  indebtedness  should  in  all  cases  be.  stamped  as  follows 
by  the  Collector,  and  when  so  stamped  forwarded  to  the  Federal  Re- 
serve Bank  by  registered  mail  uninsured: 

192.  . . . 

“This  certificate  has  been  accepted  in  payment  of  income  and  profits 
taxes  and  will  not  be  redeemed  by  the  United  States  except  for  credit  of  the 
undersigned. 

Collector  of  Internal  Revenue 

for  the district  of. ...  _ ” 

2512  Collectors  should  make  in  tabular  form  a schedule  in  duplicate  of 
the  certificates  of  indebtedness  to  be  forwarded  to  the  Federal  Reserve 
Bank,  showing  the  serial  number  of  each  certificate,  the  date  of  issue  and 
maturity,  and  face  value.  Certificates  of  indebtedness  accepted  prior  to  the 
date  of  maturity  must  be  scheduled  separately.  At  the  bottom  of  each 
schedule  there  should  be  written  or  stamped  “Income  and  Profits  Taxes 

$ which  amount  must  agree  with  the  total  shown  on  the  schedule. 

One  coi)y  of  this  schedule  must  accompany  certificates  sent  to  the  Federal 


INC. 


455  TAX 


Reserve  Bank,  and  the  other  be  retained  by  the  collector.  The  income 
and  profits  tax  deposits  resulting  from  the  deposits  of  such  certificates  must 
in  all  cases  be  shown  on  the  face  of  the  certificate  of  deposit  (National  Bank 
Form  15)  separate  and  distinct  from  the  item  of  miscellaneous  internal 
revenue  collections  (formerly  called  Ordinary),  but  it  is  not  necessary  to  give 
the  separation  into  corporation  income,  individual  income  and  profits  taxes. 

2513  Until  certificates  of  deposit  are  received  from  the  Federal  Reserve 
Banks,  the  amounts  represented  by  the  certificates  of  indebtedness 

forwarded  must  be  carried  by  collectors  as  cash  on  hand,  and  not  credited 
as  collections,  as  the  dates  of  certificates  of  deposit  determine  the  dates  of 

collections.  ^ . . 

2514  For  the  purpose  of  saving  taxpayers  the  expense  or  transmitting  - 
such  certificates  as  are  held  in  F ederal  Pveserve  cities  or  F ederal  Reserve 

branch  bank  cities  to  the  office  of  the  collector  in  whose  district  ^e  taxes 
are  payable,  taxpayers  desiring  to  pay  income  and  profits  taxes  by  Treasury*, 
certificates  of  indebtedness  acceptable  in  payment  of  such  taxes,  should 
communicate  with  the  collector  of  the  district  in  which  the  taxes  are  payable 
and  request  from  him  authority  to  deposit  such  certificates  with  the  h ederal 
Reserve  Bank  or  branch  in  the  city  in  which  the  certificates  are  held.  Col- 
lectors are  authorized  to  permit  deposits  of  Treasury  certificates  of  indebted-.  , 
ess  in  any  Federal  Reserve  Bank  or  branch  with  the  distinct  understanding 
that  the  Federal  Reserve  Bank  or  branch  is  to  issue  a certificate  of  deposit 
in  the  collector’s  name  covering  the  amount  of  the  certificates  of  indebtedness 
at  par  and  to  state  on  the  face  of  the  certificate  of  deposit  that  the  amount 
represented  thereby  is  in  payment  of  income  and  profits  taxes.  The  r ederal 
Reserve  Bank  or  branch  should  forward  the  original  certificate  of  deposit . 
to  the  Treasurer  of  the  United  States  with  its  daily  transcript,  and  transmit 
to  the  collector  the  duplicate  and  triplicate,  accompanied  by  a statement- 
giving  the  name  of  the  taxpayer  for  whom  the  payment  is  made  in  order 
that  the  collector  may  make  the  necessary  record  and  forward  the  duplicate 
to  the  office  of  the  Commissioner  of  Internal  Revenue.  ^ ^ ■ 

2515  This  Treasury  Decision  amends  and  supplements  the  provisions  ot 
Articles  1731  [112092]  and  1732  [112093]  of  Regulations  43  (Rey^e^., 

and  supersedes  Treasury  Decisions  2907  [112094]  and  2918  [1[2094].  (T  D 
2973,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated  February  9,  1920.) 


INC 


456  TAX 


2-20-20. 


(T.  D.  2977.) 

l^Matter  in  italics  is  ncwj  that  in  hold  face  brackets  [ ] is  old  matter  cut  outi] 

2516  Amendment  of  Article  251  of  Regulations  45,  as  amended  by  T.  D. 
1448  2966.  Article  251  of  Regulations  45  is  amended  to  read  as  follows: 

2499  Art.  251.  Charitable  contributions. — Contributions  or  gifts  within 
the  taxable  year  are  deductible  to  an  aggregate  amount  not  in  excess 
of  fifteen  per  cent  of  the  taxpayer’s  net  income  including  such  payments, 
if  made  (a)^  to  corporations  or  associations  of  the  kind  exempted  from  tax 
by  subdivision  (6)  of  Section  231  of  the  statute,  or  (b)  to  the  special  fund  for 
vocational  rehabilitation  under  the  Vocational  Rehabilitation  Act  of  June  27, 
1918.  For  a discussion  of  what  corporations  and  associations  are  included 
within  (a)  see  Article  517  [^760].  A gift  to  a common  agency  (as  a war  chest) 
for  several  such  corporations  or  associations  is  treated  like  a gift  [direct] 
directly  to  them.  In  connection  with  claims  for  this  deduction  there  shall  be 
stated  on  returns  of  Income  the  name  and  address  of  each  organization  to 
which  a gift  was  made,  and  the  approximate  date  and  the  amount  of  the 
gift  in  each  case.  Where  the  gift  is  other  than  money,  the  basis  for  cal- 
culation of  the  amount  of  the  gift  shall  be  the  cost  of  the  property  [if  acquired 
after  February  28,  1913,]  or  its  fair  market  value  as  of  March  1,  1913,  if 
acquired  prior  thereto  [after  deducting  from  such  cost  or  value  the  amount, 
if  any,  which  has  been  or  which  should  have  been  set  aside  and  deducted 
in  the  current  year  and  previous  years  from  gross  income  on  account  of 
depreciation,  and  which  has  not  been  paid  out  in  making  good  the  deprecia- 
tion sustained]  less  any  depreciation  sustained.  A gift  of  real  estate  to  a city 
to  be  maintained  perpetually  as  a public  park  is  not  an  allowable  deduction. 
[This  article  does  not  apply  to  gifts  by  partnerships,  estates  and  trusts,  or 
corporations.  See  sections  218  and  219  of  the  statute  and  articles  561  and 
562.]  ^ The  proportionate  share  of  contributions  made  by  a partnership  to  cor- 
porations or  associations  of  the  kind  included  in  {a)  above  and  to  the  special 
fund  for  vocational  rehabilitation  specified  in  (Jb)  may  be  claimed  as  deductions 
in  the  personal  returns  of  the  partners  to  an  amount  which,  added  to  the  amount 
of  such  contributions  made  by  the  partner  individually,  is  not  in  excess  of  fifteen 
per  cent  of  the  partner  s net  income  computed  without  the  benefit  of  the  deduction 
for  such  contributions.  However,  the  contributions  made  by  the  partnership 
shall  not  be  deducted  from  its  gross  income  in  ascertaining  the  amount  of  its 
net  income  to  be  reported  on  Form  1065  {Revised).  See  Article  321  f1[553], 
(T.  D.  2911 , signed  by  Commissioner  Daniel  C.  Roper  and  dated  Februarv 
11,  1920.) 


INC.  457 


TAX 


{Decision,) 

(Acts  of  Aug.  5,  1909  and  Oct.  3,  1913.) 

Insurance  companies  i — 1.  Premiums  collected  by  agents  but  not  trans- 
mitted to  the  company  during  the  taxable  year.  2.  “Net  addition  to  re- 
serve funds.”  3.  “Released  reserve”  as  taxable  income.  4.  A question 
as  to  the  Statute  of  Limitations. 

Supreme  Court  of  the  United  States. 


Maryland  Casualty  Company,  Appellant,  ) Appeal  from  the  Court 
vs.  > of  Claims. 

The  United  States.  ) 

[January  12,  1920.] 

Mr.  Justice  Clarke  delivered  the  opinion  of  the  Court. 

2517  Under  warrant  of  the  Act  of  Congress,  approved  August  5,1909 

985  (36  Stat.,  Ch.  6,  pp.  11,  113),  the  Government  collected  from  the 

993  claimant,  a corporation  organized  as  an  insurance  company  under 

the  laws  of  Maryland,  an  excise  tax  for  the  years  1909,  1910,  1911 
and  1912,  and,  under  warrant  of  the  Act  of  Congress  of  October  3,  1913, 
(38  Stat.,  Ch.  16,  pp.  114,  166),  it  likewise  collected  an  excise  tax  for  the 
first  two  months  of  1913,  and  an  income  tax  for  the  remaining  months  of 
that  year. 

2518  This  suit,  instituted  in  the  Court  of  Claims,  to  recover  portions  of 
such  payments  claimed  to  have  been  unlawfully  collected,  is  here 

for  review  upon  appeal  from  the  .judgment  of  that  court. 

2519  The  claimant  was  engaged  in  casualty,  liability,  fidelity,  guaranty  • 
and  surety  insurance,  but  the  larger  part  of  its  business  was  em- 
ployers’ liability,  accident,  and,  in  the  later  of  the  years  under  consideration 
in  this  case,  workmen’s  compensation  insurance. 

2520  By  process  of  elimination  the  essential  questions  of  difference  between 
the  parties  ultimately  became  three,  viz.: 

(1)  Should  claimant  be  charged,  as  a part  of  its  gross  income  each  ye^r, 
with  premiums  collected  by  agents,  but  not  transmitted  by  them  to  its 
treasurer  within  the  year.^ 

(2)  May  the  amount  of  gross  income  of  the  claimant  be  reduced  by 
the  aggregate  amount  of  the  taxes,  salaries,  brokerage  and  re-insurance 
unpaid  at  the  end  of  each  year,  under  the  provisions  in  both  the  excise  and 
income  tax  laws  allowing  deductions  of  “net  addition,  if  any,  required  by 
law  to  be  made  within  the  year  to  reserve  funds’’.^ 

(3)  Should  the  decrease  in  the  amount  of  reserve  funds  reqmredby 
law  for  the  year  1913  from  the  amount  required  for  1912  be  treated  as  “re- 
leased reserve”  and  charged  to  the  company  as  income  for  1913.^ 

2521  Of  these  in  the  order  stated. 

2 522  Section  38  of  the  Excise  Tax  Act  (36  Stat.  112)  provides  that  every 
corporation,  organized  under  the  laws  of  any  State  as  an  insurance 
company  “shall  be  subject  to  pay  annually  a special  excise  tax  with  respect 
to  the  carrying  on  or  doing  business  * * * equivalent  to  one  per  centum 

upon  the  entire  net  income  * * * received  hy  it  from  all  sources  during 

such  year.” 

2523  The  Income  Tax  Act  (38  Stat.  172)  provides  (Section  G,  paragraph 
(a)  ) that  the  tax  shall  be  levied  upon  the  entire  “net  income  arising 
or  accruing  from  all  sources  during  the  preceding  calendar  year.’  Butin 

INC.  458 


TAX 


2-20^20. 


paragraph  (b),  providing  for  deductions,  gross  income  is  described  as  that 
'‘^received  within  the  year  from  all  sources.”  So  that,  with  respect  to  domestic 
corporations,  it  is  clear  enough  that  no  change  was  intended  by  the  use  of 
the  expression  “arising  or  accruing”  in  the  Income  Tax  Act,  and  that  the 
tax  should  be  levied  under  both  acts  upon  the  income  “received”  during 
the  year.  Southern  Pacific  Co.  v.  Lowe,  247  U.  S.  330,  335. 

2524  The  claimant  did  business  in  many  States,  through  many  agents, 
with  whom  it  had  uniform  written  contracts  which  allowed  them  to 

extend  the  time  for  payment  of  the  premiums  on  policies,  not  to  exceed  thirty 
days  from  the  date  of  policy,  and  required  that  on  the  fifth  day  of  each  calen- 
dar month  they  shoujd  pay  or  remit,  in  cash  or  its  equivalent,  the  balance 
due  claimant  as  shown  by  the  last  preceding  monthly  statement  rendered  to  it. 

2525  Under  the  provisions  of  such  contracts  obviously  the  agents  were  not 
required  to  remit  premiums  on  policies  written  in  November  until 

the  fifth  of  January  of  the  next  ye^ar  and  on  policies  written  in  December 
not  until  the  following  February. 

2526  Much  the  largest  item  of  the  gross  income  of  the  company  was  pre- 
miums collected  on  policies  of  various  kinds.  Omitting  reference  to 

earlier  and  tentative  returns  by  the  claimant  and  amendments  by  the  Gov- 
exnme;it,  it  came  about  that  claimant  took  the  final  position  that  the  only 
premiums  with  which  it  could  properly  be  charged  as  net  income  “received 
by  it  * * * during  each  year”  were  such  as  weje  collected  and  actually 

paid  to  its  treasurer  within  the  year.  This  involved  omitting  from  gross 
income  each  year  “premiums  in  course  of  collection  by  agents,  not  reported 
on  December  31st,”  which  varied  in  amount  from  $584,000  in  one  year  to 
$1,020,000  in  another.  The  amount,  if  deducted  one  year,  might  appear  in 
the  return  of  the  claimant  for  the  next  year,  but  the.  rate  might  be  different. 

2527  The  Government,  on  the  other  hand,  contended  that  the  claimant 
should  return  the  full  amount  of  premiums  on  policies  written  in  each 

year,  whether  actually  collected  or  not. 

2528  The  Court  of  Claims  refused  to  accept  the  construction  of  either  of 
the  parties  and  held  that  the  claimant  should  have  returned,  not  all 

premiums  written  by  it,  but  all  which  were  actually  received  by  it  during 
the  year  and  that  receipt  by  its  agents  was  receipt  by  the  company,  v/ithin 
the  meaning  of  the  act  of  Congress. 

2529  The  claimant  contends  that  premiums  paid  to  its  agents  but  not 
remitted  to  its  treasurer  were  not  “received  by  it  during  the  year,” 

chiefly  for  the  reason  that  while  in  possession  of  the  agents  the  money  could 
not  be  attached  as  the  company’s  property  {Maxwell  v.  McGee,  66  Mass.  137), 
and  because  money,  while  thus  in  the  possession  of  agents  was  not  subject 
to  beneficial  use  by  the  claimant  and  therefore  cannot,  with  propriety,  be 
said  to  have  been  received  by  it,  within  the  meaning  of  the  act. 

2530  On  the  other  hand  it  is  conclusively  argued:  That  payment  of  the 
premium  to  the  agent  discharged  the  obligation  of  the  insured  and 

called  into  effect  the  obligation  of  the  insurer  as  fully  as  payment  to  the 
treasurer  could  have  done;  that  in  the  popular  or  generally  accepted  mean- 
ing of  the  words  “received  by  it”  (which  must  be  given  to  them,  Maillard  v. 
Lawrence,  16  Kow.  251),  receipt  by  an  agent  is  regarded  as  receipt  by  his 
principal;  that  under  their  contract  collected  premiums  in  possession  of  the 
agents  of  the  claimant  were  subject  to  use  by  it  in  an  important  respect  before 
they  were  transmitted  to  the  treasurer  of  the  company,  for  the  agency  con- 
tract, provided  that  “the  agent  will  pay  on  demand,  out  of  any  funds  col- 
lected by  him  for  account  of  premium  and  not  remitted  to  the  company,  such 
drafts  as  may  be  drawn  on  him  by  the  company  * * * purpose 

of  settling  claims,  deducting  the  amount  from  the  next  succeeding  monthly 

459  TAX 


INC. 


remittance;”  and  that  only  imperative  language  in  the  statute  would  justify 
a construction  which  would  place  it  in  the  power  of  the  claimant,  by  private 
contract  with  its  agents,  to  shift  payment  of  taxes  from  one  taxing  year  into 

ancnherThe  withheld  from  its  returns  collections  in  the  custody  of 

its  accents  at  the  end  of  each  year,  and  because  in  its  amendments  the 
Gcvernment^had  included  all  premiums  written  in  each  year  whether  or  not 
collected,  the  Court  of  Claims,  having  reached  the  conclusion  thus  approved 
by  us,  allowed  the  claimant  ninety  days  in  which  to  show  the  amount  ot 
premiums  received  by  it  and  its  agents  within  each  of  the  years  in  controversy, 
but  the  claimant  failed  to  make  such  a showing,  and  thereupon  the  court 
treated  the  return  of  premiums  written  as  the  correct  one  and  very  properly, 
so  far  as  this  item  is  concerned,  dismissed  claimant’s  petiti^. 

2532  Second:  In  the  same  words  the  Excise  and  Income  Tax  Acts  provide 
that  ‘hhe  net  addition,  if  any,  required  by  law  to  be  made  within 

the  year  to  reserve  funds”  may  be  deducted  from  gross,  in  determining  the 

amount  of  net,  income  to  be  taxed.  _ , , , , , • ^ • .11 

2533  Finding  its  authority  in  this  provision  of  the  law  the  claimant  in  ad 
of  its  returns  treated  as  “reserves,”  for  the  purpose  of  determining 

whether  the  aggregate  amount  of  them  each  year  was  greater  or  less  than  in 
the  preceding  year,  and  of  thereby  arriving  at  the  net  addition  to  reserve 
funds”  which  it  was  authorized  to  deduct  from  gross  income,  the  following, 
among  others,  viz.:  “Reserve  for  unearned  premiums.  Special  reserve  lor 
unpaid  liability  losses,”  and  “Loss  claims  reserve.”  Unearned  premiuni  re- 
serve and  special  reserve  for  unpaid  liability  losses  are  familiar  types  o in 
surance  reserves,  and  the  Government,  in  its  amended  returns,  allowed  these 
tw^o  items,  but  rejected  the  third,  “Loss  claims  reserve.  1 • 1 v 

2534  The  Court  of  Claims,  somewhat  obscurely,  held  that  the  third  item 
should  also  be  allowed.  This  “Loss  claims  reserve  was  intended  to 

provide  for  the  liquidation  of  claims  for  unsettled  losses  (other  than  those 
provided  for  by  the  reserve  for  liability  losses)  which  had  accrued  at  the  end 
of  the  tax  year  for  which  the  return  was  made  and  the  reserve  computed. 
The  finding  that  the  Insurance  Department  of  Pennsylvania,  pursuant  to 
statute,  has  at  all  times  since  and  including  1909  required  claimant  to  keep 
on  hand,  as  a condition  of  doing  business  in  that  State,  assets  as  reserves 
sufficient  to  cover  outstanding  losses,”  justifies  the  deduction  of  this  reserve 
as  one  required  by  law*  to  be  maintained,  and  the  holding  that  it  should  have 
been  allowed  for  all  of  the  years  involved  is  approved.  . 

2535  But  the  Court  of  Claims  approved  the  action  of  the  Government  in 
rejecting  other  claimed  deductions  of  reserves  for  unpaid  taxes, 

salaries,  brokerage  and  re-insurance  due  other  coinpanies.  ’ The  court  ga\  e 
as  its  reason  for  this  conclusion  that  the  “net  addition,  if  any,  required  b\ 
law  to  be  made  within  the  year  to  reserve  funds”  which  the  act  ot  Congress 
permitted  to  be  deducted  from  gross  income  w^as  limited  to  reserves  require 
bv  express  statutory  provision  and  did  not  apply  to  reserves  required  by  the 
rules  and  regulations  of  State  Insurance  Departments,  wTen  promulgated 
in  the  exercise  of  an  appropriate  power  conferred  by  statute.  , , 

2536  In  this  the  Court  of  Claims  fell  into  error.  ^ It  is  settled  by  man> 
recent  decisions  of  this  court  that  a regulation  by  a department  o 

Government,  addressed  to  and  reasonably  adapted  to  the  en  orcement 
of  an  act  of  Congress,  the  administration  of  which  is  confided  to  such  depart- 
ment, has  the  force  and  effect  of  law  if  it  be  not  in  conflict  with  express 
statutory  provision.  United  States  v.  Grimaud,  220  U.  S.  506;  United 
States  V.  Birdsall,  233  U.  S.  223,  231;  United  States  v.  Smull,  236  U S 405 
409,  411;  United  States  v.  Morehead,  243  U.  S.  607.  The  law  is  not  different 


t 

« 


# 


INC. 


460  TAX 


2-20-20. 


with  respect  to  the  rules  and  regulations  of  a department  of  a state  govern- 
ment. 

2537  But  it  is  contended  by  the  claimant  that  it  was  required  to  provide 
“reserves”  for  the  payment  of  the  rejected  items  of  liability:  because 

the  Court  of  Claims  found  that  pursuant  to  statutes  the  Insurance  Depart- 
ment of  Pennsylvania  required  the  company,  as  a condition  of  doing  business 
in  that  State,  to  keep  on  hand  “assets  as  reserves”  sufficient  to  cover  all 
claims  against  the  company  “whether  due  or  accrued;”  because  the  depart- 
ment of  New  York  required  it  to  maintain  “reserves  sufficient  to  meet  all 
of  its  accrued  but  unpaid  indebtedness  in  each  year;”  and  because  the  depart- 
ment of  Wisconsin  required  it  to  carry  “sufficient  reserves  to  cover  all  of  its 
outstanding  liabilities.” 

2538  Whether  this  contention  of  the  claimant  can  be  justified  or  not 
depends  upon  the  meaning  which  is  to  be  given  to  the  words  “reserve 

funds”  in  the  two  acts  of  Congress  we  are  considering. 

2539  The  term  “reserve”  or  “reserves”  has  a special  meaning  in  the 
law  of  insurance.  While  its  scope  varies  under  different  laws,  in 

general  it  means  a sum  of  money,  variously  computed  or  estimated,  which, 
with  accretions  from  interest,  is  set  aside,  “re^served,”  as  a fund  with  which 
to  mature  or  liquidate,  either  by  payment  or  reinsurance  with  other  companies 
future  unaccrued  and  contingent  claims,  and  claims  accrued,  but  contingent 
and  indefinite  as  to  amount  or  time  of  payment. 

2540  In  this  case,  as  we  have  seen,  the  term  includes  “unearned  premium 
reserve”  to  meet  future  liabilities  on  policies,  “liability  reserve” 

to  satisfy  claims,  indefinite  in  amount  and  as  to  time  of  payment,  but  accrued 
on  liability  and  workmen’s  compensation  policies,  and  “reserve  for  loss 
claims”  accrued  on  policies  other  than  those  provided  for  in  the  “liability 
reserve,”  but  it  has  nowhere  been  held  that  “reserve”  in  this  techuical  sense, 
must  be  maintained  to  provide  for  the  ordinary  running  expenses  of  a busi- 
ness, definite  in  amount  and  which  must  be  currently  paid  by  every  company 
from  its  income  if  its  business  is  to  continue,  such  as  taxes,  salaries,  re-insur- 
ance and  unpaid  brokerage. 

2541  The  requirements  relied  upon,  of  the  Insurance  Departments  of 
New*  York,  Pennsylvania  and  Wisconsin  that  “assets  as  reserves” 

must  be  maintained  to  cover  “all  claims,”  “all  indebtedness,”  “all  outstanding 
liabilities,”  in  terms  might  include  the  rejected  items  we  are  considering, 
but  plainly  the  departments,  in  these  expressions  used  the  word  “reserves” 
in  a non-technical  sense  as  equivalent  to  “assets,”  as  is  illustrated  by  the 
Massachusetts  requirement  that  each  company  shall  “hold  or  reserve  assets” 
for  the  payment  of  all  claims  and  obligations.  The  distinction  between 
the  “reserves”  and  general  assets  of  a company  is  obvious  and  familiar  and 
runs  through  the  statements  of  claimant  and  every  other  insurance  company. 
That  provision  for  the  payment  of  ordinary  expenses  such  as  we  are  considering 
was  not  intended  to  be  provided  for  and  included  in  “reserve  funds”  as  the 
term  is  used  in  the  acts  of  Congress  is  plain  from  the  fact  that  the  acts  permit 
deductions  for  such  charges  from  income  if  paid  within  the  year,  and  the 
claimant  was  permitted  in  this  case  to  deduct  large  sums  for  such  ordinary 
expenses  of  the  business — specifically,  large  sums  for  taxes.  The  claimant 
did  not  regard  any  such  charges  as  properly  covered  by  “reserves”  and  did 
not  so  include  them  in  its  statement  for  1909.  In  its  1910  return  “unpaid 
taxes”  and  “salaries”  first  appear  as  “reserves”  and  in  1911  “brokerage” 
and  “re-insurance”  are  added.  This  earlier,  though  it  is  now  claimed  to  have 
been  an  uninstructed  or  inexpert,  interpretation  of  the  language  of  the  acts, 
was  nevertheless  the  candid  and  correct  interpretation  of  it,  and  the  judgmont 
of  the  Court  of  Claims  in  this  respect  is  approved. 


INC. 


461 


TAX 


2542  Third:  The  year  1913  was  the  only  one  of  those  under  consider- 

ation  in  which  the  aggregate  amount  of  reserves  which  the  claimant 
was  required  by  law  to  keep  fell  below  the  amount  so  required  for  the  pte- 
ceding  year.  The  Government  allowed  only  ‘‘unearned^  prenamm  ^and 
“unpaid  liability  loss,”  reserves  to  be  considered  in  determining  deductions. 
In  1913  the  “unpaid  liability  loss  reserve”  decrease,  exceeded  the  unearned 
premium  resen^e”  increase,  by  over  $270,000,  and  this  amount  the^  Govern- 
ment added  to  the  gross  income  of  the  claimant  for  the  year,  calling  it  released 
reserve,”  on  the  theory  that  the  difference  in  the  amount  of  the  reserves 
for  the  two  years  released  the  decrease  to  the  claimant  so  that  it  could  use 
it  for  its  general  purposes,  and  therefore  constituted  free  income  for  the  year 
1913,  in  which  the  decrease  occurred. 

2543  This  theory  of  the  Government  v/as  accepted  by  the  Court  ot  Claims 
and  the  addition  to  the  gross  income  was  approved. 

2544  The  statute  does  not  in  terms  dispose  of  the  question  thus  presented. 

2545  Reserves,  as  we  have  seen,  are  funds  set  apart  as  a liability  in  the 
accounts  of  a com.pany  to  provide  for  the  payment  or  reinsurance 

of  specific,  contingent  liabilities.  They  are  held  not  only  as  security  for  the 
payment  of  claims  but  also  as  funds  from  which  payments  are  to  be  made. 
The  amount  “reserved”  in  any  given  year  m.ay  be^greater  than  is  necessc^ry 
for  the  required  purposes,  or  it  may  be  less  than  is  necessary,  but  the  lact 
that  it  is  less  in  one  year  than  in  the  preceding  year  does  not  necessarily  show 
either  that  too  much  or  too  little  was  reserved  for  the  former  year,— it  simply 
shows  that  the  aggregate  reserve  requirem,ent  for  the  second  year  is  less  than 
for  the  first,  and  this  may  be  due  to  various  causes.  If,  m this  case,  it  were 
due  to  an  over-estimate  of  reserves  for  1912  with  a resulting  excessive  deduc- 
tion for  that  year  from  gross  income  and  if  such  excess  was  released  to  the 
general  uses  of  the  company  and  increased  its  free  assets  in  1913,  to  that 
extent  it  should  very  properly  be  treated  as  incomj.e  in  the  year  in  which  it 
became  so  available,  for  the  reason  that  in  that  year,  for  the  first  time,  it 
became  free  income,  under  the  system  for  determining  net  income  provided 
by  the  statute,  and  the  fact  that  it  came  into  the  possession  of  the  company 
in  an  earlier  year  in  which  it  could  be  used  only  in  a special  manner,  which 
permitted  it  to  become  non-taxable  would  not  prevent  its  being  considered 
as  received  in  1913  for  the  purposes  of  taxation,  within  the  meaning  of  the  act. 

2546  The  findings  of  fact  in  this  case,  however,  do  not  show  that  the  diminu- 
tion in  the  amount  of  required  reserves  was  due  to  excessive  reserves 

in  prior  years  or  to  any  other  cause  by  wTich  the  free^ass^s  of  the  com- 
pany were  increased  in  the  year  1913,  and  the  following  finding  of  tact 
makes  strongly  against  such  a conclusion:  ^ j 

2547  “The  decrease  in  employers’  liability  loss  reserve  for  1913,  designated 
as  ‘released  reserve’  did  not  in  any  respect  affect  or  change  claimant  s 

gross  income  or  disbursements,  as  shown  by  the  State  insurance  reports. 

2548  It  would  not  be  difficult  to  suggest  conditions  under  which  the  statu- 
tory permit  to  deduct  net  additions  to  reserve  funds  would  result  in 

double  deduction  in  favor  of  an  insurance  com^pany,  but  such  deductions  can 
be  restored  to  income  again  only  where  it  is  clearly  shown  that  subsequent 
business  conditions  have  released  the  amount  of  them  to  the  free  beneficial 
use  of  the  company  in  a real,  and  not  in  a mere  bookkeeping  sense.  this 
seemingly  favorable  treatment  of  insurance  companies  is  to  be  otherwise  cor- 
rected or  changed,  it  is  for  Congress,  and  not  for  the  courts,  to  amend  the  law. 

2549  Since  the  findings  of  fact  before  us  do  not  make  the  clear  showing, 
which  must  be  required,  that  the  statutory  deduction  of  net^ reserves 

in  prior  years  was  restored  to  the  free  use  of  the  claimant  in  1913,  it  should 
not  have  been  charged  as  income  with  the  decrease  in  that  year,  and,  on 
' the  record  before  us,  the  holding  of  the  Court  of  CGims  must  be  reversed. 

INC.  462  TAX 


MO-20. 


2550  There  remains  the  question  as  to  the  Statute  of  Limitations. 

2551  The  Government  concedes  that  the  case  is  in  time  with  respect  to 
the  amended  returns  but  claims  that  it  is  barred  by  R.  S.  3226 

[1f^2177l,  3227  [If  2178]  and  3228  [If  2180],  with  respect  to  taxes  paid  on  the 
original  returns  for  all  of  the  years  but  1913.  The  claimant  made  its  original 
returns  without  protest  except  for  the  year  1909  and,  without  appeal  to  the 
Commissioner  of  Internal  Revenue,  voluntarily  paid  the  taxes  computed  on 
them  for  each  of  the  years.  Payment  was  made  for  1909  in  June,  1910;  for 
1910  in  June,  1911 ; for  191 1 in  June,  1912;  for  1912  in  June,  1913.  No  claim 
for  a refund  of  any  of  these  payments  was  made  until  April  30,  1915,  and  then 
the  claim  was  in  general  terms, 

“For  amounts  paid  by  it  in  taxes  which,  through  lack  of  information  as 
to  requirements  of  law  or  by  error  in  computation,  it  may  have  paid  in  excess 
of  the  amount  legally  due.” 

2552  This  claim  was  rejected  subsequent  to  the  institution  of  this  suit, 
which  was  commenced  on  February  8,  1916. 

2553  This  statement  shows  the  right  of  the  claimant  plainly  barred  by  its 
failure  to  appeal  to  the  Commissioner  of  Internal  Revenue,  R.  S. 

3226  [This  is  fundamental.  King’s  County  Savings  Institution  v.  Blair ^ 116 
U.  S.  200],  and  also  by  its  failure  to  institute  suit  within  two  years  after  the 
cause  of  action  accrued,  R.  S.  3227. 

2554  The  claimant  contends  that  the  amended  returns  filed  by  the  Com- 
missioner of  Internal  Revenue  were  not  amendments  or  modifica- 
tions^ of  the  original  returns,  but  were  based  upon  a different  principle  and, 
within  the  scope  of  Cheatham,  et  al.  v.  United  States,  92  U.  S.  85,  constituted 
new  assessments  from  which  appeals  were  taken  in  time. 

2555  But  they  are  denominated  “amended  returns”  and  while  in  dealing 
with  the  same  items  the  basis  of  computation  was  in  some  cases 

varied,  in  each  case  the  purpose  and  effect  of  them  was  to  increase  the  pay- 
ment which  the  claimant  was  required  to  make  under  the  law  and  the  pay- 
ments made  on  the  original  returns  were  credited  on  the  amounts  computed 
as  due  on  the  returns  as  amended. 

2556  The  inapplicability  of  Cheatham,  et  al  v.  United  States,  92  U.  S.  85, 
is  obvious,  and  the  contention  that  the  Fling  of  the  amended  returns 

constituted  the  beginning  of  new  proceedings  which  so  superseded  the  original 
returns  as  to  release  the  claimant  from  its  entire  failure  to  observe  the  statu- 
tory requirements  for  review  of  the  latter  is  so  unfounded  that  we  cannot 
consent  to  enter  upon  a detailed  discussion  of  it.  This  conclusion  renders 
Section  14  of  the  Act  of  Congress  of  September  8,  1916  (39  Stat.  772),  in- 
applicable. 

2557  It  results  that  the  judgment  of  the  Court  of  Claims  is  modified,  and 
as  so  modified  affirmed,  and  the  case  is  remanded  to  that  court  for 

proceedings  in  accordance  with  this  opinion. 


2558  *‘The  date  of  hisTax  return”  for  continued  holding  of  Fourth  Liberty 
1142  Loan  bonds  and  Victory  Liberty  Loan  Notes  originally  subscribed 
1144  for,  in  relation  to  the  conditional  additional  exemptions  of  interest 
1153  on  certain  prior  bond  issues,  is  held  to  be  the  date  of  filing. — Reference 
is  made  to  your  letter  of  January  24,  1920  in  which  you  quote  office 
telegram*  sent  to  the  Cleveland  Trust  Company  under  date  of  January ”6, 
1 920,  which  telegram  contained  a ruling  to  the  effect  that  the  date  of  the  actual 
filing  of  an  income  tax  return  governs  as  to  the  exemption  against  Liberty 
Bond  holdings  which  may  be  claimed  by  a taxpayer  because  of  his  original 
subscription  to  and  continued  holding  of  bonds  of  the  Fourth  Liberty  Loan. 

463  TAX 


INC. 


2569  You  advance  the  opinion  that  such  ruling  is  erroneous  and  not  in 
harmony  with  the  law.  It  is  your  contention  that  the  intent  of  that 
partiof  the  supplement  to  the  Second  Liberty  Loan  Act  which  provides  for 
the"' $45,000.00  exemption  conditioned^upon  the  amount  of  Fourth  Liberty 
Loan  Bonds  subscribed  for  and  still  held  at  the  date  of  the  taxpayer’s  return 
is  that  the  date  of  the  return  shall  be  the  end  of  the  tax  year.  In  support 
of  your  contention,  you  cite  several  cases  w’hich  might  arise.  In  some  in- 
stances you  feel  a hardship  would  be  worked  by  the  ruling,  in  others  the 
circumstances  would  be  such  that  the  ruling  could  not  be  observed. 

2660  In  reply  you  are  advised  that  before  the  ruling  was  sent  to  the 
Cleveland  Trust  Company,  careful  consideration  was  given  to  the 
question  and  it  is  the  opinion  of  the  office  that  the  ruling  is  in  accordance 
with  the  provisions  of  the  supplement  to  the  Second  Liberty  Loan  Act. 
The  office  is,  therefore,  constrained  to  adhere  to  its  decision  that  the  “date 
of  the  return”  for  the  purpose  of  determining  the  exemption  which  may  be 
claimed  by  a taxpayer  because  of  his  subscription  to  and  continued  holding 
of  Fourth  Liberty  Loan  Bonds  is  the  date  upon  which  the  return  is  actually 
filed  with  the  Collector.  (Letter  to  The  Corporation  Trust  Company 
signed  by  Commissioner  Daniel  C.  Roper,  and  dated  February  16,  1920.) 

*[Comment:  The  telegram  of  inquiry  from  The  Cleveland  Trust  Company 
read  as  follows: 

“Does  phrase  ‘owned  by  him  at  the  date  of  his  tax  return’  in  provisions 
Fourth  Liberty  Loan  upon  which  forty-five  thousand^exemption  is  predicated 
mean  actual  time  of  filing  return  or  date  it  is  due  March  fifteenth  or  the  end 
of  taxable  year?  If  answer  is  actual  time  of  filing  return  does  it  then  apply 
to  amended  returns?  Wire  reply  collect.” 

The  Commissioner’s  reply  reads  as  follows: 

. “Date  of  actual  filing  of  original  return  with  Collector  governs.  Roper, 
Commissioner.” 

The  content  of  the  Commissioner’s  letter  to  us  sufficiently  outlines  our 
thought  on  the  interpretation  of  the  Bureau  of  the  words  “still  owned  by 
him  at  the  date  of  his  tax  return”  contained  in  the  Supplement  to  the  Second 
Liberty  Loan  Act,  approved  September  24,  1918  (and  presumably  of  the 
identic  words  in  the  Victory  Liberty  Loan  Act  of  March  3,  1919),  to  explain 
our  initial  unwillingness  to  give  general  publicity  to  such  an  interpretation 
by  the  Commissioner  of  Internal  Revenue  of  a law  provision  found  in  an  Act 
authorizing  the  Secretary  of  the  Treasury  to  borrow  money  on  account 
of  the  Government.  Attention  is  called  to  Notes  A and  B of  Item  13  on  page  1 
of  Form  1040  and  then  to  the  wording  of  the  affidavit  at  the  bottom  of  that 
page,  i.  e.,  “is  a true  and  complete  return  in  good  faith  for  the  taxable  period 
as  statedd^  We  had  assumed  that' the  Bureau,  in  providing  for  an  oath  that  a 
return  is  true  and  complete  for  a taxable  period,  intended  the  words  “still 
held”  to  mean  still  held  at  the  last  possible  moment  of  such  taxable  period, 
thereby  giving  the  interpretation  to  the  words  “the  date  of  his  tax  return,” 
which  we  had  thought  should  be  given  to  them.  Attention  is  called  also  to 
what  is  apparently  true,  namely,  that  neither  the  date  of  the  oath  nor  the 
date  of  placing  in  the  mails,  but  rather  the  date  of  receipt  by  the  Collector 
is  held  to  be  the  date  of  filing.  Flowever — such  is  the  Commissioner’s  ruling 
and  taxpayers  will  be  governed  accordingly. — The  Corporation  Trust 
Company.] 


INC. 


464  TAX 


8-8-20. 


2661  On  the  deduction  of  the  Alabama  State  Income  Tax  for  Federal 
1253  Income  Tax  purposes. — Reference  is  made  to  your  letter  of  February 
5,  1920,  which  is  quoted  as  follows: 

“The  Alabama  Income  Tax  Law,  embodied  in  the  Act  to  provide  for 
the  revenue  of  the  State  of  Alabama,  approved  September  15,  1919,  pro- 
vides at  Section  324  and  at  Section  339,  coveting  individuals  and  cor- 
porations respectively,  for  allowable  deductions  in  computing  net 
income.  Among  the  items  are  ‘taxes  paid  or  accrued  within  the  taxable 
year  imposed  (a)  by  the  authority  of  the  United  States.’  In  other  words, 
in  determining  the  amount  of  net  income  subject  to  State  Tax  the 
Federal  Income  Tax  paid  or  accrued  within  the  taxable  year  may  be  de- 
ducted. Now,  for  the  purposes  of  the  Federal  Tax,  State  income  taxes 
paid  or  accrued  during  the  year  are  a proper  deduction  in  ascertaining 
net  taxable  income.  You  can  readily  see  that  one  of  those  endless  chain 
propositions  is  formed  here.  In  other  words,  the  amount  of  net  taxable 
income  becomes  undeterminable  both  for  Federal  and  for  State  pur- 
poses. We  assume  that  this  matter  has  been  brought  to  your  attention. 

“We  inquire  if  the  Bureau  of  Internal  Revenue  has  offered  any  sug- 
gestion to  Alabama  taxpayers  to  aid  them  in  the  solution  of  the  prob- 
lem thus  presented.” 

2562  In  reply  you  are  advised  that  the  following  ruling  has  been  made 
which  is  applicable  to  Alabama  taxpayers:  Income  tax  actually  paid 
to  a State  is  deductible  before  computing  Federal  income  and  excess  profits 
taxes  if  books  are  kept  on  cash  receipts  abd  expenditures  basis.  If  books 
are  kept  on  the  accrual  basis.  State  income  taxes  accrued  during  the  year 
are  deductible.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  February  19,  1920.) 

[Comment:  Under  date  of  February  2,  1920,  we  received  a letter  from 
The  State  Tax  Commission  of  Alabama  signed  by  the  Chairman,  John  S. 
Mooring,  who  is  also  Income  Tax  Supervisor,  reading  as  follows: 

“I  have  your  letter  of  the  24th  ult.  in  reference  to  the  deduction  permitted 
of  State  tax  from  the  Federal  income  return,  and  of  Federal  tax  from  the 
State  income  teturn. 

“Wherever  a tax  is  due  the  Federal  Government  as  well  as  the  State  on 
income,  the  law  of  this  State  is  that  the  State  return  is  to  be  made  within 
thirty  days  after  the  Federal  return  is  made.  The  State  law  clearly  con- 
templates that  the  Federal  income  return  shall  be  complete  before  any 
attempt  is  made  to  make  out  the  return  for  the  State  income  tax.  It  follows 
from  this  that  there  is  no  confusion  so  far  as  the  Alabama  return  is  concerned. 
After  the  Federal  return  is  complete  and  the  tax  determined,  that  tajx  can 
be  deducted  as  an  expense  in  making  out  the  Alabama  tax  return.” 

— The  Corporation  Trust  Company.] 


(T.  D.  2987.) 

2663  Adding  Article  347  to  Regulations  45,  dealing  with  estates  and  trusts 

656  which  cannot  be  treated  as  a unit. — Regulations  45  are  amended 

657  by  adding  thereto  Article  347  to  read  as  follows: 

2664  Art.  347.  Estates  and  trusts  which  cannot  be  treated  as  a unit. 

In  the  case  of  certain  estates  and  trusts,  it  is  recognized  that  the 
estate  or  trust  cannot  be  treated  as  a unit  for  income  tax  purposes  and  may 
represent  an  aggregate  of  distinct  interests  to  all  of  which  the  fiduciaries 
are  responsible;  in  such  cases  the  procedure  stated  in  this  article  should 
govern.  The  following  are  recognized  as  cases  which  cannot  be  treated  as  a 
unit  and  must,  therefore,  be  governed  by  this  article:  fa)  when  there  is  income 
distributable  periodically  and  also  income  which  is  to  be  accumulated  in 

465  TAX 


INC. 


trust,  held  for  future  distributioii,  or  added  to  the  corpus;  (b)  when  there  is 
income  distributable  periodically  and  also  income  (according  to  the  Federal 
income  tax  statutes  and  regulations)  which  is  not  distributable  periodically 
under  state  law,  e.  g.,  gains  from  sale  of  capital  assets,  stock  dividends; 
(c)  when  there  is  income  distributable  periodically  and  deductions  (according 
to  Federal  income  tax  statutes  and  regulations)  which  are  not  deductible 
under  state  law  from  the  distributable  income,  e.  g.,  losses  from  the  sale  of 
capital  assets,  depletion,  depreciation. 

2565  In  ascertaining  whether  an  estate  or  trust  comes  within  any  one 
of  the  cases  just  enumerated,  the  provisions  of  the  Federal  statutes 

and  regulations — rather  than  the  provisions  of  the  will  or  trust  and  the  pro- 
visions of  state  laws — shall  determine  what  items  constitute  taxable  gross 
income  or  allowable  deductions;  the  provisions  of  the  will  or  trust  and  of 
state  laws  shall  determine  the  allocation  of  items  of  gross  income  or  de- 
duction; that  is,  to  which  of  the  different  interests  making  up  the  whole 
such  items  shall  be  charged  or  allowed.  In  cases  which  are  to  be  treated 
under  this  article,  the  items  of  gross  income  and  deduction  as  determined  by 
the  Federal  income  tax  statutes  and  regulations  must  be  scrutinized  and 
classified  in  accordance  with  the  provisions  of  the  will  or  trust  or  rules^  of 
local  law  into  two  classes,  one  subject  to  the  procedure  specified  in  subdivision 
(c)  of  Section  219,  and  the  other  to  the  procedure  specified  in  subdivision  (d) 
of  Section  219.  The  result  will  be  that  the  beneficiary  to  whom  income  is  to 
be  distributed  periodically  must  include  in  computing  his  net  income  the 
amount  actually  distributable  to  him  (except  exempt  income)  even  though 
the  aggregate  of  the  distributive  shares  should  be  larger  than  the  net  income 
of  the  estate  or  trust  computed  as  a unit.  Any  gain,  profit,  or  income  which 
is  not  periodically  distributable,  must  be  included  in  computing  the  net  income 
of  the  estate  or  trust  so  that  the  fiduciary  will  pay  the  tax  upon  any  excess 
of  the  net  income  of  the  estate  or  trust  computed  as  a unit  over  the  aggregate 
distributive  shares. 

2566  For  example,  a trust  is  created  the  income  of  which  is  distributable 
periodically  for  the  life  of  the  beneficiary,  the  remainder  over  to 

others.  The  trust  has  the  following  items  of  income:  rent,  $3,000;  interest, 
$2,000;  gain  on  sale  of  capital  assets,  $1,500;  cash  dividend,  $1,000;  and 
deductions:  general  expenses  (all  deductible  from  distributable  income), 
$700;  depreciation,  $300;  loss  on  sale  of  capital  assets,  $3,000.  Under  the 
terms  of  the  trust  $5,300  Jwill  be  distributed  to  the  beneficiary,  viz.,  rent, 
$3,000;  plus  interest,  $2,000;  plus  dividend,  $1,000;^  less  general  expenses, 
$700.  The  gain  and  loss  on  the  sale  of  capital  assets  will  be  considered  capital 
items  affecting  the  corpus  only,  and  the  items  of  depreciation  will  not  affect 
the  amount  to  be  distributed,  there  being  no  rule  of  state  law  or  provision  of 
the  trust  requiring  this  deduction  from  distributable  income.  In  such  a case 
the  fiduciary  must  report  on  form  1041  showing  a net  income  for  the  trust  of 
$3,500,  and  must  show  as  the  distributive  share  of  the  beneficiary  the  $5,300 
to  which  he  is  entitled.  The  beneficiary  must  account  for  the  amount  actually 
distributable  to  him  as  income,  viz.,  $5,300,  as  provided  in  Section  219  (d), 
and  will  be  entitled  to  a credit  of  $1 ,000  on  account  of  the  dividends  in  comput- 
ing the  normal  tax,  but  not  to  any  deduction  on  account  of  depreciation  or 
capital  losses. 

2567  If  there  had  been  no  loss  on  the  sale  of  capital  assets  so  that  the  net 
income  of  the  estate  or  trust  was  $6,500,  form  1041  should  show  the 

distributive  share  of  the  beneficiary  as  $5,300,  and  the  distributive  share  of 
the  fiduciary  as  $1,200;  and  the  fiduciary  should  file  a separate  return  on 
form  1040A,  reporting  $1,200  for  taxation.  (T.  D.  2987,  signed  by  Daniel 
C.  Roper,  and  dated  March  1,  1920.) 


♦ 


» 


I 

t 


INC. 


466  TAX 


»>9.20. 


2668  Status  of  board  and  lodging  furnished  seamen. — Receipt  is  acknowl- 
889  edged  of  your  letter  of  July  2,  1919,  transmitting  a letter  addressed 
173(9  to  you  by , Auditor  for  the Steamship  Com- 

pany, in  which  a ruling  is  requested  as  to  the  value  which  should  be 
placed  on  board  and  lodging  furnished  seamen  in  the  employ  of  that  company 
for  the  purpose  of  including  same  as  part  of  their  compensation  in  their  per- 
sonal income  tax  returns.  1|You  ask  to  be  advised  further  whether  the 
Department  has  decided  upon  a fixed  sum  for  all  steamship  companies  cover- 
ing the  value  of  such  board  and  lodging.  Ijin  reply  you  are  advised  that  this 
office  holds  that  board  and  lodging  furnished  seamen  in  addition  to  their 
cash  compensation  is  supplied  for  the  convenience  of  their  employers  and 
for  this  reason  the  value  thereof  is  not  required  to  be  reported  in  such  em- 
ployees’ income  tax  returns.  ^Accordingly,  the  seamen  employed  by  the 

Steamship  Company  are  not  required  to  include  in  any  income 

tax  returns  they  may  be  required  to  render  the  value  of  board  and  lodging 
supplied  them  by  that  Company.  (Letter  to  the  Collector  of  Internal 
Revenue,  Jacksonville,  Fla.,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  July  21,  1919.) 


(T.  D.  2988.) 

2569  Amending  Article  29,  paragraph  200,  Regulations  No.  33. — Paragraph 
705  200,  of  Article  29,  Regulations  No.  33,  is  hereby  amended  to  read  as 

follows: 

“Nonresident  alien  beneficiary. — Where  a fiduciary  in  the  United  States 
is  the  recipient  of  trust  income  for  which  there  is  but  one  beneficiary  and 
that  beneficiary  a nonresident  alien,  the  fiduciary  will  be  required  to  make 
full  and  complete  return  on  Income  Tax  Form  1040,  or  1040  A,  as  the  case 
may  be,  for  this  trust  income  on  behalf  of  the  nonresident  alien  and  pay  any 
and  all  normal  tax  found  by  such  return  to  be  due,  and  any  and  all  surtax 
provided  the  income  is  not  returned  for  the  purpose  of  the  tax  by  the  bene- 
ficiary. Where  there  are  two  or  more  beneficiaries,  one  or  all  of  whom  are 
nonresident  aliens,  the  fiduciary  shall  render  a return  on  Form  1041,  and  a 
personal  return  on  Form  1040  or  1040  A,  for  each  nonresident  alien  bene- 
ficiary.” (T.  D.  2988,  signed  by  J.  H.  Callan,  Acting  Commissioner  of  In- 
ternal Revenue,  and  dated  March  3,  1920.) 


2570  Extension  of  time  for  the  filing  of  returns  by  corporations  to  May 

1810  15,  1920;  tentative  returns;  payment  of  first  instalment. — ‘Tn  view 

1848  of  the  fact  that  considerable  difficulty  is  being  experienced  by  cor- 
porations and  their  representatives  in  the  preparation  of  income  tax 

returns  for  the  year  1919,  collectors  of  internal  revenue  are  hereby  author- 
ized to  accept  tentative  corporation  returns  for  the  calendar  year  1919  on 
or  before  March  15,  1920.  Each  return  must  be  accompanied  by  at  least 
one-fourth  of  the  estimated  amount  of  tax  due,  together  with  a statement 
setting  forth  the  reason  why  the  return  cannot  be  completed  within  the  pre- 
scribed time  and  a formal  request  for  the  extension.  Any  deficiency  in  the 
first  instalment  will  bear  interest  at  the  rate  of  6 per  cent,  per  annum. 

2571  “An  extension  of  time  is  hereby  granted  to  corporations  in  such  cases 
to  file  completed  returns  on  or  before  May  15,  1920.  The  tentative 

return  submitted  in  accordance  with  the  foregoing  should  be  on  Form  1120, 
on  which  should  be  written  plainly  across  the  face  ‘Tentative  return.’  Only 
the  estimated  amount  of  tax  due  need  be  stated. 

2672  “Tentative  returns  filed  under  this  authority  will  be  handled  in  col- 
lectors’ offices  in  the  manner  prescribed  for  the  handling  of  similar 
returns  last  year. 


INC. 


467  TAX 


2573  further  extension  of  time  within  which  to  file  returns  will  not  be 
granted  except  in  extraordinary  cases  and  upon  proper  application 

to  the  Commissioner  of  Internal  Revenue,  setting  forth  the  reasons  why  the 
returns  cannot  be  completed.  ,t  at  i 

2574  “I.  T.  Mim.  2383  is  modified  accordingly.’’  (I.  T.  Mim.  2420,  March 
4,  1920.) 


{Decision.) 

Stock  Dividends  are  not  income  and  hence  are  not  taxable  as  such. 

Supreme  Court  of  the  United  States. 


Mark  Eisner,  as  Collector  of  United  States  In-)  In  Error  to  the  District 
ternal  Revenue  for  the  Third  District  of  the!  Court  of  the  United 
State  of  New  York,  Plaintiff  in  Error,  States  for  the  Southern 

District  of  New  York. 

Myrtle  H.  Macomber.  J 

William  L.  Frierson,  Assistant  Attorney  General  of  the  United  States,  Coun- 
sel for  plaintiff  in  error. 

Alexander  C.  King,  Solicitor  General  of  the  United  States,  Attorney  for 
plaintiff  in  error. 

Charles  E.  Hughes, 

George  Welwood  Murray,  ^ 

Counsel  for  defendant  in  error. 

Murray,  Prentice  & Howland, 

Attorneys  for  defendant  in  error. 

[March  8,  1920.]^ 

2575  ■ Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

848  This  case  presents  the  question  whether,  by  virtue  of  the  Sixteenth 

853  Amendment,  Congress  has  the  power  to  tax,  as  income  of  the  stock- 

865  holder  and  without  apportionment,  a stocK  aividend  made  lawfully, 

^2129  and  in  good  faith  against  profits  accumulated  by  the  corporation 

f2132  since  March  1,  1913.  It  arises  under  the  P.evenue  Act  of  September 

'2242  8,  1916  (Ch.  463,  39  Stat.  756,  et  seq.),  which,  in  our  opinion  (not- 

withstanding a contention  of  the  Governmient  that  will  be  noticed), 
plainly  evinces  the  purpose  of  Congress  to  tax  stock  dividends  as  income. 
2575  The  facts,  in  outline,  are  as  follows:  On  January  1,  1916,  the  Stand- 
ard Oil  Company  of  California,  a corporation  of  that  State,  out  of 
an  authorized  capital  stock  of  $100,000,000,  had  shares pf  stock  outstanding, 
par  value  $100  each,  amounting  in  round  figures  to  $50,000,000.  In  addi- 
tion, it  had  surplus  and  undivided  profits  invested  in  plant,  property,  and 
business  and  reauired  for  the  purposes  of  the  corporation,  amounting  to 
about  $45,000,000,  of  which  about  $20,000,000  had  been  earned  prior  to 
March  T 1913,  the  balance  thereafter.  In  January,  1916,  m order  to  read- 
just the  capitalization,  the  board  of  directors  decided  to  issue  additional 
shares  sufficient  to  constitute  a stock  dividend  of  50  per  cent,  of  the  out- 
standing stock,  and  to  transfer  from  surplus  account  to  capital  stock  a^ccount 
an  amount  equivalent  to  such  issue.  Appropriate  resolutions  were  adopted, 
an  amount  equivalent  to  the  par  value  of  the  proposed  new  stock  was  trans- 
ferred accordingly,  and  the  new  stock  duly  issued  against  it  and  divided 

among  the  stockholders.  r i u i 

2577  Defendant  in  error,  being  the  owner  of  2,200  shares  of  the  old  stock, 
received  certificates  for  1,100  additional  shares,  of  which  18.07  per 
cent.,  or  198.77  shares,  par  value  $19,877,  were  treated  as  representing  sur- 
plus earned  between  March  1,  1913,  and  January,  1 1916.  She  was  called 

46S  TAX 


INC. 


4-14-20. 


upon  to  pay,  and  did  pay  under  protest,  a tax  imposed  under  the  Revenue 
Act  of  1916,  based  upon  a supposed  income  of  §19,877  because  of  the  new 
shares;  and  an  appeal  to  the  Commissioner  of  Internal  Revenue  having  been 
disallowed,  she  brought  action  against  the  Collector  to  recover  the  tax.  In 
her  complaint  she  alleged  the  above  facts,  and  contended  that  in  imposing 
such  a tax  the  Revenue  Act  of  1916  violated  Art  I,  sec.  2,  cl.  3,  and  Art.  I, 
sec.  9,  cl.  4,  of  the  Constitution  of  the  United  States,  requiring  direct  taxes 
to  be  apportioned  according  to  population,  and  that  the  stock  dividend  was 
not  income  within  the  meaning  of  the  Sixteenth  Am.endment.  A general 
demurrer  to  the  complaint  was  overruled  [U  853]  upon  the  authority  of  Towne 
V.  Eisner  2313  herein],  245  U.  S.  418;  and,  defendant  having  failed  to 
plead  further,  final  judgment  went  against  him.  To  review  it,  the  present 
writ  of  error  is  prosecuted. 

2578  The  case  was  argued  at  the  last  term,  and  reargued  at  the  present 
term,  both  orally  and  by  additional  briefs. 

2579  We  are  constrained  to  hold  that  the  judgment  of  the  District 
Court  must  be  affirmed:  First,  because  the  question  at  issue  is  con- 
trolled by  Towne  v.  Eisner,  supra;  secondly,  because  a reexamination  of  the 
question,  with  the  additional  light  thrown  upon  it  by  elaborate  arguments, 
has  confirmed  the  view  that  the  underlying  ground  of  that  decision  is  sound, 
that  it  disposes  of  the  question  here  presented,  and  that  other  fundamental 
considerations  lead  to  the  same  result. 

2580  In  Towne  v.  Eisner,  the  question  was  whether  a stock  dividend  made 
in  1914  against  surplus  earned  prior  to  January  1,  1913,  was  taxable 

against  the  stockholder  under  the  Act  of  October  3,  1913  (Ch.  16,  38  Stat. 
114,  166),  which  provided  (sec.  B,  p.  167)  that  net  income  should  include 
‘‘dividends,”  and  also  “gains  or  profits  and  income  derived  from  any  source 
whatever.”  Suit  having  been  brought  by  a stockholder  to  recover  the  tax 
assessed  against  him  by  reason  of  the  dividend,  the  District  Court  sustained 
a demurrer  to  the  complaint.  242  Fed.  Rep.  702.  The  court  treated  the 
construction  of  the  act  as  inseparable  from,  the  interpretation  of  the  Sixteenth 
Amendment;  and,  having  referred  to  Pollock  v.  Farmers  Loan  & Trust  Co., 
158  U.  S.  601,  and  quoted  the  Amendment,  proceeded  very  properly  to  say 
(p.  704) : “It  is  manifest  that  the  stock  dividend  in  question  cannot  be  reached 
by  the  Income  Tax  Act,  and  could  not,  even  though  Congress  expressly 
declared  it  to  be  taxable  as  income,  unless  it  is  in  fact  income.”  It  declined 
however,  to  accede  to  the  contention  that  in  Gibbons  v.  Mahon,  136  U.  S. 
549,  “stock  dividends”  had  received  a definition  sufficiently  clear  to  be  con- 
trolling, treated  the  language  of  this  court  in  that  case  as  obiter  dictum  in 
respect  of  the  matter  then  before  it  (p.  706),  and  e,xamined  the  question  as 
res  nova,  with  the  result  stated.  When  the  case  came  here,  after  overruling 
a motion  to  dismiss  made  by  the  Government  upon  the  ground  that  the  only 
question  involved  was  the  construction  of  the  statute  and  not  its  consti- 
tutionality, we  dealt  upon  the  merits  with  the  question  of  construction  only, 
but  disposed  of  it  upon  consideration  of  the  essential  nature  of  a stock  divi- 
dend, disregarding  the  fact  that  the  one  in  question  was  based  upon  surplus 
earnings  that  accrued  before  the  Sixteenth  Amendment  took  effect.  Not 
only  so,  but  we  rejected  the  reasoning  of  the  District  Court,  saying  (245  U.  S., 
p.  426):  “Notwithstanding  the  thoughtful  discussion  that  the  case  received 
below  we  cannot  doubt  that  the  dividend  was  capital  as  well  for  the  putposes 
of  the  Income  Tax  Law  as  for  distribution  between  tenant  for  life  and  re- 
mainderman. What  was  said  by  this  court  upon  the  latter  question  is  equally 
true  for  the  former.  ‘A  stock  dividend  really  takes  nothing  from  the  property 
of  the  corporation,  and  adds  nothing  to  the  interests  of  the  shareholders. 
Its  property  is  not  diminished,  and  their  interests  are  not  increased.  . 

469  TAX 


INC. 


The  propo;rtional  interest  of  each  shareholder  remains  the  same.  The  only 
change  is  in  the  evidence  which  represents  that  interest,  the  new  shares^  and 
the  original  shares  together  representing  the  same  proportional  interest  that 
the  original  shares  represented  before  the  issue  of  the  new  ones.’  Gibbons 
V.  Mahon,  136  U.  S.  549,  559,  560.  In  short,  the  corporation  is  no  poorer 
and  the  stockholder  is  no  richer  than  they  were  before.  Logan  County  v. 
United  States,  169  U.  S.  255,  261.  [If  the  plaintiff  gained  any  small  advantage 
by  the  change,  it  certainly  was  not  an  advantage  of  $417,450,  the  sum  upon 
which  he  was  taxed.  . . . What  has  happened  is  that  the  plaintiff’s  old 

certificates  have  been  split  up  in  effect  and  have  diminished  in  value  to  the 
extent  of  the  value  of  the  new.” 

2581  This  language  aptly  answered  not  only  the  reasoning  of  the  District 
Court  but  the  argument  of  the  Solicitor  General  in  this  court,  which 

discussed  the  essential  nature  of  a stock  dividend.  And  if,  for  the  reasons 
thus  expressed,  such  a dividend  is  not  to  be  regarded  as  “income”  or  “divi- 
dends” within  the  meaning  of  the  Act  of  1913,  we  are  unable  to  see  how  it  can 
be  brought  within  the  meaning  of  “incomes”  in  the  Sixteenth  Amendment; 
it  being  very  clear  that  Congress  intended  in  that  Act  to  exert  its  power  to  the 
extent  permitted  by  the  Amendment.  In  Tozvne  v.  Eisner  it  was  not  con- 
tended that  any  construction  of  the  statute  could  make  it  narrower  than  the 
constitutional  grant;  rather  the  contrary. 

2582  The  fact  that  the  dividend  was  charged  against  profits  earned  before 
the  Act  of  1913  took  effect,  even  before  the  Amendment  was  adopted 

was  neither  relied  upon  nor  alluded  to  in  our  consideration  of  the  merits  in 
that  case.  Not  only  so,  but  had  we  considered  that  a stock  dividend  con- 
stituted income  in  any  true  sense,  it  would  have  been  held  taxable  under  the 
Act  of  1913  notwithstanding  it  was  based  upon  profits  earned  before  the 
Amendment.  We  ruled  at  the  same  term,  in  Lynch  v.  Hornby,  247  U.  S.  339, 
that  a cash  dividend  extraordinary  in  amount,  and  in  Peabody  v.  Eisner, 
247  U.  S.  347,  that  a dividend  paid  in  stock  of  another  company,  were  taxable 
as  income  although  based  upon  earnings  that  accrued  before  acioption  of  the 
Amendment.  In  the  former  case,  concerning  “corporate  profits  that  ac- 
cumulated before  the  Act  took  effect,”  we  declared  (pp.  343-344) : “Just  as 
we  deem  the  legislative  intent  manifest  to  tax  the  stockholder  with  respect 
to  such  accumulations  only  if  and  when,  and  to  the  extent  that,  his  interest 
in  them  comes  to  fruition  as  income,  that  is,  in  dividends  declared,  so  we  can 
perceive  no  constitutional  obstacle  that  stands  in  the  way  of  carrying  out 
this  intent  when  dividends  are  declared  out  of  a preexisting  surplus.  . ^ . 
Congress  was  at  liberty  under  the  Amendment^  to  tax  as  income,  without 
apportionment,  ever3rthing  that  became  income,  in  the  ordinary  sense  of  the 
word,  after  the  adoption  of  the  Amendment,  including  dividends  received  in 
the  ordinary  course  by  a stockholder  from  a corporation,  even  though  they 
were  extraordinary  in  amount  and  might  appear  upon  analysis  to  be  a mere 
realization  in  possession  of  an  inchoate  and  contingent  interest  that  the 
stockholder  had  in  a surplus  of  corporate  assets  previously  existing. ^ In 
Peabody  v.  Eisner  (pp.  349-350),  we  observed  that  the  decision  of  the  District 
Court  in  Tozvne  v.  Eisner  had  been  reversed  “only  upon  the  ground  that  it 
related  to  a stock  dividend  which  in  fact  took  nothing  from  the  property 
of  the  corporation  and  added  nothing  to  the  interest  of  the  shareholder,  but 
merely  changed  the  evidence  which  represented  that  interest;”  and  we^^dis- 
tinguished  the  Peabody  case  from  the  Tozvne  case  upon  the  ground  that  ‘^^the 
dividend  of  Baltimore  & Ohio  shares  was  not  a stock  dividend  but  a distribu- 
tion in  specie  of  a portion  of  the  assets  of  the  Union  Pacific.” 

2583  Therefore,  Tozvne  v.  Eisner  cannot  be  regarded  as  turning  upon 
the  point  that  the  surplus  accrued  to  the  company  before  the  Act 
took  effect  and  before  adoption  of  the  Amendment.  And  what  we  have 

INC.  470  TAX 


8^20. 


quoted  from  the  opinion  in  that  case  cannot  be  regarded  as  obiter  dictum,  it  * 
having  furnished  the  entire  basis  for  the  conclusion  reached.  We  adhere  to 
the  view  then  expressed,  and  might  rest  the  present  case  there;  not  because 
that  case  in  terms  decided  the  constitutional  question,  for  it  did  not;  but  be- 
cause the  conclusion  there  reached  as  to  the  essential  nature  of  a stock  divi- 
dend necessarily  prevents  its  being  regarded  as  income  in  any  true  sense. 

2584  Nevertheless,  in  view  of  the  importance  of  the  matter,  and  the  fact 
that  Congress  in  the  Revenue  Act  of  1916  declared  (39- Stat.  757) 

that  a ‘'stock  dividend  shall  be  considered  income,  to  the  amount  of  its  cash 
value,”  we  will  deal  at  length  with  the  constitutional  question,  incidentally 
testing  the  soundness  of  our  previous  conclusion. 

2585  The  Sixteenth  Amendment  must  be  construed  in  connection  with 
the  taxing  clauses  of  the  original  Constitution  and  the  effect  attri- 
buted to  them  before  the  Amendment  was  adopted.  In  Pollock  v.  Farmers 
Loan  & Trust  Co.,  158  U.  S.  601,  under  the  Act  of  August  27,  1894  (Ch. 
349,  sec.  27,  28  Stat.  509,  553),  it  was  held  that  taxes  upon  rents  and  profits 
of  real  estate  and  upon  returns  from  investments  of  personal  property  were 
in  effect  direct  taxes  upon  the  property  from  which  such  income  arose,  im- 
posed by  reason  of  ownership;  and  that  Congress  could  not  impose  such  taxes 
without  apportioning  them  among  the  States  according  to  population,  as 
required  by  Art.  I,  sec.  2,  cl.  3,  and  sec.  9,  cl.  4,  of  the  original  Constitution. 

2586  Afterwards,  and  evidently  in  recognition  of  the  limitation  upon  the 
taxing  power  of  Congress  thus  determined,  the  Sixteenth  Amendment 

was  adopted,  in  words  lucidly  expressing  the  object  to  be  accomplished: 
“The  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes,  from 
whatever  source  derived,  without  apportionment  among  the  several  States, 
and  without  regard  to  any  census  or  enumeration.”  As  repeatedly  held,  this 
did  not  extend  the  taxing  power  to  new  subjects,  but  merely  removed  the 
necessity  which  otherwise  might  exist  for  an  apportionment  among  the  States 
of  taxes  laid  on  income.  Brnshaber  v.  Union  Pacific  R.  R.  Co.,  240  U.  S.  1, 
17-19;  Stanton  v.  Baltic  Mini7ig  Co.,  240  U.  S.  103,  112  et  seq.;  Peck  & Co. 
V.  Lozi'e,  247  U.  S.  165,  172-173. 

2587  A proper  regard  for  its  genesis,  as  well  as  its  very  clear  language, 
requires  also  that  this  Amendment  shall  not  be  extended  by  loose 

construction,  so  as  to  repeal  or  modify,  except  as  applied  to  income,  those 
provisions  of  the  Constitution  that  require  an  apportionment  according  to 
population  for  direct  taxes  upon  property,  real  and  personal.  This  limita- 
tion still  has  an  appropriate  and  important  function,  and  is  not  to  be  over- 
riden by  Congress  or  disregarded  by  the  courts. 

2588  In  order,  therefore,  that  the  clauses  cited  from  Article  1 of  the  Con- 
stitution may  lia\c  proper  force  and  effect,  save  only  as  modified  b\' 

the  Amendment,  and  that  tlie  latter  also  may  have  proper  effect,  it  becomes 
essential  to  distinguish  between  what  is  and  what  is  not  “income,”  as  the 
term  is  there  used;  and  to  apply  the  distinction,  as  cases  arise,  according  to 
truth  and  substance,  without  regard  to  form.  Congress  cannot  by  any  defini- 
tion it  may  adopt  conclude  the  matter,  since  it  cannot  by  legislation  alter  the 
Constitution,  from  which  alone  it  derives  its  power  to  legislate,  and  wit  tin 
whose  limiitations  alone  that  power  can  be  lawfully  exercised. 

2589  4 he  fundamiental  relation  of  “capital”  to  “income”  has  been  much 
discussed  by  economists,  the  former  being  likened  to  tlie  tree  or  the 

land,  tlie  latter  to  the  fruit  or  the  crop;  the  former  depicted  as  a reservoir 
supplied  from  springs,  the  latter  as  the  outlet  stream,  to  be  measured  by  its 
flow  during  a period  of  time.  For  the  present  purpose  we  require  only  a clear 
definition  of  the  term  “income,”  as  used  in  common  speech,  in  order  to  de- 
termine its  meaning  in  the  Amendment;  and,  having  formed  also  a correct 

47 1 TAX 


INC. 


• judgment  as  to  the  nature  of  a stock  dividend,  we  shall  find  it  easy  to  decide 

the  matter  at  issue.  ' t T-k  c^-  ^ ^ 

2590  After  examining  dictionaries  in  common  use  (bouv.^  L.  U.;  Otanaam 
Diet.;  Webster’s  Internat.  Diet.;  Century  Diet.),  we  find  little  to  add  to  the 
succinct  definition  adopted  in  two  cases  arising  under  the  Corporation  1 ax 
Act  of  1909  (Stratton's  Independence  v.  Howhert,  231  U.  S.  399,  415;  Doyle 
V.  Mitchell  Bros.  Co.,  247  U.  S.  179,  185)— “Income  may  be  defined  as  the  gam 
derived  from  capital,  from  labor,  or  from  both  combined,  provided  it  be 
understood  to  include  profit  gained  through  a sale  or  conversion  of  capital 
assets,  to  which  it  was  applied  in  the  Doyle  case  (pp.  183,^  185).  ^ 

2951  Brief  as  it  is,  it  indicates  the  characteristic  and  distinguishing  attri- 
bute of  income  essential  for  a correct  solution  of  the  present  contro- 
versy. The  Government,  although  basing  its  arguinent  upon  the  definition 
as  quoted,  placed  chief  emphasis  upon  the  word  “gain,’  which  was  extended 
to  include  a variety  of  meanings;  while  the  significance  of  the  next  three  words 
was  either  overlooked  or  misconceived.  **Derwed  from  capital  ; the 
gain — derived — from — capital,"  etc.  Here  we  have  the  essential  inatter. 
not  a gain  accruing  to  capital,  not  a growth  or  increment  of  value  in  the  invest- 
ment; but  a gain,  a profit,  something  of  exchangeable  value  proceeding  from 
the  property,  severed  from  the  capital  however  invested  or  ernployed,  and 
coming  in,  being  ^^derived",  that  is,  received  or  drawn  by  the  recipient  (the  tax- 
payer) for  his  separate  use,  benefit  and  disposal;  that  is  income  derived  from 
property.  Nothing  else  answers  the  description.  ^ , c-  u 

2592  The  same  fundamental  conception  is  clearly  set  forth  m the  Sixteenth 
Amendment— “incomes, /row  whatever  source  derived  —the  essential 

thought  being  expressed  with  a conciseness  and  lucidity  entirely  m harmony 
with  the  form  and  style  of  the  Constitution. 

2593  Can  a stock  dividend,  considering  its  essential  character,  be  brought 
within  the  definition  ? To  answer  this,  regard  must  be  had  to  the  nature 

of  a corporation  and  the  stockholder’s  relation  toiL.  We  refer,  of  course,  to 
a corporation  such  as  the  one  in  the  case  at  bar,  organized  for  profit  and  having 
a capita]  stock  divided  into  shares  to  which  a nominal  or  par  value  is  attri- 

2594  Certainly  the  interest  of  the  stockholder  is  a capital  interest,  and 
his  certificates  of  stock  are  but  the  evidence  of  it.  They  state  the 

number  of  shares  to  which  he  is  entitled  and  indicate  their  par  value  and  how 
the  stock  may  be  transferred.  They  show  that  he  or  his  assignors,  immediate 
or  remote,  have  contributed  capital  to  the  enterprise,  that  he  is  entitled  to 
a corresponding  interest  proportionate  to  the  whole,  entitled  to  have  the  pro- 
perty and  business  of  the  company  devoted  during  the  corporate  existence  to  at- 
tainment of  the  common  objects,  entitled  to  vote  at  stockholders  meetings, 
to  receive  dividends  out  of  the  corporation’s  profits  if  and  when  declared, 
and,  in  the  event  of  liquidation,  to  receive  a proportionate  share  of  the  net 
assets,  if  any,  remaining  after  paying  creditors.  Short  of  liquidation,  or 
until  dividend  declared,  he  has  no  right  to  withdraw  any  part  of  either  capital 
or  profits  from  the  common  enterprise;  on  the  contrary,  his  interest  pertains 
not  to  any  part,  divisible  or  indivisible,  but  to  the  entire  assets,  business, 
and  affairs  of  the  company.  Nor  is  it  the  interest  of  an  owne^  since  the 
corporation  has  full  title,  legal  and  equitable,  to  the  whole.  The  stock- 
holder has  the  right  to  have  the  assets  employed  m the  enterpnse,  with  th^e 
incidental  rights  mentioned;  but,  as  stockholder,  he  has  no  right  to  with- 
draw, only  the  right  to  persist,  subject  to  the  risks  of  the  enterprise,  and 
looking  only  to  dividends  for  his  return.  If  he  desires  to  dissociate  himself 
from  the  company  he  can  do  so  only  by  disposing  of  his  stock. 

2595  For  bookkeeping  purposes,  the  company  acknowledges  a liability 
in  form  to  the  stockholders  equivalent  to  the  aggregate  par  value 
INC.  472  TAX 


a.9-20- 


of  their  stock,  evidenced  by  a “capital  stock  account.”  If  profits  have  been 
made  and  not  divided  they  create  additional  bookkeeping  liabilities  under 
the  head  of  “profit  and  loss,”  “undivided  profits,”  “surplus  account,”  or 
the  like.  None  of  these,  however,  gives  to  the  stockholders  as  a body,  much 
less  to  any  one  of  them,  either  a claim  against  the  going  concern  for  any 
particular  sum  of  money,  or  a right  to  any  particular  portion  of  the  assets  or 
any  share  in  them  unless  or  until  the  directors  conclude  that  dividends  shall 
be  made  and  a part  of  the  company’s  assets  segregated  from  the  common 
fund  for  the  purpose.  The  dividend  normally  is  payable  in  money,  under 
exceptional  circumstances  in  some  other  divisible  property;  and  when  so 
paid,  then  only  (excluding,  of  course,  a possible  advantageous  sale  of  his 
stock  or  winding-up  of  the  company)  does  the  stockholder  realize  a profit 
or  gain  which  becomes  his  separate  property,  and  thus  derive  income  from  the 
capital  that  he  or  his  predecessor  has  invested. 

2596  In  the  present  case,  the  corporation  had  surplus  and  undivided 
profits  invested  in  plant,  property,  and  bminess,  and  required 
for  the  purposes  of  the  corporation,  amounting  to  about  $45,000,000,  in 
addition  to  outstanding  capital  stock  of  $50,000,000.  In  this  the  case  is  not 
extraordinary.  The  profits  of  a corporation,  as  they  appear  upon  the  balance 
sheet  at  the  end  of  the  year,  need  not  be  in  the  form  of  money  on  hand  in 
excess  of  what  is  required  to  meet  current  liabilities  and  finance  current 
operations  of  the  company.  Often,  expecially  in  a growing  bitsiness,  only 
a part,  sometimes  a small  part,  of  the  year’s  profits  is  in  property  capable 
of  division;  the  remainder  having  been  absorbed  in  the  acquisition  of  in- 
creased plant,  equipment,  stock  in  trade,  or  accounts  receivable,  or  in  decrease 
of  outstanding  liabilities.  When  only  a part  is  available  for  dividends,  the 
balance  of  the  year’s  profits  is  carried  to  the  credit  of  undivided  profits, 
or  surplus,  or  some  other  account  having  like  significance.  If  thereafter  the 
company  finds  itself  in  funds  beyond  current  needs  it  may  declare  dividends 
out  of  such  surplus  or  undivided  profits;  otherwise  it  may  go  on  for  years 
conducting  a successful  business,  but  requiring  more  and  more  working 
capital  because  of  the  extension  of  its  operations,  and  therefore  unable  to 
declare  dividends  approximating  the  amount  of  its  profits.  Thus  the  surplus 
may  increase  until  it  equals  or  even  exceeds  the  par  value  of  the  outstanding 
capital  stock.  This  may  be  adjusted  upon  the  books  in  the  mode  adopted 
in  the  case  at  bar — by  declaring  a “stock  dividend.”  This,  however,  is  no 
more  than  a book  adjustment,  in  essence  not  a dividend  but  rather  the 
opposite;  no  part  of  the  assets  of  the  company  is  separated  from  that  common 
fund,  nothing  distribured  except  paper  certificates  that  evidence  an  ante- 
cedent increase  in  the  value  of  the  stockholder’s  capital  interest  resulting  from 
an  accumulation  of  profits  by  the  company,  but  profits  so  far  absorbed  in 
the  business  as  to  render  it  impracticable  to  separate  them  for  withdrawal 
and  distribution.  In  order  to  make  the  adjustment,  a charge  is  made  against 
surplus  account  with  corresponding  credit  to  capital  stock  account,  equal  to 
the  proposed  “dividend”;  the  new  stock  is  issues  against  this  and  the  certi- 
ficates delivered  to  the  existing  stockholders  in  proportion  to  their  previous 
holdings*  This,  hov/ever,  is  merely  bookkeeping  that  does  not  affect  the 
aggregate  assets  of  the  corporation  or  its  outstanding  liabilities;  it  affects 
only  the  form,  not  the  essence,  of  the  “liability”  acknowledged  by  the  cor- 
poration to  its  own  shareholders,  and  this  through  a readjustment  of  accounts 
on  one  side  of  the  balance  sheet  only,  increasing  “capital  stock”  at  the  ex- 
pense of  “surplus”;  it  does  not  alter  the  preexisting  proportionate  interest 
of  any  stockholder  or  increase  the  intrinsic  value  of  his  holding  or  of  the 
aggregate  holdings  of  the  other  stockholders  as  they  stood  before.  The  new 


INC. 


473  TAX 


certificates  simply  increase  the  number  of  the  shares,  with  consequent 

dilution  of  the  value  of  each  share.  i j ^ 

2597  A “stock  dividend”  shows  that  the  company  s accumulated  protits 
have  been  capitalized,  instead  of  distributed  to  the  stockholders  or 
retained  as  surplus  available  for  distribution  in  money  or  in  kind  should 
opportunity  offer.  Far  from  being  a realization  of  profits  of  the  stockholder, 
it  tends  rather  to  postpone  such  realization,  in  that  the  fund  represented 
by  the  new  stock  has  been  transferred  from  surplus  to  capital,  and  no  longer 

is  available  for  actual  distribution.  , , , , , • j 

2698  The  essential  and  controlling  fact  is  that  the  stockholder  has  received 
nothing  out  of  the  company’s  assets  for  his  separate  use  and  beneiit; 
on  the  contrary,  every  dollar  of  his  original  investment,  together  with 
ever  accretions  and  accumulations  have  resulted  from  employment  oi  nis 
money  and  that  of  the  other  stockholders  in  the  business  of  the  company, 
still  remains  the  property  of  the  company,^  and  subject  to  business  risks 
which  may  result  in  wiping  out  the  entire  investment.  Having  regard  o 
the  very  truth  of  the  matter,  to  substance  and  not  to  form,  he  has  received 
nothing  that  answers  the  definition  of  income  within  the  meaning  oi  t e 

Sixteenth  Amendment.  j rr  f u o 

2599  Being  concerned  only  with  the  true  character  and  effect  ot  sucn  a 
dividend  when  lawfully  made,  we  lay  aside  the  question  whether  in 

a particular  case  a stock  dividend  may  be  authorized  by  the  local  law  govern 
ing  the  corporation,  or  whether  the  capitalization  of  profits  may  be  the  result 
of  correct  judgment  and  proper  business  policy  on  the  part  of  its  manage- 
ment, and  a due  regard  for  the  interests  of  the  stockholders.  And  we  are 
considering  the  taxability  of  bona  fide  stock  dividends  only. 

2600  We  are  clear  that  not  only  does  a stock  dividend  really  tal^  nothing 
from  the  property  of  the  corporation  and  add  nothing  to  that  ot  the 

shareholder,  but  that  the  antecedent  accumulation  of  profits  evidenced 
thereby,  while  indicating  that  the  shareholder  is  the  richer  because  ot  an 
increase  of  his  capital,  at  the  same  time  shows  he  has  not  realized  or  received 

any  income  in  the  transaction.  • j 

2601  It  is  said  that  a stockholder  may  sell  the  new  shares  acquired  in  t 
stock  dividend;  and  so  he  may,  if  he  can  find  a buyer.  It  is  equally 

true  that  if  he  does  sell,  and  in  doing  so  realizes  a profit,  such  profit  like  any 
other,  is  income,  and  so  far  as  it  may  have  arisen  since  the  Sixteenth  Amend- 
ment is  taxable  by  Congress  without  apportionment.  The  same  wou  d be 
true  were  he  to  sell  some  of  his  original  shares  at  a profit.  i5ut  it  a snare- 
holder  sells  dividend  stock  he  necessarily  disposes  of  a part  ot  fiis  capital 
interest,  just  as  if  he  should  sell  a part  of  his  old  stock,  either  before  or  alter 
the  dividend.  What  he  retains  no  longer  entitles  him  to  the  same  propor- 
tion of  future  dividends  as  before  the  sale.  His  part  in  the  control  ot  the 
company  likewise  is  diminished.  Thus,  if  one  holding  $60,000  out  of  a total 
$100,000  of  the  capital  stock  of  a corporation  should  receive  m common  with 
other  stockholders  a 50  per  cent,  stock  dividend,  and  should  sell  his  part  he 
thereby  would  be  reduced  from  a majority  to  a minority  stockholder,  hav- 
ing six-fifteenths  instead  of  six-tenths  of  the  total  stock  outstanding  A 
corresponding  and  proportionate  decrease  in  capital  interest  and  in  voting 
power  would  befall  a minority  holder  should  he  sell  dividend  stock;  it  being 
in  the  nature  of  things  impossible  for  one  to  dispose  of  any  part  of  such  an 
issue  without  a proportionate  disturbance  of  the  distribution  of  the  entire 
capital  stock,  and  a like  diminution  of  the  seller’s  comparative  voung  power 
—that  “right  preservative  of  rights”  in  the  control  of  a corporation.  Yet 
without  selling,  the  shareholder,  unless  possessed  o,! 

the  wherewithal  to  pay  an  income  tax  upon  the  dividend  stock.  Nothing 


# 


9 


9 


% 


% 


% 


I 


INC. 


474  TAX 


8-9-20. 


could  more  clearly  show  that  to  tax  a stock  dividend  is  to  tax  a capital  in- 
crease, and  not  income,  than  this  demonstration  that  in  the  nature  of  things 
it  requires  conversion  of  capital  in  order  to  pay  the  tax. 

2602  Throughout  the  argument  of  the  Government,  in  a variety  of  forms, 
runs  the  fundamental  error  already  mentioned — a failure  to  appraise 

correctly  the  force  of  the  term  “income”  as  used  in  the  Sixteenth  Amend- 
ment, or  at  least  to  give  practical  effect  to  it.  Thus,  the  Government  con- 
tends that  the  tax  “is  levied  on  income  derived  from  corporate  earnings,” 
when  in  truth  the  stockholder  has  “derived”  nothing  except  paper  certifi- 
cates which,  so  far  as  they  have  any  effect,  deny  him  present  participation 
in  such  earnings.  It  contends  that  the  tax  may  be  laid  when  earnings  “are 
received  by  the  stockholder”,  whereas  he  has  received  none;  that  the  profits 
are  “distributed  by  means  of  a stock  dividend,”  although  a stock  dividend 
distributes  no  profits;  that  under  the  Act  of  1916  “the  tax  is  on  the  stock- 
holder’s share  in  corporate  earnings,”  when  in  truth  a stockholder  has  no 
such  share,  and  receives  none  in  a stock  dividend;  that  “the  profits  are  segre- 
gated from  his  former  capital,  and  he  has  a separate  certificate  representing 
his  invested  profits  or  gains,”  whereas  there  has  been  no  segregation  of  profits, 
nor  has  he  any  separate  certificate  representing  a personal  gain,  since  the 
certificates,  new  and  old,  are  alike  in  what  they  represent — a capital  interest 
in  the  entire  concerns  of  the  corporation. 

2603  We  have  no  doubt  of  the  power  or  duty  of  a court  to  look  through 
the  form  of  the  corporation  and  determine  the  question  of  the  stock- 
holder’s right,  in  order  to  ascertain  whether  he  has  received  income  taxable 
by  Congress  without  apportionment.  But,  looking  through  the  form,  we 
cannot  disregard  the  essential  truth  disclosed;  ignore  the  substantial  differ- 
ence between  corporation  and  stockholder;  treat  the  entire  organization  as 
unreal;  look  upon  stockholders  as  partners,  when  they  are  not  such;  treat 
them  as  having  in  equity  a right  to  a partition  of  the  corporate  assets,  when 
they  have  none;  and  indulge  the  fiction  that  they  have  received  and  realized 
a share  of  the  profits  of  the  company  which  in  truth  they  have  neither  received 
nor  realized.  We  must  treat  the  corporation  as  a substantial  entity  separate 
from  the  stockholder,  not  only  because  such  is  the  practical  fact  but  because 
it  is  only  by  recognizing  such  separateness  that  any  dividend — even  one  paid 
in  money  or  property — can  be  regarded  as  income  of  the  stockholder.  Did 
we  regard  corporation  and  stockholders  as  altogether  identical,  there  would 
be  no  income  except  as  the  corporation  acquired  it;  and  while  this  would  be 
taxable  against  the  corporation  as  income  under  appropriate  provisions  of 
law,  the  individual  stockholders  could  not  be  separately  and  additionally 
taxed  with  respect  to  their  several  shares  even  when  divided,  since  if  there 
were  entire  identity  between  them  and  the  company  they  could  not  be  re- 
garded as  receiving  anything  from  it,  anymore  than  if  one’s  money  were  to 
removed  from  one  pocket  to  another. 

2604  Conceding  that  the  mere  issue  of  a stock  dividend  makes  the  recipient 
no  richer  than  before,  the  Government  nevertheless  contends  that 

the  new  certificates  measure  the  extent  to  which  the  gains  accumulated  by 
the  corporation  have  made  him  the  richer.  There  are  two  insuperable  diffi- 
culties with  this:  In  the  first  place,  it  would  depend  upon  how  long  he  had 
held  the  stock  whether  the  stock  dividend  indicated  the  extent  to  which  he 
had  been  enriched  by  the  operations  of  the  company;  unless  he  had  held  it 
throughout  such  operations  the  measure  would  not  hold  true.  Secondly, 
and  more  important  for  present  purposes,  enrichment  througli  increase  in 
value  of  capital  investment  is  not  income  in  any  proper  meaning  of  the  term. 
2606  The  complaint  contains  averments  respecting  the  market  prices  of 
stock  such  as  plaintiff  held,  based  upon  sales  before  and  after  the 


INC. 


475  TAX 


stock  dividend,  tending  to  show  that  the  receipt  of  thejadditional  1,100 
shares  did  not  substantially  change  the  market  value  of  her  entire  holdings. 
This  tends  to  show  that  in  this  instance  market  quotations  reflected  intrinsic 
yalues— a thing  they  do  not  always  do.  But  we  regard  the  market  prices  of 
the  securities  as  an  unsafe  criterion  in  an  inquiry  such  as  the  present,  when 
the  question  must  be,  not  what  will  the  thing  sell  for,  but  what  is  it  in  trtth 

and  in  essence.  ^ ....  . , i j-  • 

2606  It  is  said  there  is  no  difference  in  principle  between  a simple  stock  divi- 
dend and  a case  where  stockholders  use  money  received  as  cash 

dividends  to  purchase  additional  stock  contemporaneously  issued  by  the  cor- 
poration. But  an  actual  cash  dividend,  with  a real  option  to  the  stockholder 
either  to  keep  the  money  for  his  own  or  to  reinvest  it  in  new  shares,  would  be 
as  far  removed  as  possible  from  a true  stock  dividend,  such  as  the  one  we 
have  under  consideration,  where  nothing  of  value  is  taken  from  the  com- 
pany’s assets  and  transferred  to  the  individual  ov/nership  of  the  several 
stockholders  and  thereby  subjected  to  their  disposal. 

2607  The  Government’s  reliance  upon  the  supposed  analogy  between^  a 
dividend  of  the  corporation’s  own  shares  and  one  made  by  dis- 
tributing shares  owned  by  it  in  the  stock  of  another  company,  calls  for  no 
comm^ent  beyond  the  statement  that  the  latter  distributes  assets  of  the  com- 
pany among  the  shareholders  while  the  former  does  not;  and  for  no  citation 
of  authority  except  Peabody  v.  Eisner,  247  U.  S.  347,  349-350. 

2608  Two  recent  decisions,  proceeding  from  courts  of  high  jurisdiction, 
are  cited  in  support  of  tlie  position  of  the  Government. 

2609  Swan  Brewery  Co.,  Ltd.  v.  Rex,  [1914]  A.  _C.  231,  arose  under  the 
Dividend  Duties  Act  of  Western  Australia,  which  provided^  that 

“dividend”  should  include  “every  dividend,  profit,  advantage,  or  gain  in- 
tended to  be  paid  or  credited  to  or  distributed  among  any  members  or  directors 
of  any  company,”  except,  etc.  There  was  a stock  dividend,  the  new  shares 
being  allotted  among  the  shareholders  pro  rata;  and  the  question  was  whether 
this  was  a distribution  of  a dividend  within  the  meaning  of  the  act.  The 
Judicial  Committee  of  the  Privy  Council  sustained  the  dividend  duty  upon 
the  ground  that,  although  “in  ordinary  language  the  new  shares  would  not 
be  called  a dividend,  nor  would  the  allotment  of  them  be  a distribution  of  a 
dividend,”  yet,  within  the  meaning  of  the  act,  such  new  shares  were  an 
“advantage”  to  the  recipients.  There  being  no  constitutional  restriction 
upon  the  action  of  the  lawmaking  body,  the  case  presented  merely  a question 
of  statutory  construction,  and  manifestly  the  decision  is  not  a precedent  for 
the  guidance  of  this  court  when  acting  under  a duty  to  test  an  act  of  Congress 
by  the  limitations  of  a written  Constitution  having  superior  force. 

2610  In  Tax  Commissioner  v.  Putnam  (1917),  227  hlass.  522,  it  was 
held  that  the  44th  Amendment  to  the  Constitution  of  Massachusetts, 

which  conferred  upon  the  Legislature  full  power  to  tax  incomes,  “must  be 
interpreted  as  including  every  item  which  by  any  reasonable  understanding 
can  fairly  be  regarded  as  income”  (pp.  526,  531);  and  that  under  it  a stock 
dividend  was  taxable  as  income,  the  court  saying  (p.  535):  “In  essence  the 
thing  which  has  been  done  is  to  distribute  a symbol  representing  an  accumu- 
lation of  profits,  which  instead  of  being  paid  out  in  cash  is  invested  in  the 
business,  thus  augmenting  its  durable  assets.  In  this  aspect  of  the  case  the 
substance  of  the  transaction  is  no  different  from  what  it  would  be  if  a cash 
dividend  had  been  declared  with  the  privilege  of  subscription  to  an  equivalent 
amount  of  new  shares.”  We  cannot  accept  this  reasoning.  Evidently,  in 
order  to  give  a sufficiently  broad  sweep  to  the  new  taxing  provision,  it  was 
deemed  necessary  to  take  the  symbol  for  the  substance,  accumulation  for  dis- 
tribution, capital  accretion  for  its  opposite;  while  a case  where  money  is  paid 


INC. 


476  TAX 


5^20. 


'into > the  hand  of  the  stockholder  Vv^ith  an  option  to  buy  new  shares  with  it, 
'fallowed  by  a hypothetical  acceptance  of  the  option,  was  regarded  as  identical 
tntaubstance  with  a case  where  the  stockholder  receives  no  money  and  has  no 
option.  The  Massachusetts  court  was  not  under  an  obligation,  like  the  one 
which  binds  us,  of  applying  a constitutional  amendment  in  the  light  of  other 
constitutional  provisions  that  stand  in  the  way  of  extending  it  by  construction, 
1 Upon  the  second  argument,  the  Government,  recognizing  the  force 
of  the  decision  in  Towne  v.  Eisner^  supra,  and  virtually  abandoning 
'the»contention  that  a stock  dividend  increases  the  interest  of  the  stockholder 
or  otherwise  enriches  him,  insisted  as  an  alternative  that  by  the  true  construc- 
'trion  of  the  Act  of  1916  the  tax  is  imiposed  not  upon  the  stock  dividend  but 
'rather  upon  the  stockholder’s  share  of  the  undivided  profits  previously 
.'adcumulated  by  the  corporation;  the  tax  being  levied  as  a matter  of  conven- 
ience at  the  time  such  profits  become  manifest  through  the  stock  dividend. 
If -s-o construed,  would  the  Act  be  constitutional.^ 

2612  That  Congress  has  power  to  tax  shareholders  upon  their  property 
interests  in  the  stock  of  corporations  is  beyond  question;  and  that 

such  interests  mdght  be  valued  in  view  of  the  condition  of  the  company,  in- 
cluding its  accummlated  and  undivided  profits,  is  equally  clear.  But  that  this 
would  be  taxation  of  property  because  of  ownership,  and  hence  would  re- 
quire apportionment  under  the  provisions  of  the  Constitution,  is  settled 
.beyond  peradventure  by  previous  decisions  of  this  court. 

2613  The  Governmient  relies  upon  Collector  v.  Huhha-rd  (1870),  12  Wall. 
1,  17,  which  arose  under  see.  117  of  the  Act  of  June  30,  1864  (Ch.  173; 

i3;'Stat.  223,  282),  providing  that  ‘‘the  gains  and  profits  of  all  companies, 
whether  incorporated  or  partnership,  other  than  the  companies  specified 
m this  section,  shall  be  included  in  estimating  the  annual  gains,  profits, 
or  income  of  any  person  entitled  to  the  same,  whether  divided  or  otherwise.” 
The  court  held  an  individual  taxable  upon  his  proportion  of  the  earnings  of 
a corporation  although  not  declared  as  dividends  and  although  invested  in 
assets  not  in  their  nature  divisible.  Conceding  that  the  stockholder  for  cer- 
tain purposes  had  no  title  prior  to  dividend  declared,  the  court  nevertheless 
said  (p.  18):  “Grant  all  that,  still  it  is  true  that  the  owner  of  a share  of  stock 
m a corpc)ration  holds  the  share  with  all  its  incidents,  and  that  among  those 
•mcidents  is  the  right  to  receive  all  future  dividends,  that  is,  his  proportional 
share  of  all  profits  not  then  divided.  Profits  are  incident  to  the  share  to 
wltich  the  owner  at  once  becon:es  entitled  provided  he  remains  a member  of 
the  corporation  until  a dividend  is  made.  Regarded  as  an  incident  to  the 
shares  undivided  profits  are  property  of  the  shareholder,  and  as  such  are 
■the  proper  subject  of  sale,  gift,  or  devise.  Undivided  profits  invested  in  real 
f estate,  machinery,  or  raw  material  for  the  purpose  of  being  manu'actured 
are  investments  in  which  the  stockholders  are  interested,  and  when  such 
.profits  are  actually  appropriated  to  the  payment  of  the  debts  of  the  cor- 
poration they  servm  to  increase  the  market  value  of  the  shares,  wdiether  held 
by  the  original  subscribers  or  by  assignees.”  In  so  far  as  tliis  seems  to  upliold 
=the  right  of  Congress  to  tax  witliout  apportionment  a stockholder’s  interest 
iin  accumulated  earnings  prior  to  dividend  declared,  it  must  be  regarded  as 
overruled  by  Pollock  v.  Farmers  Loan  & Trust  Co.  158  IJ.  S.  601,  627,  628, 
637.  Conceding  Collector  v.  Hubbard  w^as  incor.sistcnt  with  the  eloctrine  of 
that  case,  because  it  sustained  a direct  tax  upon  property  not  apportioned 
among  the  States,  the  Government  nevertheless  insists  that  the  Sixteenth 
Amendment  removed  this  obstacle,  so  that  now  t\\Q  Hubbard  case  is  authority 
for  the  power  of  Congress  to  levy  a tax  on  the  stockholder’s  share  in  the 
accurnulated  profits  of  the  corporation  even  before  division  by  the  declaration 
of  a dividend  of  any  kind.  Manifestly  this  argument  must  be  rejected,  since 

477  TAX 


INC. 


the  Amendment  applies  to  income  only,  and  what  is  called  the  stockholder’s 
share  in  the  accumulated  profits  of  the  company  is  capital,  not  income.  As 
we  have  pointed  out,  a stockholder  has  no  individual  share  in  accumulated 
profits,  nor  in  any  particular  part  of  the  assets  of  the  corporation,  prior 
to  dividend  declared. 

2614  Thus,  from  every  point  of  view,  we  are  brought  irresistibly  to  the 
conclusion  that  neither  under  the  Sixteenth  Amendment  nor  other- 
wise has  Congress  power  to  tax  without  apportionment  a true  stock  dividend 
made  lawfully  and  in  good  faith,  or  the  accumulated  profits  behind  it,  as 
income  of  the  stockholder.  The  Revenue  Act  of  1916,  in  so  far  as  it  imposes 
a tax  upon  the  stockholder  because  of  such  dividend,  violates  the  provisions 
of  Article  I,  Section  2,  clause  3,  and  Article  I,  Section  9,  clause  4,  of  the 
Constitution,  and  to  this  extent  is  invalid  notv/ithstanding  the  Sixteenth 
Amendment. 

Judgment  affirmed. 


Mr.  Justice  Holmes,  dissenting. 

2615  I think  that  Towne  v.  Eisner,  245  U.  S.  418,  was  right  in  its  reason" 
ing  and  result  and  that  on  sound  principles  the  stock  dividend  was 
not  income.  But  it  was  clearly  intimated  in  that  case  that  the  construction 
of  the  statute  then  before  the  Court  might  be  different  from  that  of  the  Con- 
stitution, 245  U.  S.  425.  I think  that  the  word  ‘incomes’  in  the  Sixteenth 
Amendment  should  be  read  in  “a  sense  most  obvious  to  the  common  under- 
standing at  the  time  of  its  adoption.”  Bishop  v.  State,  149  Ind.  223,  230; 
State  V.  Butler,  70  Fla.  102,  133.  For  it  was  for  public  adoption  that  it  was 
proposed.  McCulloch  v.  Maryland,  4 Wheat.  316,  407.  The  known  pur- 
pose of  this  Amendment  was  to  get  rid  of  nice  questions  as  to  what  might  be 
direct  taxes,  and  I cannot  doubt  that  most  people  not  lawyers  would  suppose 
when  they  voted  for  it  that  they  put  a question  like  the  present  to  rest.  I 
am  of  opinion  that  the  Amendment  justifies  the  tax.  See  Tax  Commissioner 
V.  Putnam,  227  Mass.  522,  532,  533. 

Mr.  Justice  Day  concurs  in  this  opinion. 


Mr.  Justice  Brandeis  delivered  the  following  dissenting  opinion,  in  which 
Mr.  Justice  Clarke  concurs: 

2616  Financiers,  with  the  aid  of  lawyers,  devised  long  ago  two  different 
methods  by  which  a corporation  can,  without  increasing  its  indebt- 
edness, keep  for  corporate  purposes  accumulated  profits,  and  yet,  in  effect, 
distribute  these  profits  among  its  stockholders.  One  method  is  a simple  one. 
The  capital  stock  is  increased;  the  new  stock  is  paid  up  with  the  accumulated 
profits;  and  the  new  shares  of  paid-up  stock  are  then  distributed  among  the 
stockholders  pro  rata  as  a dividend.  If  the  stockholder  prefers  ready  money 
to  increasing  his  holding  of  the  stock  in  the  company,  he  sells  the  new  stock 
received  as  a dividend.  The  other  method  is  slightly  more  complicated. 
Arrangements  are  made  for  an  increase  of  stock  to  be  offered  to  stockholders 
pro  rata  at  par  and,  at  the  same  time,  for  the  payment  of  a cash  dividend 
equal  to  the  amount  which  the  stockholder  will  be  required  to  pay  to  the 
company,  if  he  avails  himseff  of  the  right  to  subscribe  for  his  pro  rata  of  the 
new  stock.  If  the  stockholder  takes  the  new  stock,  as  is  expected,  he  may 
endorse  the  dividend  check  received  to  the  corporation  and  thus  pay  for  the 
new  stock.  In  order  to  ensure  that  all  the  new  stock  so  offered  will  be  taken, 
the  price  at  which  it  is  offered  is  fixed  far  below  what  it  is  believed  will  be  its 
market  value.  If  the  stockholder  prefers  ready  money  to  an  increase  of 
his  holdings  of  stock,  he  may  sell  his  right  to  take  new  stock  pro  rata,  which 


INC. 


478  TAX 


8-9-20. 


IS  evidenced  by  an  assignable  instrument.  In  that  event  the  purchaser  of  the 
rights  repays  to  the  corporation,  as  the  subscription  price  of  the  new  stock, 
an  amount  equal  to  that  which  it  had  paid  as  a cash  dividend  to  the  stock- 
holder. ^ ^ 1 -1  • rr 

2617  Both  of  these  methods  of  retaining  accumulated  profits  while  in  effect 
distributing  them  as  a dividend  had  been  in  common  use  in  the 

United  States  for  many  years  prior  to  the  adoption  of  the  Sixteenth  Amend- 
ment. They  were  recognized  equivalents.  Whether  a particular  corpora- 
tion employed  one  or  the  other  method  was  determined  sometimes  by  re- 
quirements of  the  law  under  which  the  corporation  was  organized;  some- 
times it  was  determined  by  preferences  of  the  individual  officials  of  the  cor- 
poration; and  sometimes  by  stock  market  conditions.  Whichever  method 
was  employed  the  resultant  distribution  of  the  new  stock  was  commorily 
referred  to  as  a stock  dividend.  How  these  two  methods  have  been  employed 
may  be  illustrated  by  the  action  in  this  respect  (as  reported  in  Moody’s 
Manual,  1918  Industrial,  and  the  Commercial  and  Financial  Chronicle),  of 
some  of  the  Standard  Oil  companies,  since  the  disintegration  pursuant  to  the 
decision  of  this  court  in  1911.  Standard  Oil  Co.  v.  United  States,  221  U.  S.  1. 

2618  (a)  Standard  Oil  Co.  (of  Indiana),  an  Indiana  corporation.  It  had 
on  December  31,  1911,  $1,000,000  capital  stock  (all  common),  and 

a large  surplus.  On  May  15,  1912,  it  increased  its  capital  stock  to  $30,000,- 
000,  and  paid  a simple  stock  dividend  of  2900  per  cent,  in  stock  to  stock- 
holders of  record  May  15,  1912.^ 

2619  (b)  Standard  Oil  Co.  (of  Nebraska),  a Nebraska  corporation.  It 
had  on  December  31,  1911,  $600,000  capital  stock  (all  common), 

and  a substantial  surplus.  On  April  25,  1912,  it  paid  a simple  stock  dividend 
of  33j^  per  cent.,  increasing  the  outstanding  capital  to  $800,000.  During 
the  calendar  year  1912  it  paid  cash  dividends  aggregating  20  per  cent.;  but 
it  earned  considerably  more,  and  had  at  the  close  of  the  year  again  a sub- 
stantial surplus.  On  June  20,  1913,  it  declared  a further  stock  dividend  of 
25  per  cent.,  thus  increasing  the  capital  to  $1,000,000.^ 

2620  (c)  The  Standard  Oil  Co.  (of  Kentucky),  a Kentucky  corporation. 
It  had  on  December  31,  1913,  $1,000,000  capital  stock  (all  common) 

and  $3,701,710  surplus.  Of  this  surplus  $902,457  had  been  earned  during 
the  calendar  year  1913,  the  net  profits  of  that  year  having  been  $1,002,457 
and  the  dividends  paid  only  $100,000  (10  per  cent.).  On  December  22,  1913, 
a cash  dividend  of  $200  per  share  was  declared  payable  on  February  14,  1914, 
to  stockholders  of  record  December  31,  1913;  and  these  stockholders  were 
offered  the  right  to  subscribe  for  an  equal  amount  of  new  stock  at  par  and 
to  apply  the  cash  dividend  in  payment  therefor.  The  outstanding  stock  was 
thus  increased  to  $3,000,000.  During  the  calendar  years  1914,  1915  and 
1916,  quarterly  dividends  were  paid  on  this  stock  at  an  annual  rate  of  be- 
tween 15  per  cent,  and  20  per  cent.,  but  the  company’s  surplus  increased  by 
$2,347,614,  so  that  on  December  31,  1916,  it  had  a large  surplus  over  its 
$3,000,000  capital  stock.  On  December  15,  1916,  the  company  issued  a cir- 
cular to  the  stockholders,  saying; 

“The  company’s  business  for  this  year  has  shown  a very  good  increase  m 
volume  and  a proportionate  increase  in  profits,  and  it  is  estimated  that  by 
Jan.  1,  1917,  the  company  will  have  a surplus  of  over  $4,000,000.  ^ The  board 
feels  justified  in  stating  that  if  the  proposition  to  increase  the  capital  stock  is 
acted  on  favorably,  it  will  be  proper  in  the  near  future  to  declare  a cash  divi- 

'Moodys,  p.  1545;  Commercial  and  Financial  Chronicle,  Vol.  94,  p.  851;  Vol.  98, 
pp.  1005,  1076.  _ ^ . .r  1 ' . 

* Moodys,  p.  1548;  Commercial  and  Financial  Chronicle,  Vol.  94,  p.  771;  Vol.  96, 
p.  1428;  Vol.  97,  p.  1434;  Vol.  98,  p.  1541. 

479  TAX 


INC. 


dend  of  100%;  and  to  allow  stockholders  the  privilege  pro  rata  according  to 
their  holdings,  to  purchase,  the  new  stock  at  par,  the  plan  being  to  allc^ 
the  stockholders,  if  they  desire  to  use  their  cash  dividend  to  pay  for  the 
new  stock.’’ 

2621  The  increase  of  stock  was  voted.  The  company  then  paid  a cash 
dividend  of  100  per  cent.,  payable  May  1,  1917,  again  offering  to 

such  stockholders  the  right  to  subscribe  for  an  equal  amount  of  new  stock 
at  par  and  to  apply  the  cash  dividend  in  payment  therefor. 

2622  Moodys  Manual,  describing  the  transaction  with  exactness,:  says 
first  that  the  stock  was  increased  from  $3,000,000  to  $6,000,000,-  a 

cash  dividend  of  100%,  payable  M^y  1,  1917,  being  exchanged  for  one  share 
of  new  stock,  the  equivalent  of  a 100%  stock  dividend.”  But  later  in  the 
report  giving,  as  custom^ary  in  the  Manual,  the  dividend  record  of  the  com- 
pany, the  Manual  says:  “A  stock  dividend  of  200%  Was  paid  Feb.  14,  1-914, 
and  one  of  100%  on  May  1,  1917.”  And  in  reporting  specifically  the  income 
account  of  the  company  for  a series  of  years  ending  Deceniber  31,.  covering, 
net  profits,  dividends  paid  and  surplus  for  the  year,  it  gives,  as  the  aggregate 
of  dividends  for  the  year  1917,  $660,000;  (which  was  the  aggregate  paid  on 
the  quarterly  cash  dividend- — 5 per  cent.  January  and  April;^  6 per  cent.  Juty 
and  October);  and  adds  in  a note:  “In  addition  a stock  dividend  of  100 /h 
was  paid  during  the  year.”^.  The  Wall  Street  Journal  of  May  2,  1917,  P- 
quotes  the  1917  “High”  price  for  Standard  Oil  of  Kentucky  as  “375  Ex. 

Stock  Dividend.”  ^ • -u  • 

2623  It  thus  appears  that  among  financiers  and  investors  the  distribution 
of  the  stock  by  whichever  method  effected  is  called  a stock  dividend; 

that  the  two  methods  by  which  accumulated  profits  are  legally  retained  for 
corporate  purposes  and  at  the  same  timm  distributed  as  dividends  are  recog- 
nized by  them  to  be  equivalents;  and  that  the  financial  results  to  the  corpo-^ 
ration  and  to  the  stockholders  of  the  tv/o  methods  ame  substantiaUy  the 
sarnie— unless  a difference  results  from  the  application  of  the  federal  income 
tax  law.  ^ ^ . 

2624  Mrs.  Macom.ber,  a citizen*  and  resident  of  New  York,  was,-  in-  the 
year  1916,  a stockholder  in  the  Standard  Oil^  Company  (of  Cali- 
fornia), a corporation  organized  under  the  laws  of  California  and  having  its 
principal  place  of  business  in  that  State.  During  that  year  she  received  from 
the  comipany  a stock  dividend  representing  profits  earned  since  March  1, 
1913.  I'he  dividend  was  paid  by  direct  issue  of  the  stock  to  her  according  to 
the  simple  method  described  above,  pursued  also  by  the  Indiana  and  Nebraska 
companies.  In  1917  she  was  taxed  under  tlie  federal  law  on  the  stock  dividend 
so  received  at  its  par  value  of  $100  a share,  as  incorcie  received  during  the 
year  1916.  Such  a stock  dividend  is  incomie  as  distinguished  from  capital 
both  under  the  law  of  New  York  and  under  the  law  of  California;  because  in 
both  States  every  dividend  representing  profits  is  deem^ed  to  be  income  whether 
paid  in  cash  or  in  stock.  It  had  been  so  held  in  New  York,  where  the  question^ 
arose  as  between  life-tenant  and  remiaindermian,  Lowery  v.  Farmers  Loan  & 
Trust  Company^  172  N.  Y.  137;  Matter  of  Oshorne^  209  N.  Y.  450;  and  al^, 
where  the  question  arose  in  matters  of  taxation.  People  v.  Glynn,  130  N.  Y. 
App.  Div.  332;  198  N.  Y.  605.  it  has  been  so  held  in  California,  where  the 
question  appears  to  have  arisen  only  in  controversies  between  life-tenant  and< 
remainderman.  Estate  of  Duf field,  58  Calif.  Dec.  97;  183  Pac.  337. 


2 Moodys,  p.  1547;  O'oiuir.trciai  and  I inancial  Chronicle,  "Vol.  97,  pp.  1589,  1827,  1903; 
Vol.  98,  pp.  76,  457;  \g1.  103,  p.  2.-)38.  Poor's  P'anual  of  induslrials  (I9l8),  p.  22-10,  in 
gi\'ing  the  “Coini:iaratit'e  Income  Account”  of  the  company  describes  the  1914  dividend 
as  “Stock  lOividend  paid  (200C )— $2,000,000”;  and  describes  the  1917  dividend  as 
“$3,000,000  special  cash  di\'idcnd.” 

480! 


ING. 


TAX 


3-9-20. 


2625‘T  It  is  conceded  th at  if  the ^stock'  dividend  paid  to  Mrs.  Maciombei* 

• had  been -made  by:' the  more  complicated  method  pursued  by  the  ^ 
Standard  Gil  Company* -of ^Kentucky,  that  is,  issuing  rights  to  take  new 
stock  pro  rata  and  paying’ to*  each 'Stockholder  simultaneously  a dividend  in  ^ 
cash  sufficient  ih'amount‘to  ena,ble  him  to  pay  for  this  pro  rata  of  new  stock  to 
be  purchased=^the  dividend  so  paid  to  him  would  have  been  taxable  as  income, 
whether  he  retained  the  cash  or  whether- he  teturned  it  to  the  corporation  ' 
in  payment  for  his  pno'rata:  of  new'stock.  ^'Butut  is  contended  that,  because 
the  simple  method  was  adopted  of  having  the  new  stock  issued  direct  to  the*  ^ 
stockholders  as  paid-up*  stock,  ’ the  new ' stock  is  not ' to  be  deemed  income^- 
whether  she  retained  it -or’ converted  it -into  cash  by  sale.  If  such  a^different 
result  can' flow  merely  frOm  the*  difference  in  the  method  pursued,  it  must  be 
because' Congress  is  without  power  to  tax  as 'income  of  the  stockholder  eithef 
the  stock  received  under  the ’latter  method  or  the  proceeds  of  its  sale;  for 
Congress  has;  by  the'^provisions  In 'the  Revenue  Act  of  1916,  expressly  de-  ' 
dared  its  purpose  to  make 'Stock*  dividends’,' by  whichever  method  paid,  taxable 
as  income.  ■ - t-il  t.  :■;}»■■:  i i - M i - . r 

2626'  The  Sixteenth  Amendment  proclairhed  February  25,Xl913,  de-  " 
i ‘ ■ claresi  ■ . !•  j si.  ■ j I.  ^ r. 

‘ ‘‘The  Congress' ' shall  * have  power ' tO’  lay  and  ’ collect  taxes  on  incomes 
from  whatever  soiirce  derived,'* without  apportionment  among  the  several" 
States  and  withou  t tegard  to 'any  census  dr  enumeration.’’  : r < -- 

2G27  ‘ The  Revenue 'Act ’of  September' 8,  1916,  c.  463,  39  Stat.  756,  757, 

• provided * ’**  * ’•  * i ;-  mu  -i  ■'  ->  > 

“That  the  term  ‘dividen'ds’“as' used  in  this' title  shall  be  held  to  mean*' 
any  distribution  made  drordered  to  be  made  by  a corporation,  . . . out- 

of  its  earnings  or  profits  accrued  since  March  first,  nineteen  hundred  and  thir- 
teen, and  payable  to  its  shareholders, whether  in 'cash  or  in  stocks  of  the  Cdr^  " 
poratiob’*  . .•  which  dividend'*  shall  "be  considered  income,  to  the 

amount  of  its  cash 'value.'’'’'  "I  ^'*’  • 

2628  Hitherto  powers  conferred  **upon  Congress  by  the  Constitution  * 

* " ^ have  been  liberally  eonsttuedp  and 'have ‘been  held  to  extend  to  every  ' 

rrieans  appropriate  to 'attain  the 'eiid' sought.  In  determining  the  scope  of  i 
the  power  the  substance  of' the  transaction,  not  its  form  has  been  regarded.'" 
Martin  Y.  Hunter^  1 Wheaton '304,  326.;''  McCullough  y.  Mary  land:,  4 Wheaton*’ 
316^  407,  415;  Brown  y.  Maryland',  12  Wheaton  419,  446;  Craig  v.  Missourr^y 
4 Pet.  410,  433;  ’ Jarrolt  YjMoberly,'  103''U.'  S.  580,  585,  587;  Legal  Tender  ] 
Case,  \\i)  U.  S.  Ar2\;'^  Liihdgraph  Co.  v.  Sarony,  III  U*.  S.  53,  58;  United 
Stated'  V.  Realty  Co.,  162>  \].  Si  >427,  440,  441,  442;  South  Carolina  v.  United 
States,  199  13.  S.  437*;  448-^9.'*  ’ Is  there  anything  in  the  phraseology  of  the ^ 
Sixteenth  Amendment  or  in  the  nature  of  corporate  dividends  w^hich  should  ' 
lead  to  a departure  frorh  these  rules  of  construction  and  compel  this  court  • 
to' hold,  that  Congress 'is  powerless' to' prevent  a result  so  extraordinary  as  * 
that  here  contended  for' by  the  Stockholder 

2629  First:  Tl\^  term'  “income,’’ *when  applied  to  the  investment  of  the 

" stdckholdet  in  a corporation*  had,  before  the  adoption  of  the  Six^" 
tdenth  Amend mebt;  been*  commonly  understood  to  mean  the  returns  from  ’ 
time  to  time "received 'by  the  stockholder  from  gains  Or  earnings  of  the  cor- 
poration. A dividend  recei\^ed  by  a stodkliolder  from  a corporation  may 
be’either  in  distribution  of  capital  assets 'or  in  distribution  of  profits.  Whether 
it  ibthe  one  or  the  other  ist  in  no*  way  affected  by  the  medium  in  which  it  is 
paid,  nor  by  the  method- oi*  means  through  which  the  particular  thing  dis- 
tributed as  a dividend  was  procured.  If  the  dividend'  is  declared  payable*^ 
in  cash,  the  money  with  which  to  pay  it  is  ordinarily  taken  from  surplus 
cash  in  the  treasury.  But  (if  there  are  profits  legally  available  for  distribu- 

IN^.a  t;  481  , ? TAj;,. 


tion  ^nd'  the  l^w  under  which  the  company  w^as  incjorppr^ted  so  permits) 
the  company  may  raise  the  mopey  by  discounting  nego^able  papeti;  or  by 
selling  bonds,  scrip  or  stock  of  another  corporation  then  in.  the  treasury;  or 
by  selling  its  own  bonds,  scrip  or  stoqk  then  in, the  treasury;,  or  by  selling  its 
own  bonds,  scrip  or  stock  issued  expressly  fpr  that  purpose.  How  the, money 
shall  be  raised  is  wholly  a matter  pf  financial  management,.  The  manner  in 
which  it  is  raised  in  no  way  affects  the  question  whether  the  dividend  re- 
ceived, by  the  stockholder  is  income  or  capital;  nor  cau  it  conceivably  affect 
the  question  whether  it  is  taxable  as  incpme. 

263,0  Likewise  whether  a dividend  declared  payable  frpm  profits,  shall 
be  paid  in  cash  or  in  some  pther  medium  is  also  wholly  a matter  pf 
financial  management.  If  some  other  medium  is  decided  uppn,  it  is  also 
wholly  a question  of  financial  management  whether  the  distribution^  shall 
be,  for  instance,  in  bonds,  scrip  or  stpck  of  anpther  cprppratipn  or  in  issues 
of  its  own.  And  if  the  dividend  is  paid  in  its  own  issues,  why  should  there 
be  a difference  in  result  dependent  upon  whether  the  distribution  W^'S  made 
from  such  securities  then  in  the  treasury  or  from  others  to  be  created,  and 
issued  by  the  company  expressly  for  that  purpose.^  So  fat  as  the  distribu- 
tion may  be  made  from  its  own  issues  of  bonds,  or  preferred  s.tock  created 
expressly  for  the  purpose,  it  clearly  would,  m^ke  no  difference  in  the  decision 
of|  the  question  whether  the  dividend  was  a distribution  of  profits,  that  the 
securities  had  to  be  created  expressly  for  the  purpose  pf  distribution.  If 
a dividend  paid  in  securities  of  that  nature  represents  a distribution  pf  profits 
Congress  may,  of  course,  tax  it  as  income  of  the  stockholder.  Is  the  result 
different  where  the  security  distributed  is,  common  stock 
263^1  Suppose  that  a corporation  having  power  to  buy  and.  sell  its  own 
stock,  purchases,  in  the  interval  between  its  regular  dividend  dates, 
with  monies  derived  from  current  profits,  some  of  its  own  common  stock  a^ 
a temporary  investment,  intending  at  the  tin>e  of  purchase  to^sell  it  before 
the  next  dividend  date  and  to  use  the  proceeds  in  paying^  dividends,  but 
la, ter,  deeming  it  inadvisable  either  to  sell  this  stock  or  to  raise  by  borrowing 
the  money  necessary  to  pay  the  regular  diyidjend  in  cash,  declares  a dividend 
payable  in  this  stock: — Can  anyone  doubt  that  in  su,ch  a case  the  dividend 
in  common  stock  would  be  income  of  the  stockholder  and  constitutionally 
taxable  as  such.^  See  Green  v.  BUsell,  79  Cpnn.  547;  Leland  v.  Hayden, 
102  Mass.  542.  And  would  it  not  likewise  be  income  of  the  stockholder  sub- 
ject to  taxation  if  the  purpose  of  the  company  in  buying  the  stock  so  dis- 
tributed had  been  from  the  beginning  to  take  it  off  the  market  and  distribute 
it  among  the  stockholders  as  a dividend,  and  the  company  actually  did  so? 
And  proceeding  a short  step  further:  Suppose  that  a corporation  decided  to 
capitalize  some  of  its  accumulated  profits  by  preating  additional  common 
stock  and  selling  the  same  to  raise  working  capital,  but  after  the  stock 
has  been  issued  and  certificates  therefot  are  delivered  to  the  bankers  for  sale, 
general  financial  conditions  make  it  undesiralDLe.  to  market  the  stock  and  the 
company  concludes  that  it  is  wiser  to  husband;,  for  working  capital,  the  cash 
which  it  had  intended  to  use  in  paying  stockholders  a dividend,  and,  instead, 
to  pay  the  dividend  in  the  common  stock  which  it  had  planned  to  sell:  Would 
not  the  stock  so  distributed  be  a distribution  of  profits,  and,  hence,  when 
received,  be  income  of  the  stockholder  and  taxable  such?  If  this  be  con- 
ceded, why  should  it  not  be  equally  income  of  the  stockholder,  and  taxable 
as  such,  if  the  common  stock  created  by  capitalizing  profits,  had  been  originally 
created  for  the  express  purpose  of  being  distributed  as  a dividend  to  the  stock- 
holder who  afterwards  received  it? 


t 


INC. 


482  TAX 


8-9-20. 


2632  Second:  It  has  been  said  that  a dividend  payable  in  bonds  or  preferred 
stock  created  for  the  purpose  of  distributing  profits  may  be  income 

and  taxable  as  such,  but  that  the  case  is  different  where  the  distribution  is 
in  common  stock  created  for  that  purpose.  Various  reasons  are  assigned 
for  making  this  distinction.  One  is  that  the  proportion  of  the  stockholder’s 
ownership  to  the  aggregate  number  of  the  shares  of  the  company  is  not  changed 
by  the  distribution.  But  that  is  equally  true  where  the  dividend  is  paid 
in  its  bonds  or  in  its  preferred  stock.  Furthermore,  neither  maintenance 
nor  change  in  the  proportionate  ownership  of  a stockholder  in  a corporation 
has  any  bearing  upon  the  queston  here  involved.  Another  reason  assigned 
is  that  the  value  of  the  old  stock  held  is  reduced  approximately  by  the 
value  of  the  new  stock  received,  so  that  the  stockholder  after  receipt  of  the 
stock  dividend  has  no  more  than  he  had  before  it  was  paid.  That  is  equally 
true  whether  the  dividend  be  paid  in  cash  or  in  other  property,  for  instance, 
bonds,  scrip  or  preferred  stock  of  the  company.  The  payment  from  profits 
of  a large  cash  dividend,  and  even  a small  one,  customarily  lowers  the  then 
market  value  of  stock  because  the  undivided  property  represented  by  each 
share  has  been  correspondingly  reduced.  The  argument  which  appears  to 
be  most  strongly  urged  for  the  stockholders  is,  that  when  a stock  dividend 
is  made,  no  portion  of  the  assets  of  the  company  is  thereby  segregated  for 
the  stockholder.  But  does  the  issue  of  new  bonds  or  of  preferred  stock  created 
for  use  as  a dividend  result  in  any  segregation  of  assets  for  the  stockholder? 
In  each  case  he  receives  a piece  of  paper  which  entitles  him  to  certain  rights 
in  the  undivided  property.  Clearly  segregation  of  assets  in  a physical  sense 
is  not  an  essential  of  income.  The  year’s  gains  of  a partner  is  taxable  as  income 
although  there,  likewise,  no  segregation  of  his  share  in  the  gains  from  that  of 
his  partners  is  had. 

2633  The  objection  that  there  has  been  no  segregation  is  presented  also 
in  another  form.  It  is  argued  that  until  there  is  a segregation, 

the  stockholder  cannot  know  whether  he  has  really  received  gains;  since  the 
gains  may  be  invested  in  plant  or  merchandise  or  other  property  and  perhaps 
be  later  lost.  But  is  not  this  equally  true  of  the  share  of  a partner  in  the 
year’s  profits  of  the  firm  or,  indeed,  of  the  profits  of  the  individual  who  is 
engaged  in  business  alone?  And  is  it  not  true,  also,  when  dividends  are  paid 
in  cash?  The  gains  of  a business,  whether  conducted  by  an  individual, 
by  a firm  or  by  a corporation,  are  ordinarily  reinvested  in  large  part.  Many 
a cash  dividend  honestly  declared  as  a distribution  of  profits,  proves  later 
to  have  been  paid  out  of  capital,  because  errors  in  forecast  prevent  correct 
ascertainment  of  values.  Until  a business  adventure  has  been  completely 
liquidated,  it  can  never  be  determined  with  certainty  whether  there  have  been 
profits  unless  the  returns  have  at  least  exceeded  the  capital  originally  invested. 
Business  men,  dealing  with  the  problem  practically,  fix  necessarily  periods 
and  rules  for  determining  whether  there  have  been  net  profits — that  is  income 
or  gains.  They  protect  themselves  from  being  seriously  misled  by  adopting 
a system  of  depreciation  charges  and  reserves.  Then,  they  act  upon  their 
own  determination,  whether  profits  have  been  made.  Congress  is  legislating 
has  wisely  adopted  their  practices  as  its  own  rules  of  action. 

2634'^^  Third :T,.The  Government  urges  that  it  would  have  been  within 
the  power  of  Congress  to  have  taxed  as  income  of  the  stockholder 
his  pro  rata  share  of  undistributed  profits  earned,  even  if  no  stock  dividend 
representing  it  had  been  paid.  Strong  reasons  may  be  assigned  for  such  a view 
See  The  Collector  v.  Ilubhardy  12  Wall.  1.  The  undivided  share  of  a partner 
in  the  year’s  undistributed  profits  of  his  firm  is  taxable  as  income  of  the  partner 
although  the  share  in  the  gain  is  not  evidenced  by  any  action  taken  by  the 
firm.  Why  may  not  the  stockholder’s  interest  in  the  gains  of  the  company? 

483 


INC. 


TAX 


The  law  finds  no  difiiculty  in  disregarding  the  corporate  fiction  whenever 
that  is  deemed  necessary  to  attain  a just  result.  Linn  Timber  Co.  v.  United 
States,  236  U.  S.  574;  see  Morawetz  on  Corporations  (2d  ed.),  secs.  227-231; 
Cook  on  Corporations,  (7th  ed.),  secs  663,  664.  The  stockholder’s  interest 
in  the  property  of  the  corporation  differs,  not  fundamentally  but  in  form  only, 
from  the  interest  of  a partner  in  the  property  of  the  firm.  There  is  much 
authority  for  the  proposition  that,  under  our  law,  a partnership  or  joint  stock 
company  is  just  as  distinct  and  palpable  an  entity  in  the  idea  of  the  law 
as  distinguished  from  the  individuals  composing  it,  as  is  a corporation.^ 
No  reason  appears,  why  Congress,  in  legislating  under  a grant  of  power  so 
cornprehensive  as  that  authorizing  the  levy  of  an  income  tax,  should  be  limited 
by  the  particular  view  of  the  relation  of  the  stockholder  to  the  corporation 
and  its  property  which  may,  in  the  absence  of  legislation,  have^  been  taken 
by  this  court.  But  we  have  no  occasion  to  decide  the  question  whether 
Congress  might  have  taxed  to  the  stockholder  his  undivided  share  of  the 
corporation’s  earnings.  For  Congress  has  in  this  act  limited  the  income 
tax  to  that  share  of  the  stockholder  in  the  earnings  which  is,  in  effect,  distri- 
blited  by  means  of  the  stock  dividend  paid.  In  other  words  to  render  the 
stockholder  taxable  there  mmst  be  both  earnings  made  and  a dividend^  paid. 
Neither  earnings  without  dividend — nor  a dividend  without  earnings 
subjects  the  stockholder  to  taxation  under  the  Revenue  Act  of  1916. 

2636  Fourth:  The  equivalency  of  all  dividends  representing  profits,  whether 
paid  in  cash  or  in  stock,  is  so  complete  that  serious  question  of  the 
taxability  of  stock  dividends  would  probably  never  have  been  made,  if 
Congress  had  undertaken  to  tax  only  those  dividends  which^  represented 
profits  earned  during  the  year  in  which  the  dividend  was  paid  or  in  the 
year  preceding.  But  this  court,  construing  liberally  not  only  the  constitu- 
tional grant  of  power  but  also  the  revenue  act  of  1913,  held  that  Congress 
might  tax,  and  had  taxed,  to  the  stockholder  dividends  received  during  the 
year,  although  earned  by  the  com^pany  long  before;  and  even  prior  to  the 
adoption  of  the  Sixteenth  Amendment.  Lynch  v.  Hornby,  247  U.  S.  339. 
That  rule,  if  indiscriminatingly  applied  to  all  stock  dividends  representing 
profits  earned,  mighty,  in  view  of  corporate  practice,  have  worked  consider- 
able hardship,  and  have  raised  serious  questions.  Alany  corporations,  with- 
out legally  capitalizing  any  part  of  their  profits,  had  assigned  definitely  some 
part  or  all  of  the  annual  balances  remaining  after  paying  the  usual  cash 
dividends,  to  the  uses  to  which  permanent  capital  is  ordinarily  applied. 
of  the  corporations  doing  this  transferred  such  balances  on  their  books 
to  “Surplus”  account, — distinguishing  between  such  permanent  Surplus 
and  the  “Undivided  Profits”  account.  Other  corporations,  without  this 
formality,  had  assumed  that  the  annual  accumulating  balances  carried  as 
undistributed  profits  were  to  be  treated  as  capital  permanently  invested 
in  the  business.  And  still  others,  without  definite  assumption  of  any  kind, 
had  so  used  undivided  profits  for  capital  purposes.  To  have  made  the  revenue 
law  apply  retroactively  so  as  to  reach  such  accumulated  profits,  if  and  when 
ever  it  should  be  deemed  desirable  to  capitalize  them  legally  by  the  issue 
of  additional  stock  distributed  as  a dividend  to  stockholders,  would  have 
worked  great  injustice.  Congress  endeavored  in  the  Revenue  Act  of  1916 

^See  “Some  Judicial  Myths,”  by  Francis  M.  Burdick,  22  Harvard  Law  Review,  394- 

396;  The  Firm  as  a Legal  Person,  by  William  Hamilton  Cowles,  57  Cent.  L.  J.,  348;  Lstates 
of  Non-Bankrupt  Partners,  b>  J.  D.  Brannan,  20  Harvard  law  Review,  589-592;  compare 
Harvard  Law  Review,  Vol  7,  p.  426;  Vol.  14,  p.  222;  Vol.  17,  p.  194.  _ 

'The  hardship  supposed  to  have  resulted  from  such  a decision  has  teen  removed  in 
the  Revenue  Act  of  1916  by  providing  in  Section  201  (b)  that  such  cash  dividends  shall 
thereafter  be  exempt  from  taxation,  if  before  they  are  made,  all  earnings  made  since 
February  28,  1913,  shall  have  been  distributed. 

484  TAX 


INC. 


3-9-20. 


to  guard  against  any  serious  hardship  which  might  otherwise  have  arisen 
frorn  making  taxable  stock  dividends  representing  accumulated  profit. 
It  did  not  limit  the  taxability  to  stock  dividends  representing  profits  earned 
within  the  tax  year  or  in  the  year  preceding;  but  it  did  limit  taxability 
to  such  dividends  representing  profits  earned  since  March  1,  1913.  Thereby 
stockholders  were  given  notice  that  their  share  also  in  undistributed  profits 
accumulating  thereafter  was  at  some  time  to  be  taxed  as  income.  And  Con-f 
gress  sought  by  section  220  to  discourage  the  postponement  of  distribution 
for  the  illegitimate  purpose  of  evading  liability  to  surtaxes. 

2636  Fifth:  ^ The  decision  of  this  court,  that  earnings  made  before  the 
adoption  of  the  Sixteenth  Amendment  but  paid  out  in  cash  dividend 

after  its  adoption  were  taxable  as  income  of  the  stockholder,  involved  a very 
liberal  construction  of  the  Amendment.  To  hold  now  that  earnings  both 
made  and  paid  out  after  the  adoption  of  the  Sixteenth  Amendment  cannot  be 
taxed  as  income  of  the  stockholder,  if  paid  in  the  form  of  a stock  dividend, 
involves  an  exceeding  narrow  construction  of  it.  As  said  by  Mr.  Chief  Justice 
Marshall  in  Brown  v.  Maryland,  12  Wheat.  419,  446:  “To  construe  the 
power  so  as  to  impair  its  efficacy,  would  tend  to  defeat  an  object,  in  the  at- 
tainment of  which  the  American  public  took,  and  justly  took,  the  strong  in- 
terest which  arose  from  a full  conviction  of  its  necessity.’’ 

2637  No  decision  heretofore  rendered  by  this  court  requires  us  to  hold 
that  Congress,  in  providing  for  the  taxation  of  stock  dividends, 

exceeded  the  power  conferred  upon  it  by  the  Sixteenth  Amendment.  The  two 
cases  mainly  relied  upon  to  show  that  this  was  beyond  the  power  of  Congress 
are  Towne  v.  Eisner,  245  U.  S.  418,  which  involved  a question  not  of  con- 
stitutional power  but  of  statutory  construction,  and  Gibbons  v.  Mahon,  136 
U.  S.  549,  which  involved  a question  arising  between  life-tenant  and  remain- 
derman. So  far  as  coneerns  Towne  v.  Eisner  we  have  only  to  bear  in  mind 
what  was  there  said  (p.  425),  “But  it  is  not  necessarily  true  that  income 
means  the  same  thing  in  the  Constitution  and  the  [an]  act.”*  Gibbons  v. 
Mahon  is  even  less  an  authority  for  a narrow  construction  of  the  power  to 
tax  incornes  conferred  by  the  Sixteenth  Amendment.  In  that  case  the  court 
was  required  to  determine  how,  in  the  administration  of  an  estate  in  the  Dis- 
trict of  Columbia,  a stock  dividend,  representing  profits,  received  after  the 
decedent’s  death,  should  be  disposed  of  as  between  life-tenant  and  remain- 
derman. The  question  was  in  essence:  What  shall  the  intention  of  the  tes- 
tator be  presumed  to  have  been.i^  On  this  question  there  was  great  diversity 
of  opinion  and  practice  in  the  courts  of  English-speaking  countries.  Three 
well-defined  rules  were  then  competing  for  acceptance:  two  of  these  involve 
an  arbitrary  rule  of  distribution,  the  third  equitable  apportionment.  See 
Cook  on  Corporations  (7th  ed.),  sections  552-558. 

2638  1.  The  so-called  English  rule,  declared  in  1799,  by  Brander  v. 
Brander,  4 Ves.  800,  that  a dividend  representing  profits,  whether 

in  cash,  stock  or  other  property,  belongs  to  the  life-tenant  if  it  was.  a regular 
or  ordinary  dividend,  and  belongs  to  the  remainderman  if  it  was  an  extraor- 
dinary dividend. 

2639  2.  The  so-called  Massachusetts  rule,  declared  in  1868  by  Minot  v. 
f Paine,  99  Mass.  101,  that  a dividend  representing  profits,  whether 

regular,  ordinary  or  extraordinary,  if  in  cash  belongs  to  the  life-tenant,  and 
if  in  stock  belongs  to  the  remainderman. 

‘Compare  Rugg,  C.  J.,  in  Tax  Commissioner  v.  Putnam,  227  Mass.  552,  533:  “However 
strong  such  an  argument  might  be  when  urged  as  to  the  interpretation  of  a statute,  k is 
not  of  prevailing  force  as  to  the  broad  considerations  involved  in  the  interpretation  of  an 
amendment  to  the  Constitution  adopted  under  the  conditions  preceding  aad  attendant 
upon  the  ratification  of  the  Forty-fourth  Amendment.” 


INC. 


485  TAX 


2640  3.  The  so-called  Pennsylvania  rule  declared  in  1857  by  Earp’s 

Appeal,  29  Pa.  St.  368,  that  where  a stock  dividend  is  paid,  the  court 
shall  inquire  into  the  circumstances  under  which  the  fund  had  been  earned 
and  accumulated  out  of  which  the  dividend,  whether  a regular  an  ordinary 
or  an  extraordinary  one,  was  paid.  If  it  finds  that  the  stock  dividend  was 
paid  out  of  profits  earned  since  the  decedent’s  deatn,  the  stock  dividend  be- 
longs to  the  life-tenant;  if  the  court  finds  that  the  stock  dividend  was  paid 
from  capital  or  from  profits  earned  before  the  decedent  s death,  the  stock 
dividend  belongs  to  the  remainderman.  ... 

2041  This  court  adopted  in  Gibbons  v.  Mahon  as  the  rule  of  administra- 
tion for  the  District  of  Columbia  the  so-called  Massachusetts  rule, 
the  opinion  being  delivered  in  1890  by  Mr.  Justice  Gray.  Since 
same  question  has  come  up  for  decision  in  many  of  the  States. 
called  Massachusetts  rule,  although  approved  by  this  court,  has  found  favor 
in  only  a few  States.  The  so-called  Pennsylvania  rule,  on  the  other  hand 
has  been  adopted  since  by  so  many  of  the  States  (including  York  and 
California),  that  it  has  come  to  be  known  as  the  American  Rule.  Whether, 
in  view  of  these  facts  and  the  practical  results  of  the  operation  of  the  two 
rules  as  shown  by  the  experience  of  the  thirty  years  which  have  elapsed  since 
the  decision  in  Gibbons  v.  Mahon,  it  might  be  desirable  for  this  court  to  re- 
consider the  question  there  decided,  as  some  other  courts  have  done  (see  29 
Harvard  Law  Review  551),  we  have  no  occasion  to  consider  in  this  case.  For, 
as  this  court  there  pointed  out  (p.  560),  the  question  involved  was  one  be- 
tween the  owners  of  successive  interests  in  particular  shares,  and  not,  as  in 
Bailey  v.  Railroad  Co.,  22  Wall.  604,  a question  “between  the  corporation 
and  the  government,  and  [which]  depended  upon  the  terms  of  a statute  care- 
fully framed  to  prevent  corporations  from  evading  payment  of  the  tax  upon 

their  earnings.”  i i • v 

2642  We  have,  however,  not  merely  argument,  we  have  examples  which 
should  convince  us  that  “there  is  no  inherent,  necessary  and  im- 
mutable reason  why  stock  dividends  should  always  be  treated  as  capital.” 
Tax  Commissioner  v.  Putnam,  Til  Mass.  522,  533.  The  Supreme  Judicial 
Court  of  Massachusetts  has  steadfastly  adhered,  despite  ever-renewed  protest, 
to  the  rule  that  every  stock  dividend  is,  as  between  life-tenant  and  remainder- 
man, capital  and  not  income.  But  in  construing  the  Alassachusetts  Income 
Tax  Amendment,  which  is  substantially  identical  with  the  Federal  Amend- 
ment, that  court  held  that  the  legislature  was  thereby  empowered  to  levy 
an  income  tax  upon  stock  dividends  representing  profits.  The  courts  of 
England  have,  with  some  relaxation,  adhered  to  their  rule  that  every  extra- 
ordinary dividend  is,  as  between  life-tenant  and  remanderman,  to  be  deemed 
capital.  But  in  1913  the  Judicial  Committee  of  the  Privy  Council  held  that 
a stock  dividend  representing  accumulated  profits  was  taxable  like  an  ordinary 
cash  dividend.  Swan  Brewery  Company,  Limited  v.  The  King,  A.  C.  (1914) 
231.  In  dismissing  the  appeal  these  words  of  the  Chief  Justice  of  the  Supreme 
Court  of  Western  Australia  were  quoted  (p.  236)  which  show  that  the  facts 
involved  were  identical  with  those  in  the  case  at  bar;  Had  the  company 
distributed  the  101,450£  among  the  shareholders  and  had  the  shareholders 
repaid  such  sums  to  the  company  as  the  price  of  the  81,160  new  shares,  the 
duty  on  the  101,450£  would  clearly  have  been  payable.  Is  not  iJiis  virtually 
the  effect  of  what  was  actually  done?  I think  it  is.” 

2643  Sixth:  If  stock  dividends  representing  profits  are  held  exempt 
from  taxation  under  the  Sixteenth  Amendment,  the  owners  of  the 

most  successful  businesses  in  America  will,  as  the  facts  in  this  case  illustrate, 
be  able  to  escape  taxation  on  a large  part  of  what  is  actually  their  income. 
So  far  as  their  profits  are  represented  by  stock  received  as  dividends  they  will 


8-10-20. 


pay  these  taxes  not  upon  their  income  but  only  upon  the  income  of  their 
income.  That  such  a result  was  intended  by  the  people  of  the  United  States 
when  adopting  the  Sixteenth  Amendment  is  inconceivable.  Our  sole  duty  is 
to  ascertain  their  intent  as  therein  expressed.^  In  terse,  comprehensive 
language  befitting  the  Constitution,  they  empowered  Congress  “to  lay  and 
collect  taxes  on  incomes  from  whatever  source  derived.”  They  intended  to 
include  thereby  everything'  which  by  reasonable  understanding  can  fairly 
be  regarded  as  income.  That  stock  dividends  representing  profits  are  so 
regarded,  not  only  by  the  plain  people  but  by  investors  and  financiers,  and 
by  most  of  the  courts  of  the  country,  is  shown,  beyond  peradventure,  by 
their  acts  and  by  their  utterances.  It  seems  to  me  clear,  therefore,  that 
Congress  possesses  the  power  which  it  exercised  to  make  dividends  represent- 
ing profits,  taxable  as  income,  whether  the  medium  in  which  the  dividend  is 
paid  be  cash  or  stock,  and  that  it  may  define,  as  it  has  done,  what  dividends 
representing  profits  shall  be  deemed  income.  It  surely  is  not  clear  that  the 
enactment  exceeds  the  power  granted  by  the  Sixteenth  Amendment.  And, 
as  this  court  has  so  often  said,  the  high  prerogative  of  declaring  an  Act  of 
Congress  invalid,  should  never  be  exercised  except  in  a clear  case*  “It  is 
but  a decent  respect  due  to  the  wisdom,  the  integrity,  and  the  patriotism 
of  the  legislative  body,  by  which  any  law  is  passed,  to  presume  in  favor  of  its 
validity,  until  its  violation  of  the  Constitution  is  proved  beyond  a reasonable 
doubt.”  Ogden  v.  Saunders^  12  Wheaton  213,  270. 

^Compare  Rugg,  C.  J.,  Tax  Commissioner  v.  Putnam,  227  Mass  522,  533:  “It  is  a grant 
from  the  sovereign  people  and  not  the  exercise  of  a delegated  power.  It  is  a statement  of 
general  principles  and  not  a specification  of  details.  Amendments  to  such  a charter  of 
government  ought  to  be  construed  in  the  same  spirit  and  according  to  the  same  rules  as  the 
original.  It  is  to  be  interpreted  as  the  Constitution  of  a State  and  not  as  a statute  or  an 
ordinary  piece  of  legislation.  Its  words  must  be  given  a construction  adapted  to  carry  into 
effect  its  purpose.” 

*‘Tt  is  our  duty,  when  required  in  the  regular  course  of  judicial  proceedings,  to  declare 
an  act  of  Congress  void  if  not  within  the  legislative  power  of  the  United  States;  but  this 
declaration  should  never  be  made  except  in  a clear  case.  Every  possible  presumption  is  in 
favor  of  the  validity  of  the  statute,  and  this  continues  until  the  contrary  is  shown  beyond 
a rational  doubt.  One  branch  of  the  Government  cannot  encroach  on  the  domain  of  another 
without  danger..  The  safety  of  our  institutions  depends  in  no  small  degree  on  a strict 
observance  of  this  salutary  rule.”  The  Sinking  Fund  Cases,  99  U.  S.  700,  718  (1878). 
See  also  Legal  Tender  Cases,  12  Wall.  457,  531  (1870);  Trade  Mark  Cases,  100  U.  S.  82, 
96  (1879).  See  American  Doctrine  of  Constitutional  Law  by  James  B.  Thayer,  7 Harvard 
Law  Review  129,  142. 

“With  the  exception  of  the  extraordinary  decree  rendered  in  the  Dred  Scott  Case, 
. . . all  of  the  acts  or  the  portions  of  the  acts  of  Congress  invalidated  by  the  courts 

before  1868  related  to  the  organization  of  courts.  Denying  the  power  of  Congress  to  make 
notes  legal  tender  seems  to  be  the  first  departure  from  this  rule.”  Haines,  American  Doc- 
trine of  Judical  Supremacj,  p.  288.  The  first  legal  tender  decision  was  overruled  in  part 
two  years  later  (1870),  Legal  Tender  Cases,  12  Wall.  457;  and  again  in  1883,  Legal  Tender 
Case,  110  U.  S.  421. 


2644  Credit  and  refund  claims  on  account  of  taxes  paid  on  stock  divi- 
2123  dends. — Following  the  decision  of  the  United  States  Supreme  Court 

2433  in  the  case  of  Eisner  vs.  Macomber  [TI2575],  which  holds  that  stock 
dividends  are  not  taxable,  the  following  letter  of  instruction  outlining 
the  procedure  to  be  followed  by  taxpayers  in  claiming  credit  for  taxes  paid 
on  stock  dividends,  was  issued  to  collectors  of  internal  revenue  by  Com- 
missioner Daniel  C.  Roper  today: 

2646  “The  Supreme  Court  handed  down  on  Monday  a decision  in  the 
case  of  Eisner  vs.  Macomber,  which  in  substance  is  as  follows: 

“A  true  stock  dividend  made  lawfully  and  in  good  faith  by  a corporation, 
either  against  profits  invested  in  lands,  buildings,  equipment  or  working 


INC. 


487  TAX 


assets  of  a corporation,  or  against  accumulated  and  undivided  profits,  is  not 
taxable  as  income  to  the  shareholder  recipient,  it  being  held  that  to  tax  such 
stock  dividends  would  be  to  tax  property  without  apportionment  in  violation 
of  the  provisions  of  Article  1,  Section  2,  Clause  3,  and  Article  1,  Section  9, 
Clause  4,  of  the  Constitution,  notwithstanding  the  Sixteenth  Amendment, 
there  being  no  realization  of  profit  taxable  as  income  until  a sale  of  shares  is 
made. 

2646  “The  Bureau  has  telegraphed  to  the  collectors  of  Internal  Revenue  as 
follows: 

“ ‘Claims  for  credit  against  first  installment  March  fifteen  on  account 
of  tax  paid  in  prior  years  on  stock  dividends  may  be  accepted  but  must 
not  be  permitted  to  reduce  payment  on  March  fifteenth  installment 
unless  Claim  on  Form  Forty-seven  A is  -filed  setting  forth  full  details 
of  dividends  received  and  taxes  paid  thereon  and  a statement  of  all 
details  of  any  subsequent  sale  of  shares  received  as  a stock  dividend  and 
unless  claim  is  accompanied  by  statements  from  the  corporations  which 
distributed  dividends  as  to  amount  distributed  to  taxpayer  and  years 
in  which  profits  distributed  were  earned.’ 

2647  “In  filing  returns  for  prior  years  taxpayers  reported  dividends  re- 
ceived, including  both  cash  and  stocl^diyidends,  without  segregation. 

It  will  therefore  be  necessary  for  the  Department  to  have  specific  information, 
verified  by  the  corporations  declaring  the  dividends,  as  to  the  amount  of 
dividends  distributed  to  each  taxpayer,,  the  year  in  which  the  profits  distrib- 
uted were  earned  and  a statement  disclodng  all  details  of  subsequent  sales  of 
the  shares  in  order  that  the  amount  of  credit  allowable  and  the  validity  of  the 
claim  may  be  correctly  and  justly  determined. 

2648  “In  accordance  with  this  the  taxpayer  should  present  to  the  Collector 
formally  a claim  for  credit  for  any  overpayment  of  taxes  in  prior  years 

on  the  regular  form  for  that  purpose  (Form  47 A)  and  on  this  form  must  be 
set  forth  the  full  details  of  dividends  received  and  taxes  paid  chereon.  This 
claim  must  be  accompanied  by  a statement  or  certificate  from  the  corpo- 
ration distributing  the  dividends,  showing’’  the  amount  distributed  to  the 
taxpayer  and  the  years  in  which  profits  distributed  were  earned. 

2649  “Taxpayers  on  complying  with  these  requirements  will  be  permitted 
by  the  collectors  to  credit  the  amounts  due  them  against  any  install- 
ment of  taxes  remaining  unpaid.  In  case  the  credit  to  which  the  taxpayer 
is  entitled  exceeds  the  amount  of  taxes  remaining  unpaid,  a claim  for  refund 
of  the  difference  may  be  filed.”  (Letter  of  instructions  signed  by  Com- 
missioner Daniel  C.  Roper,  and  dated  March  10,  1920.) 


4r 


(0 


0 


§ 


INC. 


488  TAX. 


8-27-20. 


(T.  D.  2992.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out,] 

2660  Gross  income  defined:  Inclusions.  Article  33,  Regulations  45, 
889  amended* — ^Article  33  of  Regulations  45  is  hereby  amended  to  read 

2568  as  follows: 

Art.  33.  Compensation  paid  other  than  in  cash. — Where  services  are 
paid  for  with  something  other  than  money,  the  fair  market  value  of  the  thing 
taken  in  payment  is  the  amount  to  be  included  as  income.  If  the  services 
were  rendered  at  a stipulated  price,  in  the  absence  of  evidence  to  the  contrary 
such  price  will  be  presumed  to  be  the  fair  value  of  the  compensation  received. 
Compensation  paid  an  employee  of  a corporation  in  its  stock  is  to  be  treated 
as  if  the  corporation  sold  the  stock  for  its  market  value  and  paid  the  employee 
in  cash.  When  living  quarters  such  as  camps  are  furnished  to  employees 
for  the  convenience  of  the  employer,  the  ratable  value  need  not  be  added  to 
the  cash  compensation  of  the  employee,  but  where  a person  receives  as  com- 
pensation for  services  rendered  a salary  and  in  addition  thereto  living  quarters, 
the  value  to  such  person  of  the  quarters  furnished  constitutes  income  subject 
to  tax.  Premiums  paid  by  an  employer  on  [life,  accident  or  health  policies 
in  favor  of  his  employees  as  additional  compensation  of  such  employees 
are  income  to  the  employees]  policies  of  group  life  insurance  covering  the 
lives  of  employees,  the  beneficiaries  of  which  are  designated  by  the  employees, 
are  not  income  to  such  employees.  (T.  D.  2992,  signed  by  Paul  F.  Myers, 
Acting  Commissioner  of  Internal  Revenue,  and  dated  March  20,  1920.) 


{Decision.) 

(Act  of  October  3,  1913.) 

United  States  Supreme  Court. 

March  22,  1920. 

Profits  earned  in  1912  but  distributed  as  cash  dividends  in  1913  are  taxable 

income  of  1913. 

The  Union  Pacific  Coal  Co.,  Petitioner,  vs.  Mark  A..  Skinner,  Collector 
of  Internal  Revenue. 

2661  [Comment:  ^ The  Union  Pacific  Coal  Co.  owned  all  the  capital  stock 
2327  of  the  Superior  Coal  Co.  The  latter,  on  June  19,  1913,  paid  to  the 
plaintiff  a dividend  on  the  profits  of  its  business  for  the  fiscal  year 
extending  from  July  1,  1912,  to  June  30,  1913,  of  50%  amounting  to  $500,000. 
In  March,  1914,  the  plaintiff  made  its  income  tax  return,  but  instead  of  in- 
cluding in  its  income  the  entire  $500,000,  included  only  one-half,  $250,000, 
stating  that  the  other  half  was  not  income  of  the  calendar  year  1913  for  the 
reason  that  it  was  earned  by  the  Superior  Coal  Co.  during  the  latter  half  of 
the  calendar  year  of  1912.  The  defendant  amended  the  plaintiff’s  return  so  as 
to  include  the  $250,000  and  levied  a tax  thereon.  Plaintiff  paid  the  tax 
under  protest  and  brought  this  action  to  recover  it.  The  Circuit  Court 
held  that  the  income  tax  law  does  not  deal  with  the  period  during  which  the 
corporation  accumulates  the  profits  upon  which  the  dividend  is  paid  but 
is  concerned  only  with  the  income  of  the  corporation  receiving  the  dividend. 
Viewed  in  that  light  the  dividend  accrued  to  the  Union  Pacific  Coal  Co.  in 
the  year  1913,  and  all  of  it  was  taxable.  The  judgment  of  the  District  Court 
was  reversed  by  the  Circuit  Court  in  favor  of  the  defendant,  Skinner,  and  the 
Supreme  Court  now  (March  22,  1920)  affirms,  per  curiam,  the  judgment  of 
the  Circuit  Court — The  Corporation  Trust  Company.] 

INC.  489  TAX 


2652  Excise  and  stamp  taxes  are  deductible  by  the  one  only  against 
1254  whom  such  taxes  are  levied.— Receipt  is  acknowledged  of  your  letter 
2484  of  February  28,  1920,  in  which  you  inquire  as  to  the  taxpayer  who  is 
entitled  to  the  benefit  of  a deduction  from  gross  income  in  respect  of 
excise  and  stamp  taxes  levied  by  the  Federal  Government.  ^In  reply  you 
are  advised  that  the  general  rule  which  applies  in  respect  of  a deduction  for 
all  taxes  is  that  the  deduction  may  be  taken  only  by  the  person  against  whom 
such  taxes  are  levied.  The  fact  that  one  person  ultimately  pays  a tax  levied 
upon  another  does  not  give  such  person  a right  to  the  benefit  of  the  deduction. 
®,lAs  to  the  person  against  whom  excise  and  stamp  taxes  are  levied,  your  at- 
tention is  directed  to  Sections  900  to  907,  and  1006,  1100  to  1107,  inclusive, 
of  the  Revenue  Act  of  1918.  (Letter  to  Leslie,  Banka  & Company,  New 
York,  N.  Y.,  signed  by  G.  V.  Newton,  Acting  Assistant  to  the  Commissioner, 
and  dated  A'larch  6,  1920.) 


{Mim.  2436.) 

2653  Further  instructions  relative  to  overpayments  of  taxes  on  stock 
2123  dividends.  (Supplementing  M.  2429  [T|2644j.) — A claim  for  credit 
2133  on  Form  47A  for  payment  of  tax  on  stock  dividends  is  to  be  accepted 
2644  as  a suspension  of  immediate  collection  of  tax  due  only — 

2654  (1)  Against  income  or  income  and  excess-profits  taxes  due  and 
unpaid. 

2655  (2)  If  amount  claimed  as  a credit  does  not  exceed  the  amount  of 
865  tax  collected  on  the  stock  dividend  less  any  additional  tax  due  and 

unpaid  upon  the  sale  of  stock  received  as  a dividend  or  stock  upon 
which  the  dividend  was  declared.  (The  basis  of  determining  the  gain  or 
loss  upon  sale  of  stock  is  stated  in  R-egulations  45,  article  1547,  paragraphs 
1 and  2 [1(865  (1)  and  (2)].  That  article  provides  that  the  cost  of  each  share 
of  stock  is  the  quotient  of  the  cost  of  the  old  stock  divided  by  the  number 
of  old  and  new  shares  added  together.) 

2656  (3)  When  accompanied  by  an  affidavit  of  the  taxpayer  (supported 
by  statements  from  the  corporation  which  distributed  the  dividends 

as  to  the  amount  distributed  to  the  taxpayer  and  years  in  which  the  profits 
distributed  were  earned)  covering  the  following  information: 

2657  {a)  Whether  the  dividend  consists  of  stock  of  the  corporation  dis- 
tributing the  dividend  to  the  taxpayer,  or  of  stock  of  another  corpo- 
ration acquired  by  the  distributor. 

2658  {b)  The  name  of  each  corporation  declaring,  the  declaration  of, 
and  the  date  of  receipt  by  the  taxpayer  of,  the  stock  dividends,  the 

tax  on  which  was  paid  and  is  covered  by  the  claim. 

2659  (c)  The  year  in  which  the  stock  dividend  was  included  in  the  tax- 
payer’s return  of  income. 

2660  id)  The  number  of  shares  the  taxpayer  received  and  the  value 
placed  upon  the  dividend  in  the  return.  (If  no  sale  of  stock  was 

made,  the  taxpayer  need  not  furnish  the  following  information.) 

2661  {e)  If  any  sale  has  been  made  of  stock  of  the  corporation  declar- 
ing the  dividends,  whether  the  stock  be  that  acquired  by  a dividend, 

or  upon  which  the  dividend  was  declared,  state — 

(1)  The  number  of  shares  sold. 

(2)  The  selling  price. 

(3)  The  date  or  .dates  of  sale. 

(4)  The  portion,  if  any,  of  the  selling  price  included  as  taxable  profit 
in  the  return  of  net  income  for  the  year  the  sale  was  made  and  the  item  in 
the  return  under  which  the  amount  was  reported. 

490  TAX 


INC. 


4-1^20. 


2662  (J)  State  how  many  shares  of  stock  the  taxpayer  owned  at  the 
time  he  received  the  first  stock  dividend;  how  much  that  stock 

cost  the  taxpayer  and  the  date  the  stock  was  acquired.  (If  acquired  prior 

to  March  1,  1913,  state  its  value  on  that  date  and  manner  of  determining  the 

value.) 

2663  (g)  State  separately  the  dates  from  March  1,  1913,  upon  which 
you  received  stock  dividends,  the  number  of  shares  received  on  each 

date,  and  the  names  of  the  corporations  distributing  the  dividends. 

2664  The  receipt  or  canceled  check  covering  the  payment  of  tax  involved 
in  the  claim  should  be  attached  to  the  claim.  (Mim.  2436,  signed 

by  Commissioner  Daniel  C.  Roper,  and  dated  March  12,  1920.) 


2665  Depreciation  of  fruit  trees  and  the  computation  of  deductible  loss  in 
1305  event  of  death. — Receipt  is  acknowledged  of  your  letter  dated 
1331  February  24,  1920,  quoted  here  as  follows:  “I  have  a 20-acre  prune 
orchard  of  two  thousand  (2,000)  six-year  old  trees.  Last  year, 
two  hundred  and  fifty  (250)  of  them  died  from  some  unavoidable  cause. 
Am  I allowed  any  depreciation  on  same?’’  Uln  reply,  you  are  advised  that 
the  loss  sustained  by  the  killing  of  the  trees  is  the  cost  of  the  trees  killed,  and 
the  amount  of  such  loss  is  deductible  from  your  income  for  the  taxable  year 
1919.  If  the  orchard  had  not  reached  an  income  producing  stage  at  the  time 
the  trees  were  killed,  the  cost  of  the  trees  would  be  the  initial  cost,  or  fair 
market  value  on  March  1,  1913,  if  the  trees  were  acquired  prior  to  that  date, 
plus  the  capitalized  expenditures  incurred  in  bringing  them  to  maturity.  In 
the  event  the  orchard  had  reached  the  income  producing  stage  at  the  time  the 
trees  were  destroyed,  the  cost  would  be  the  initial  cost  or  fair  market  value 
as  of  March  1,  1913,  plus  the  capitalized  expenditures  incurred  in  bringing 
them  to  maturity  less  depreciation  sustained.  ^The  basis  of  computing 
depreciation  is  the  cost  of  the  trees  at  the  time  the  orchard  has  reached  an 
income  producing  stage,  including  initial  cost  and  capitalized  expenditures 
incurred  in  bringing  them  to  maturity,  and  the  rate  of  depreciation  is  to  be 
determined  by  the  average  life  of  the  trees  from  the  income  producing  stage 
under  normal  conditions.  (Letter  to  C.  M.  McKinney,  Walla  Walla,  Wash- 
ington, signed  by  G.  V.  Newton,  Acting  Assistant  to  the  Commissioner,  by 
S.  Alexander,  Head  of  Division,  dated  March,  1920,  and  made  available 
through  the  courtesy  of  Moore  and  Booth  of  Seattle,  Washington.) 


(T.  D.  2998.) 

[Matter  in  italics  is  new;  that  in  hold  face  brackets  [ ] is  old  matter  cut  out.\ 

2666  Charitable  contributions,  Article  251,  Regulations  45,  amended. — 

1448  Article  251  of  Regulations  45  is  hereby  amended  to  read  as  follows: 
r2449  Art.  251.  Charitable  Contributions. — Contributions  or  gifts  within 
[2516  the  taxable  year  are  deductible  to  an  aggregate  amount  not  in  excess 
of  fifteen  per  cent  of  the  taxpayer’s  net  income,  including  such 
payments,  if  made  (a)  to  corporations  or  associations  of  the  kind  exempted 
from  tax  by  subdivision  (6)  of  Section  231  of  the  statute,  or,  (b)  to  the  special 
fund  for  vocational  rehabilitation  under  the  vocational  rehabilitation  act 
of  June  27,  1918.  For  a discussion  of  what  corporations  and  associations 
are  included  within  (a)  see  Article  517.  A gift  to  a common  agency  (as  a 
war  chest)  for  several  such  corporations  or  associations  is  treated  like  a gift 
[directly]  direct  to  them.  In  connection  with  claims  for  this  deduction  there 


INC.  491 


TAX 


shall  be  stated  on  returns  of  income  the  name  and  address  of  each  organiza- 
tion to  which  a gift  was  made,  and  the  approximate  date  and  the  amount  of 
the  gift  in  each  case.  Where  the  gift  is  other  than  money  the  basis  for 
calculation  of  the  amount  of  the  gift  shall  be  the  cost  of  the  property,  if 
acquired  after  February  28,  1913,  or  its  fair  market  value  a.s  of  March  1,  1913, 
if  acquired  prior  thereto,  [less  any  depreciation  sustained]  after  deducting 
from  such  cost  or  value  the  amount,  if  any,  which  has  been  or  which  should 
have  been  set  aside  and  deducted  in  the  current  year  and  previous  years  from 
gross  income  on  account  of  depreciation,  and  which  has  not  been  paid  out 
in  making  good  the  depreciation  sustained.  K gift  of  real  estate  to  a city 
to  be  maintained  perpetually  as  a public  park  is  not  an  allowable  deduction. 
The  proportionate  share  of  contributions  made  by  a partnership  to  cor- 
porations or  associations  of  the  kind  included  in  (a)  above  and  to  the  special 
fund  for  vocational  rehabilitation  specified  in  (b)  may  be  claimed  as  deduc- 
tions in  the  personal  returns  of  the  partners  to  an  amount  which,  added  to 
the  amount  of  such  contributions  made  by  the  partner  individually,  is  not 
in  excess  of  fifteen  per  cent  of  the  partner’s  net  income  computed  without^ the 
benefit  of  the  deduction  for  such  contributions.  However,  the  contributions 
made  by  the  partnership  shall  not  be  deducted  from  its  gross  income  in  ascer- 
taining the  amount  of  its  net  income  to  be  reported  on  Form  1065  (revised). 
See  Article  321.  This  article  does  not  apply  to  gifts  by  estates  and  trusts  or 
corporations.  See  section  219  oj  the  statute  and  articles  561  and  562. 

2S67  This  decision  supersedes  Treasury  Decisions  2966  [1(2499]  and  2977 
[1(2516].  (T.  D.  2998,  signed  by  Paul  F.  Myers,  Acting  Commissioner 
of  Internal  Revenue,  and  dated  April  10,  1920.) 

(T.  D.  3001.) 

2668  [Comment:  This  Treasury  Decision  merely  incorporates  a decision 
2319  under  the  Revenue  Act  of  1916,  of  the  United  States  Circuit  Court 
of  Appeals  for  the  Sixth  Circuit  (March  2,  1920 — No.  3360),  in  the 
case  of  Weiss  vs.  Mohawk  Mining  Company,  which  “is  published  not  as  a 
ruling  of  the  Treasury  Department,  but  for  the  information  of  Internal 
Revenue  officers  and  others  concerned.”  The  decision  sustains  the  govern- 
ment’s contention  that  the  lessee  of  mining  property  is  entitled  to  no  depletion 
allowance  by  the  terms  of  the  Revenue  Act  of  1916  (see  1(2319). — The  Cor- 
poration Trust  Company,  April  15,  1920.] 

{Decision.) 

(262  Fed.  550.) 

Evans,  District  Judge,  v.  Gore,  Deputy  and  Acting  Collector. 

Salaries  of  United  States  Judges. 

2869  Brief  Summary:  Walter  Evans,  United  States  District  Judge  for 
803  the  Western  District  of  Kentucky,  in  making  his  return  of  income 
in  March,  1919,  under  the  Revenue  Act  of  1918,  included,  under 
protest,  in  his  gross  income,  his  salary,  as  judge,  for  the  preceding  year,  and 
paid  the  tax,  shown  by  such  return  to  be  due,  under  protest.  Having  filed  a 
claim  for  refund,  which  was  adversely  decided  by  the  Commissioner,  Judge 
Evans  filed  his  petition  in  a suit  against  the  deputy  and  acting  collector  for 
recovery,  the  sole  basis  of  the  suit  being  that  to^  include  a United  States 
judge’s  salary  in  his  gross  taxable  income  is  to  diminish  his  compensation 
as  judge  and  thus  to  violate  the  provisions  of  article  3,  section  I of  the  Federal 
Constitution.  To  the  petition  the  collector  demurred.  The  court  sustained 
the  demurrer,  saying  in  part:  “It  seems,  therefore,  that  the  tax  which  the 
plaintiff  now  sues  to  recover  is  at  most  but  an  indirect  or  incidental^burden 
upon  judicial  compensation,  resulting  from  a uniform  and  general|mcome 
tax,  and  is  therefore  not  a diminution  of  such  compensation  within  the  mean- 
ing of  the  Constitution.”  (262  Fed.  550.)--The  Corporation  Trust  Company. 

INC.  492  TAX 


4-27-20. 


2670  Purchase  and  sale  of  acceptances  on  behalf  of  foreign  corporation 
1618  having  no  office  or  place  of  business  in  United  States.  Reference 

is  made  to  office  telegram  of  April  2,  1920,  and  your  letter  of  July  22, 
1919,  in  regard  to  discount  on  bank  acceptances.  Further  consideration  has 
been  given  to  the  question  presented  by  you  as  to  whether  income  deiived 
by  a foreign  corporation  through  buying  and  selling  bank  acceptances  in  this 
country  represents  income  from  sources  within  the  United  States  v/hich  is 
subject  to  the  withholding  provisions  of  the  taxing  act.  lIThe  ordinary 
bank  acceptances  do  not  bear  interest.  The  excess  of  the  face  value  of  a so- 
called  bank  acceptance  as  collected  at  its  maturity  over  the  amount  paid  there- 
for by  the  person  collecting  the  acceptance  at  maturity  is  discount,  not  in- 
terest. ^Discount  is  a compensation  for  the  use  of  money  and  ^as  such 
resembles  interest.  But  it  has  many  features  which  distinguish  it  from  interest. 
Interest  is  usually  payable  annually  or  at  shorter  periods  before  the  maturity 
of  the  obligation.  Discount  is  never  paid  by  the  obligor  until  the  maturity 
of  the  obligation.  A bank  which  loans  money  on  a non-interest-bearing  note 
payable  in  the  future  receives  upon  the  payment  of  the  note  “discount.” 
Such  discount  is  not  “interest”  and  is  not,  therefore,  subject  to  the  with- 
holding provisions  of  Sections  221  (a)  and  237  of  the  Revenue  Act  of  1918. 
Where  a trust  company  purchases  acceptances  for  a foreign  corporation,  the 
foreign  corporation  is  required  to  make  a return  of  income  derived  from  such 
transactions  and  pay  the  tax  shown  to  be  due  by  such  return.  1|Since  dis- 
count is  not  be  be  regarded  as  interest  or  as  a fixed,  determinable  annual 
or  periodical  income  within  the  meaning  of  the  taxing  act,  a trust  company 
purchasing  and  selling  acceptances  for  a foreign  corporation  and  making 
a profit  for  the  foreign  corporation  from  such  transactions,  is  not  required 
to  withhold  income  tax  upon  the  profits  realized.  The  foreign  corporation 
is  required  to  account  for  the  gains  and  profits  made  on  such  transactions 
the  same  as  is  indicated  in  the  preceding  paragraph.  ^The  ruling  in  this 
letter  supersedes  the  ruling  contained  in  office  letter  of  July  1,  1919.^  [See 
ruling  on  page  232  of  the  1919  Cumulative  Bulletin.]  (Letter  to  M.  F.  Frey, 
the  Guaranty  Trust  Company,  New  York,  N.  Y.,  signed  by  Commis- 
sioner Wm.  M.  Williams,  and  dated  April  17,  1920.) 

2671  Continued  use  of  1919  ov/nership  certificates. — All  of  ownership 
1694  certificates  referred  to  in  your  telegram  April  15  (i.  e.,  revisions  of 

February,  May  and  September,  1919)  may  still  be  used.  No  date 
has  been  set  beyond  which  they  may  not  be  used.  (Telegram  to  M.  R. 
Dickey,  the  Cleveland  Trust  Company,  Cleveland,  Ohio,  signed  by  Deputy 
Commissioner  G.  V.  Newton,  and  dated  April  17,  1920.) 

2672  Isolated  sales  of  real  and  personal  property  on  the  installnient  or 
914  deferred  payment  plan. — Reference  is  made  to  your  communication 
to  of  February  19,  1920,  in  which  you  ask  whether  the  provisions  of 
937  Articles  42  to  46  of  Regulations  45  (Revised),  relative  to  the  sale 

of  real  or  personal  property  on  the  installment  plan  or  on  the  deferred 
payment  plan  have  to  do  only  with  transactions  entered  into  by  those  who 
are  regularly  engaged  in  the  business  of  selling  real  or  personal  property 
or  whether  such  sales  are  also  applicable  to  isolated  individual  transactions. 
^You  are  advised  that  for  the  purpose  of  the  income  tax  any  sales  of  real 
or  personal  property  on  the  installment  or  deferred  payment  plan,  as  described 
under  Articles  42  to  46  of  Regulations  45,  shall  be  treated  as  therein  provided, 
regardless  of  whether  the  sale  is  made  by  a dealer  or  other  individual.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Commissioner  Wm.  M. 
Williams,  and  dated  ApriL20,  1920.) 

493  TAX 


INC. 


{Decision.) 

(Act>f  Oct.  3;:i913.) 

Premiums  received  during  the  year  are  not  to  be  further  reduced  for 
purpose  of  determining  net  taxable  income  by  amdends  paid  in  excess  of 
those  representing  actual  return  of  current  year  s premiumo. 

Supreme  Court  of  the  United  States. 


The  Penn  Mutual  Life  Insurance  Com 
pany,  Petitioner, 
vs. 

Ephraim  Lederer,  Collector  of  Internal 
Revenue. 


On  Writ  of  Certiorari  to  the 
• United  States  Circuit  Court  of 
Appeals  for  the  Third  Circuit. 


. [April  19,  1920.] 

Mr.  Justice  Brandeis  delivered  the  opinion  of  the  Court. 

2673  The  Penn  Alutual  Life  Insurance  Company,  a purely  mutual  legal 
988  reserve  company  which  issues  level-premium  insurance,  brought 

this  action  in  the  District  Court  of  the  United  States  for  the  Eastern 
District  of  Pennsylvania  to  recover  $6,865.03  which  was  assessed^ and  col- 
lected as  an  income  tax  of  one  per  cent,  upon  the  sum  of  $686, 50o,  alleged 
to  have  been  wrongly  included  as  a part  of  its  gross-income,  and  hence  also 
of  its  net-income,  for  the  period  from  Alarch  1,  1913  to  December  31,  1913, 
The  latter  sum  equals  the  aggregate  of  the  am.ounts  paid  during  that  period 
by  the  company  to  its  policy  holders  in  cash  dividends^which  were  not  used 
by  them  during  that  period  in  payment  of  premiums.  I he  several  amounts 
making  up  this  aggregate  represent  m-ainly  a part  of  the  sO’-called  ^redundancy 
in  premiums  paid  by  the  respective  policyholders  in  some  previous  year  or 
years.^^  They  are,  in  a sense,  a repayment  of  that  part  of  the  premium  pre- 
viously paid  which  experience  has  proved  was  in  excess  of  the  amount  which 
had  been  assumed  would  be  required  to  m.eet  the  policy  obligations  ^(ordin- 
arily termed  losses)  or  the  legal  reserve  and  the  expense  of  conducting  the 
business. 1 The  District  Court  allowed  recovery  of  the  full  amount  with 
interest.  (247  Fed.  559.)  The  Circuit  Court  of  Appeals  for  the  Idiird 
Circuit,  holding  that  nothing  was  recoverable  except  a single  small  item, 
reversed  the  judgment  and  awarded  a new  trial.  (258  Fed.  81.)  A writ  of 
certiorari  from  tliis  court  was  then  allowed.  (250  U.  S.  656.) 

2674  Whether  the  plaintiff  is  entitled  to  recover  depends  wlrolly  upon 

the  construction  to  be  given  certain  provisions  in  Section  II  G. 

(b)  of  the  jR.evenue  Act  of  October  3,  1913,  c.  16,  38  Stat.  114,  172,  173. 
The  Act  enumerates  aivong  the  corporations  upoji  which  the  income  tax 
is  imposed,  ‘‘every  insurance  company”  “other  than  fraternal  benefidary 
societies,  orders  or  associations  operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a fraternity  Itself  operating  under  a 
lodge  system.”  It  provides  (G.  (b)  pp.  172-174)  how  the  net  income  of 
insurance  companies  shall  be  ascertained  for  purposes  of  taxation,  prescrib- 
ing what  shall  be  included  to  determine  the  gross-income  of  any  year,  and 
also  specifically  what  deductions  from  the  ascertained  gross-income  shall 


^The  manner  in  which  mutual  level-premium  life  insurance  companies  conduct  their 
business,  and  the  nature  and  application  of  dividends  are  fully  set  forth  in  hlutual  Benefit 
Life  Ins.  Co.  v.  Herold,  198  Fed.  199;  Connecticut  General  Life  Ins.  Co.  v.  Eaton,  218  Fed- 
188;  Connecticut  Mutual  Life  Ins.  Co.  v.  Eaton,  218  ted.  206» 


INC, 


494  TAX 


be  made  in  order  to  determine  the  net-income  upon  which  the  tax  is  assessed. 
Premium  receipts  are  a part  of  the  gross-income  to  be  accounted  for. 

2675  In  applying  to  insurance  companies  the  system  of  income  taxation 
in  which  the  assessable  net-income  is  to  be  ascertained  by  making 

enumerated  deductions  from  the  gross-income  (including  premium  receipts) 
Congress  naturally  provided  how,  in  making  the  computation^,  repayment 
of  the  redundancy  in  the  premium  should  be  dealt  with.  In  a mutual  company 
whatever  the  field  of  its  operation,  the  premium  exacted  is  necessarily  greater 
than  the  expected  cost  of  the  insurance,  as  the  redundancy  in  the  premium 
furnishes  the  guaranty  fund  out  of  which  extraordinary  losses  may  be  met, 
while  in  a stock  company  they  may  be  met  from  the  capital  stock  subscribed. 
It  is  of  the  essence  of  mutual  insurance  that  the  excess  in  the  premium  over  the 
actual  cost  as  later  ascertained  shall  be  returned  to  the  policyholder.  Some 
payment  to  the  policyholder  representing  such  excess  is  ordinarily  made 
by  every  mutual  company  every  year;  but  the  so-called  repayment  or  divi- 
dend is  rarely  made  within  the  calendar  year  in  which  the  premium  (of  which 
it  is  supposed  to  be  the  unused  surplus)  was  paid.  Congress  treated  the  so- 
called  repayments  or  dividends  in  this  way  (p.  173); 

(a)  Mutual  fire  companies  “shall  not  return  as  income  any  portion  of 
the  premium  deposits  returned  to  their  policyholders.” 

(b)  Mutual  marine  companies  “shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  account  of  premiums 
previously  paid  by  them  and  interest  paid  upon  such  amounts  between 
the  ascertainment  thereof  and  the  payment  thereof.” 

(c)  Life  insurance  companies  (that  is  both  stock  and  strictly  mutual) 
“shall  not  include  as  income  in  any  year  such  portion  of  any  actuaj  premium 
received  from  any  individual  policyliolder  as  shall  have  been  paid  back  or 
credited  to  such  individual  policyholder,  or  treated  as  an  abatement  of  prem- 
ium’of  such  individual  policyholder,  within  such  year.” 

(d)  For  all  insurance  companies,  whatever  their  field  of  operation,  and 
whether  stock  or  mutual,  the  Act  provides  that  there  be  deducted  from 
gross-income  “the  net  addition,  if  any,  required  by  law  to  be  made  vyithin 
the  year  to  reserve  funds  and  the  sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts.” 

2676  1 he  Governm.ent  contends,  in  substance,  for  the  rule  that  in  figuring 
the  gross-income  of  life  insurance  companies,  there  shall  be  taken 

the  aggregate  of  the  year’s  net  premium  receipts  made  up  separately  for  each 
policyholder.^  The  Penn-h'Iutual  Compan>^  contends  for  the  rule  that  in 
figuring  the  gross-income  there  shall  be  taken  the  aggregate  full  premiums 
received  by  the  company  less  the  aggregate  of  all  dividends  paid  by  it  to  any 
policyholder  by  credit  upon  a premium  or  by  abatemient  of  a premium  and 
also  of  all  diridends  whatsoever  paid  to  an)^  policyholder  in  cash  whether 
applied  in  payment  of  a premium  or  not.  The  non-inclusion  clause,  (c)  above, 
excludes  from  gross-income  those  preniium-receipts  which  Avere  actually 
or  in  effect  paid  by  applying  diaddends.  Tlie  comipany  seeks  to  graft  upon  the 
clause  so  restricted  a provision  for  what  it  calls  non-including,  but  which 

^The  percentage  of  the  redundancy  to  the  premium  varies,  from  year  to  year,  greatly 
in  the  several  fields  of  insurance,  and  likewise  in  the  same  year  in  the  several  companies 
in  the  same  field.  Where  the  margin  between  the  probable  losses  and  those  reasonably 
possible  is  very  large,  the  return  premiums  rise  often  to  90  per  cent  or  more  of  the  premium 
paid.  This  is  true  of  the  manufacturers’  mutual  fire  insurance  companies  of  New  I'mgland. 
Sec  Report  Tvlassachusctts  Insurance  Commissioner  (1913),  Vol.  1,  p.  16. 

^ A separate  account  is  kept  by  the  company  with  each  policyholder.  In  that  account 
there  is  entered  each  year  the  charges  of  the  premiums  payable  and  all  credits  cither  for 
cash  payments  or  by  way  of  credit  of  dividends,  or  by  way  of  abatement  of  premium. 

495  TAX 


INC. 


in  fact  is  deducting,  all  cash  dividends  not  so  applied.  In  support  of  this 
contention  the  company  relies  mainly,  not  upon  the  words  of  the  statute, 
but  upon  arguments  which  it  bases  upon  the  nature  of  mutual  insurance, 
upon  the  supposed  analogy  of  the  rules  prescribed  in  the  statute  for  mutual 
fire  and  marine  companies  and  upon  the  alleged  requirements  of  consistency. 

2677  First:  The  reason  for  the  particular  provision  made  by  Congress  seems 
to  be  clear : Dividends  may  be  made,  and  by  many  of  the  companies  have 

been  made  largely,  by  way  of  abating  or  reducing  the  amount  of  the  renewal 
premium.'*  Where  the  dividend  is  so  made  the  actual  premium  receipt  of 
the  year  is  obviously  only  the  reduced  amount.  But,  as  a matter  of  book- 
keeping, the  premium,  is  entered  at  the  full  rate  and  the  abatement  (that  is, 
the  amount  by  which  is  was  reduced)  is  entered  as  a credit.  The  financial 
result  both  to  the  company  and  to  the  policyholders  is,  however,  exactly  the 
same  whether  the  renewal  premium  is  reduced  by  a dividend  or  whether  the 
renewal  premium  remains  unchanged  but  is  paid  in  part  either  by  a credit 
or  by  cash  received  as  a dividend.  And  the  entries  in  bookkeeping  would 
be  substantially  the  same.  Because  the  several  ways  of  paying  a dividend 
are,  as  between  the  company  and  the  policyholder,  financial  equivalents. 
Congress,  doubtless,  concluded  to  make  the  incidents  the  same,  also,  as 
respects  incomm  taxation.  Where  the  dividend  was  used  to  abate  or  reduce 
the  full  or  gross  prem.ium — the  direction  to  eliminate  from  the  apparent 
premium  receipts  is  aptly  expressed  by  the  phrase  ‘‘shall  not  include,”  used 
in  clause  (c)  above.  Where  the  premium  was  left  unchanged,  but  was  paid 
in  part  by  a credit  or  cash  derived  from  the  dividend  the  instruction  would  be 
more  properly  expressed  by  a direction  to  deduct  those  credits.  Congress 
doubtless  used  the  words  “shall  not  include”  as  applied  also  to  these  credits 
because  it  eliminated  them  from  the  aggregate  of  taxable  premiums  as  being 
the  equivalent  of  abatement  of  premiums. 

2678  That  such  was  the  intention  of  Congress  is  confirmed  by  the  history 
of  the  non-inclusion  clause,  (c)  above.  The  provision  in  the  Revenue 

Act  of  1913,  for  taxing  the  incom.e  of  insurance  companies  is  in  large  part 
identical  with  the  provision  for  the  special  excise  tax  upon  them  imposed  by 
the  Act  of  August  5,  1909,  c.  6,  sec.  38,  36  Stat.  112.  By  the  latter  act  thi 
net  incomie  of  insurance  com.panies  was,  also,  to  be  ascertained  by  deducting 
from  gross-income  “sums  other  than  dividends,  paid  within  the  year  on  policy 
and  renewal  contracts;”  but  there  was  in  that  act  no  non-inclusion  clause 
whatsoever.  The  question  arose  whether  the  provision  in  the  Act  of  1913, 
indentical  with  (c)  above,  prevented  using  in  the  computation  the  reduced 
renewal  premiums  instead  of  the  full  premiiums,  where  the  reduction  in  the 
premium  had  been  effected  by  means  of  dividends.  In  Mutual  Benefit  Life 
Insurance  Co.  v.  Herold^  198  Fed.  199,  decided  July  29,  1912,  it  was  held  that 
the  renewal  prem^ium  as  reduced  by  such  dividends  should  be  used  in  com- 
puting the  gross-premium;  and  it  was  said  (p.  212)  that  dividends  so  applied 
in  reduction  of  renewal  prerniumis  “should  not  be  confused  with  dividends 
declared  in  the  case  of  a full-paid  participating  policy,  wherein  the  policy- 
holder has  no  further  premium  payments  to  make.  Such  payments  having 
been  duly  met,  the  policy  has  become  at  once  a contract  of  insurance  and  of 

^The  dividend  provision  of  the  Mutual  Benefit  Life  Insurance  Company  involved 
in  the  Herold  Case,  supra,  198  Fed.  199,  204,  was,  in  part:  “After  this  policy  shall  have  been 
in  force  one  year,  each  year’s  premium  subsequently  paid  shall  be  subject  to  reduction  by 
such  dividend  as  may  be  apportioned  by  the  directors.”  The  dividend-provision  in  some 
of  the  participating  policies  involved  in  the  Connecticut  General  Life  Ins.  Co.  Case,  supra 
218  Fed  188,  192,  was:  “Reduction  of  premiums  as  determined  by  the  company  will  be 
made  annually  beginning  at  the  second  year  or  the  insur.d  may  pay  the  full  premium 
and  instruct  the  company  to  apply  the  amount  of  the  reduction  apportioned  to  him  in  any 
one  of  the  following  plans;”  (Then  follow  four  plans.) 


INC. 


496 


TAX 


4-27-20. 


investment.  The  holder  participates  in  the  profits  and  income  of  the  invested 
funds  of  the  company.”  On  writ  of  error  sued  out  by  the  Government  the 
judgment  entered  in  the  District  Court  was  affirmed  by  the  Circuit  Court  of 
Appeals  on  January  21,  1913,  201  Fed.  918;  but  that  court  stated  that  it 
refrained  from  expressing  any  opinion  concerning  dividends  on  full  paid 
policies,  saying  that  it  did  so  “not  because  we  wish  to  suggest  disapproval, 
but  merely  because  no  opinion  about  these  matters  is  Called  for  now,  as  they 
do  not  seem  to  be  directly  involved.”  The  non-inclusion  clause  in  the  Revenue 
Act  of  1913,  (c)  above,  was  doubtless  framed  to  define  what  amounts  involved 
in  dividends  should  be  “non-included,”  or  deducted,  and  thus  to  prevent 
any  controversy  arising  over  the  questions  which  had  been  raised  under  the 
Act  of  1919.®  The  petition  for  writ  of  certiorari  applied  for  by  the  Government 
was  not  denied  by  this  court  until  December  15,  1913,  (231  U.  S.  755), 
that  is,  after  the  passage  of  the  act. 

2679  Second:  It  is  argued  that  the  nature  of  life  insurance  dividends 
is  the  same,  whatever  the  disposition  made  of  them;  and  that  Con- 
gress could  not  have  intended  to  relieve  the  companies  from  taxation  to  the 
extent  that  dividends  are  applied  in  payment  of  premiums  and  to  tax  them 
to  the  extent  that  dividends  are  not  so  applied.  If  Congress  is  to  be  assumed^ 
to  have  intended,  in  obedience  to  the  demands  of  consistency,  that  all 
dividends  declared  under  life  insurance  policies  should  be  treated  alike  in 
connection  with  income  taxation  regardless  of  their  disposition,  the  rule  of 
consistency  would  require  deductions  more  far-reaching  than  those  now 
claimed  by  the  company.  Why  allow  so-called  non-inclusion  of  amounts 
equal  to  the  dividends  paid  in  cash  but  not  applied  in  reduction  of  renewal 
premium  and  disallow  so-called  non-inclusion  of  amounts,  equal  to  the 
dividends  paid  by  a credit  representing  amounts  retained  by  the  company 
for  accumulation  or  to  be  otherwise  used  for  the  policyholders’  benefit.^ 
The  fact  is,  that  Congress  has  acted  with  entire  consistency  in  laying  down  the 
rule  by  which  in  computing  gross-earnings  certain  amounts  only  are  excluded; 
but  the  company  has  failed  to  recognize  what  the  principle  is  which  Congress 
has  consistently  applied.  The  principle  applied  is  that  of  basing  the  taxation 
on  receipts  of  net-premiums,  instead  of  on  gross-premiums.  The  amount 
equal  to  the  aggregate  of  certain  dividends  is  excluded,  although  they  are 
dividends,  because  by  reason  of  their  application  the  net-premium  receipts 
of  the  tax  year  are  to  that  extent  less.  There  is  a striking  difference  between 
an  aggregate  of  individual  premiums,  each  reduced  by  means  of  dividends, 
and  an  aggregate  of  full  premiums,  from  which  it  is  sought  to  deduct  amounts 
paid  out  by  the  company  which  have  no  relation  whatever  to  premiums 
received  within  the  tax  year  but  which  relate  to  some  other  premiums  which 
may  have  been  received  many  years  earlier.  The  difference  between  the  two 
cases  is  such  as  may  well  have  seemed  to  Congress  sufficient  to  justify  the 
application  of  different  rules  of  taxation. 

2680  There  is  also  a further  significant  difference.  All  life  insurance  has 
in  it  the  element  of  protection.  That  afforded  by  fraternal  bene- 
ficiary societies,  as  originally  devised,  had  in  it  only  the  element  of  protection. 
There  the  premiums  paid  by  the  member  were  supposed  to  be  sufficient, 
and  only  sufficient,  to  pay  the  losses  which  will  fall  during  the  current  year; 
just  as  premiums  in  fire,  marine,  or  casualty  insurance  are  supposed  to  cover 
only  the  losses  of  the  year  or  other  term  for  which  the  insurance  is  written. 
Fraternal  life  insurance  has  been  exempted  from  all  income  taxation;  Con- 

^Substantially  the  same  questions  were  involved,  also,  in  Connecticut  General  Life 
Ins.  Co.  V.  Eaton,  218  Fed.  188,  and  Connecticut  Mutual  Life  Ins.  Co.  v,  Eaton,  21 S 
Fed.  206,  in  which  decisions  were  not,  however,  reached  until  the  following'year. 


INC.  497 


TAX 


gress  having  differentiated  these  societies,  in  this  respect  as  it  had  in  others, 
from  ordinary  life  insurance  companies.  Compare  Royal  Arcanum  Supreme 
Council  V.  Behrend^  247  U.  S.  394.  But  in  level  premium  life  insurance, 
while  the  motive  for  taking  it  may  be  mainly  protection,  the  business  is  largely 
that  of  savings  investment.  The  premium  is  in  the  nature  of  a savings 
deposit.  Except  where  there  are  stockholders,  the  savings  bank  pays  back 
to  the  depositor  his  deposit  with  the  interest  earned  less  the  necessary  expense 
of  management.  The  insurance  company  does  the  same,  the  difference 
being  merely  that  the  savings  bank  undertakes  to  repay  to  each  individual 
depositor  the  whole  of  his  depsoit  with  interest;  while  the  life  insurance 
company  undertakes  to  pay  to  each  member  of  a class  the  average  amount 
(regarding  the  chances  of  life  and  death);  so  that  those  who  do  not  reach  the 
average  age  get  more  than  they  have  deposited,  that  is,  paid  in  premiums 
(including  interest)  and  those  who  exceed  the  average  age  less  than  they 
deposited  (including  interest).  The  dividend  of  a life  insurance  company 
may  be  regarded  as  paying  back  part  of  these  deposits  called  premiums. 
The  dividend  is  made  possible  because  the  amounts  paid  in  as  premium  have 
earned  more  than  it  was  assumed  they  would  when  the  policy  contract  was 
made,  or  because  the  expense  of  conducting  the  business  was  less  than  it 
was  then  assumed  it  would  be  or  because  the  mortality,  that  is  the  deaths 
in  the  class  to  which  the  policyholder  belongs,  proved  to  be  less  than  had  then 
been  assumed  in  fixing  the  premium  rate.  When  for  any  or  all  of  these  reasons 
the  net  cost  of  the  investment  (that  is,  the  right  to  receive  at  death  or  at 
the  endowment  date  the  agreed  sum)  has  proved  to  be  less  than  that  for 
which  provision  was  made,  the  difference  may  be  regarded  either  as  profit 
on  the  investment  or  as  a saving  in  the  expense  of  the  protection.  When  the 
dividend  is  applied  in  reduction  of  the  renewal  premium,  Congress  might  well 
regard  the  elem.ent  of  protection  as  predominant  and  treat  the  reduction 
of  the  premium  paid  by  means  of  a dividend  as  merely  a lessening  of  the  ex- 
pense of  protection.  But  after  the  policy  is  paid  up,  the  element  of  investment 
predominates  and  Congress  might  reasonably  regard  the  dividend  substan- 
tially as  profit  on  the  investment. 

2681  The  dividends,  aggregating  $686,503,  which  the  Penn  Mutual 
Company  insists  should  have  been  “non-included,”  or  more  properly 

deducted,  from  the  gross  income,  were,  in  part,  dividends  on  the  ordinary 
limited  payment  life  policies  which  had  been  paid  up.  There  are  others 
which  arose  under  policy  contracts  in  which  the  investment  feature  is  more 
striking;  for  instance,  the  Accelerative  Endowment  Policy  or  such  special 
form  of  contract  as  the  25-year  “6%  Investment  Bond”  matured  and  paid 
March,  1913,  on  which  the  policyholder  received  besides  dividends,  interest 
and  a ‘‘share  of  forfeitures.”  In  the  latter,  as  in  “Deferred  Dividend”  and 
other  semi-tontine  policies,  the  dividend  represents  in  part  what  clearly  could 
not  be  regarded  as  a repayment  of  excess-premium  of  the  policyholder 
receiving  the  dividend.  For  the  “share  of  the  forfeiture”  which  he  receives 
is  the  share  of  the  redundancy  in  premium  of  other  policyholders  who  did 
not  persist  in  premium-payments  to  the  end  of  the  contract  period. 

2682  Third:  The  non-inclusion  clause  here  in  question,  (c)  above,  is 
found  in  Section  II  G.  (b)  in  juxtaposition  to  the  provisions,  con- 
cerning mutual  fire  and  mutual  marine  companies,  clauses  (a)  and  (b)  above. 
The  fact  that  in  three  separate  clauses  three  different  rules  are  prescribed  by 
Congress  for  the  treatment  of  redundant  premiums  in  the  three  classes  of 
insurance,  would  seem  to  be  conclusive  evidence  that  Congress  acted  with 
deliberation  and  intended  to  differentiate  between  them  in  respect  to  income- 
taxation.  But  the  company,  ignoring  the  differences  in  the  provisions  con- 
cerning fire  and  marine  companies  respectively,  insists  that  mutual  life  insur- 


INC. 


498  TAX 


4^7-20. 


ance  rests  upon  the  same  principles  as  mutual  fire  and^  marine  and  that 
as  the  clauses  concerning  fire  and  marine  companies  provide  specitically  tor 
non-inclusion  in  or  deduction  from  gross-income  of  all  portions  of  premiums 
returned,  Congress  must  have  intended  to  apply  the  same  rule  to  all. 
Neither  premise  not  conclusion  is  sound.  . 

2683  Mutual  fire,  mutual  marine  and  mutual  life  insurance  companies 
are  analogous  in  that  each  performs  the  service  called  insuring  wholly 
for  the  benefit  of  their  policyholders  and  not  like  stock  insurance  companies 
in  part  for  the  benefit  of  persons  who  as  stockholders  have  provided  working 
capital  on  which  they  expect  to  receive  dividends  representing  pyohts 
their  investment.  In  other  words,  these  mutual  companies  are  alike  in  that 
they  are  cooperative  enterprises.  But  in  respect  to  the  service  performed 
fire  and  marine  companies  differ  fundamentally,^  as  above  pointed,  out, 
from  legal  reserve  life  companies.  The  thing  for  which  a fire  or  marine  insur- 
ance premium  is  paid  is  protection,  which  ceases^  at  the  end  of  the  term. 
If  after  the  end  of  the  term  a part  of  the  premium  is  returned  to  the  policy- 
holder, it  is  not  returned  as  something  purchased  with  the  premium,  but  as  a 
part  of  the  premium  which  was  not  required  to  pay  for  the  protection,  that 
is  the  expense  was  less  than  estimated.^  On  the  other  hand,  the  service 
performed  in  level-premium  life  insurance  is  both  protection  and  myestrn^ent. 
Premiums  paid— not  in  the  tax  year,  but  perhaps  a generation  earlier— have 
earned  so  much  for  the  cooperators,  that  the  company  is  able  to  pay  to  each 
not  only  the  agreed  amount  but  also  additional  sums  called  dividends,  and 
have  earned  these  additional  sums,  in  part  at  least,  by  transactions  not  among 
the  members,  but  with  others;  as  by  lending  the  money  of  the  cooperators 
to  third  persons  who  pay  a larger  rate  of  interest  than  it  was  assumed  would 
be  received  on  investments.  The  fact  that  the  investrnent^  resulting  in 
accumulation  or  dividend  is  made  by  a cooperative  as  distinguished  from  a 
capitalistic  concern  does  not  prevent  the  amount  thereof  being  properly 
deemed  a profit  on  the  investment.  Nor  does  the  fact  that  the  profit  was 
earned  by  a cooperative  concern  afford  basis  for  the  argument  that  Congress 
did  not  intend  to  tax  the  profit.  _ Congress  exempted  certain  co-operative 
enterprises  from  all  income  taxation,  among  others,  mutual  savings  banks; 
but,  with  the  exception  of  fraternal  beneficiary  societies,  it  imposed  in  express 
terms  such  taxation  upon  “every  insurance  company.”®  . 

2684  The  purpose  of  Congress  to  differentiate  between  mutual  fire  and 
marine  insurance  companies  on  the  one  hand  and  life  insurance 
companies  on  the  other  is  further  manifested  by  this:  Fhe  provision  con- 
cerning return-premiums  in  computation  of  the  gross  income  of  fire  and 
marine  insurance  companies  is  limited  in  terms  to  mutual  companies,  whereas 
the  non-inclusion  clause,  (c)  above,  relating  to  life  insurance  companies, 
applies  whether  the  company  be  a stock  or  a mutual  one.  There  is  good  reason 
to  believe  that  the  failure  to  differentiate  between  stock  and  mutual  life 
insurance  companies  was  not  inadvertant.  For  while  there  is  a radical  dif- 
ference between  stock,  fire  and  marine  companies  and  mutual  fire  and  marine 
companies,  both  in  respect  to  the  conduct  of  the  business  and  in  the  results 
to  policyholders,  the  participating  policy  commonly  issued  by  the  stock 
life  insurance  company  is,  both  in  rights  conferred  and  in  financial  results, 
substantially  the  same  as  the  policy  issued  by  a purely  mutual  life  insurance 
company.  The  real  difference  between  the  two  classes  of  life  companies  as 


•^Thc  alleged  unwisdom  and  injustice  of  taxing  mutual  life  insurance  companies  while 
mutual  savings  banks  were  exempted  had  been  strongly  pressed  upon  Congress. 
and  statements  filed  with  Senate  Committee  on  Finance  on  H.  R.  3321  Sixty-third 
Congress,  First  Session,  Vol.  3,  pp.  1955-2094. 

499  TAX 


INC. 


now  conducted  lies  in  the  legal  right  of  electing  directors  and  ofhcers.  In  the 
stock  company  stockholders  have  that  right;  in  the  mutual  companies, 
the  policyholders  who  are  the  members  of  the  corporation. 

2685  The  Penn  Mutual  Company,  seeking  to  draw  support  for  its  argu- 
ment from  legislation  subsequent  to  the  Revenue  Act  of  1913,  points 

also  to  the  fact  that  by  the  Act  of  September  8,  1916,  c.  463,  section  12, 
subsection  second,  subdivision  c,  39  Stat.  756,  768,  the  rule  for  computing 
gross-income  there  provided  for  mutual  fire  insurance  companies  was  made 
applicable  to  mutual  employers’  liability,  mutual  workmen’s  compensation 
and  mutual  casualty  insurance  companies.  It  asserts  that  thereby  Congress 
has  manifested  a settled  policy  to  treat  the  taxable  income  of  mutual  concerns 
as  not  including  premium  refunds;  and  that  if  mutual  life  insurance  companies 
are  not  permitted  to  “exclude”  them,  these  companies  will  be  the  only  mutual 
concerns  which  are  thus  discriminated  against.  Casualty  insurance,  in 
its  various  forms,  like  fire  and  marine  insurance,  provide  only  protection,  and 
the  premium  is  wholly  an  expense.  If  such  later  legislation  could  be  considered 
in  construing  the  Act  of  1913,  the  conclusion  to  be  drawn  from  it  would  be 
clearly  the  opposite  of  that  urged.  The  later  Act  would  tend  to  show  that 
Congress  persists  in  its  determination  to  differentiate  between  life  and  other 
forms  of  insurance. 

2686  Fourth:  It  is  urged  that  in  order  to  sustain  the  interpretation  given 
to  the  non-inclusion  clause  by  the  Circuit  Court  of  Appeals  (which 

was,  in  effect,  the  interpretation  set  forth  above)  it  is  necessary  to  interpolate 
in  the  clause  the  words  “within  such  year,”  as  shown  in  italics  in  brackets, 
thus: 

“And  life  insurance  companies  shall  not  include  as  Income  in  any  year 
such  portion  of  any  actual  premiums  received  from  any  individual  policy- 
holder [within  such  year]  as  shall  have  been  paid  back  or  credited  to  such  in- 
dividual policyholder,  or  treated  as  an  abatement  of  premium  of  such  indi- 
vidual policyholder,  within  such  year.” 

2687  What  has  been  said  above  shows  that  no  such  interpolation  is  neces- 
sary to  sustain  the  construction  given  by  the  Circuit  Court  of  Appeals. 

That  court  did  not  hold  that  the  permitted  non-inclusion  from  the  year’s 
gross-income  is  limited  to  that  portion  of  the  premium  received  within  the 
year  which,  by  reason  of  a dividend,  is  paid  back  within  the  same  year.  What 
the  court  held  was  that  the  non-inclusion  is  limited  to  that  portion  of  the 
premium  which,' although  entered  on  the  books  as  received,  was  not  actually 
received,  within  the  year,  because  the  full  premium  was,  by  means  of  the 
dividend,  either  reduced,  or  otherwise  wiped  out  to  that  extent.  Nor  does 
the  Government  contend  that  any  portion  of  a premium,  not  received 
within  the  tax  year  shall  be  included  in  computing  the  year’s  gross  income. 
On  the  other  hand  what  the  com.pany  is  seeking  is  not  to  have  “non-included” 
a part  of  the  premiums  which  were  actually  received  within  the  year,  or  which 
appear,  as  matter  of  bookkeeping  to  have  been  received  but  actually  were  not. 
It  is  seeking  to  have  the  aggregate  of  premiums  actually  received  within  the 
year  reduced  by  an  amount  which  the  company  paid  out  within  the  year: 
and  which  it  paid  out  mainly  on  account  of  premiums  received  long  before 
the  tax  year.  What  it  seeks  is  not  a non-inclusion  of  amounts  paid  in — but  a 
deduction  of  amounts  paid  out. 

2688  If  the  terms  of  the  non-inclusion  clause,  (c)  above,  standing  alone 
permitted  of  a doubt  as  to  its  proper  construction,  the  doubt  would 

disappear  when  it  is  read  in  connection  with  the  deduction  clause,  (d)  above. 
The  deduction  there  prescribed  is  of  “the  sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts.”  This  is  tantamount  to 
a direction  that  dividends  shall  not  be  deducted.  It  was  argued  that  the 


INC. 


500  TAX 


5-21-20. 


dividends  tliere  referred  to  are  ‘'commerciar’  dividends  like  tnose  upon 
capital  stock;  and  that  those  here  involved  are  dividends  of  a different 
character.  But  the  dividends,  which  the  deduction-clause  says,  in  ettect 
shall  not  be  deducted,  are  the  very  dividends  here  in  question,  that  is  divi- 
dends .“on  policy  and  annuity  contracts.”  None  such  may  be  deducted  by 
any  insurance  company  except  as  expressly  provided  for  in  the  Act,  m clauses 
quoted  above,  (a)  (b)  and  (c).  That  is,  clauses  [a)  (bj  and  (c)  are,  m effjct, 
exceptions  to  the  general  exclusion  of  dividends  from  the  permissible  deduc- 
tions as  prescribed  in  clause  (d)  above.  . , , • i • r 

2689  In  support  of  the  company’s  contention  that  the  interpolation  ot 
the  words  “within  the  year”  is  necessary  in  order  to  support  the 

construction  given  to  the  Act  by  the  Circuit  Court  of  Appeals  we  are  asked 
to  consider  the  legislative  history  of  the  Revenue  Act  of  1918  (enacted 
February  24,  1919,  c.  18,  40  Stat.  1057);  and  specilically  to  the  fact  that  in 
the  bill  as  introduced  in  and  passed  by  the  House,  the  corresponding  section 
(233  (a)  ) contained  the  words  “v/ithin  the  taxable  year”  and  that  these  words 
were  stricken  out  by  the  Conference  Committee  (Report  No.  1037,  bixty- 
fifth  Congress,  Third  Session.  The  legislative  history  of  an  act  may,  where 
the  m-eanine  of  the  words  used  is  doubtful,  be  resorted  to  as  an  aid  to  con- 
struction. Caminetti  v.  United  States,  242  U.  S.  470,  490.  But  no  aid  cou  d 
possibly  be  derived  from  the  legislative  history  of  another  act  passed  nearly 
six  years  after  the  one  in  question.  Further  answer  to  the  argument  bped 
on  the  legislative  history  of  the  later  act  would,  therefore,  be  inappropriate. 

2690  We  find  no  error  in  the  judgment  of  the  Circuit  Court  of  Appeals. 

Affirw-ed. 


2691 

2575 


2692 

896 

898 

899 

2693 


(T.  D.  3010.) 


Macomber  vs.  Eisner  Case. — [Comment:  The  opinion  of  the  Supreme 
Court  in  the  stock  dividend  case  is  reproduced  in  this  1 . U.  1 he 
Corporation  Trust  Company.] 


(T.  D.  3011.) 


Inventories  of  Livestock  Raisers  and  Other  farmers.— Regulations 

45  are  hereby  amended  by  inserting  after  Article  1585  HI  10951  a 
paragraph  to  be  known  as  Article  1585  (a),  reading  as  follows. 

Art.  1585  (a).  Inventories  of  livestock  raisers  and  other  farmers.— 
Because  of  the  impracticability  of  identifying  livestock  purchased 
and  livestock  raised,  and  the  difficulty  of  ascertaining  actual  cost  ot  livestock 
and  other  farm  products  raised,  farmers  who  render  their  returns 
accrual  basis  may  at  their  option  value  their  inventories  for  the  taxable  year 
according  to  the  farm  price  method  which  contemplates  a valuation  ol  inven- 
tories at  market  price  less  cost  of  marketing.  If  the  use  of  the  farm  price 
method  of  valuing  inventories  for  any  taxable  year  represents  a change  in 
method  of  taking  inventories  from  that  employed  in  prior  yeara,  the  opening 
inventory  for  the  taxable  year  in  which  the  change  is  made  should  be  brough 
in  at  the  same  value  as  the  closing  inventory  for  the  preceding  taxab  e year 
(this  being  the  same  in  effect  as  valuing  the  opening  inventory  on  the  new 
basis  and  crediting  income  with  the  excess  valuation  brought  in).  However, 
if  such  treatment  of  the  opening  inventory  for  the  taxable  year  m which  the 


INC. 


501  TAX 


change  is  made  results  in  abnormally  large  income  for  that  year,  by  reason 
of  the  fact  that  certain  livestock  or  other  farm  products  which  were  on  hand 
at  the  beginning  is  still  on  hand  at  the  end  of  the  year,  then  adjustments  in 
the  form  of  an  adjustment  sheet  attached  to  the  return  for  such  taxable  year 
may  be  made  of  the  taxes  for  1915  and  each  succeeding  year  to  the  year  in 
which  the  change  is  made.  In  making  such  adjustments  the  farm  price 
method  of  valuing  inventories  should  be  used  for  each  of  the  preceding  tax- 
able years.  (T.  D.  3011,  signed  by  Commissioner  Wm.  M.  Williams,  and 
dated  April  26,  1920.) 


(T.  D.  3013.) 

2694  Maryland  Casualty  Company  Case. — [Comment.  The  opinion  of 
2517  the  Supreme  Court  in  this  case  is  reproduced  in  this  T.  D. — ^The 
Corporation  Trust  Company.] 


{Decision.) 

(Act  of  September  8,  1916.) 

Building  erected  on  leased  ground  by  lessee  as  income  to  lessor. 

District  Court,  Northern  District  of  California,  Second  Division. 

Cryan  vs.  Y/ardell,  Collector. 

(263  Fed.  248.) 

2695  Van  Fleet,  District  Judge.  Action  to  recover  an  item  of  income  tax 

939  assessed  against  plaintiff  under  section  2a  of  the  act  of  September  8, 
1231  1916  (39  Stat.  756  [Comp.  St.  § 6336b]),  which  provides  that — 

“The  net  income  of  a taxable  person  shall  include  gains,  profits,  and  in- 
come derived  from  * * * sales,  or  dealings  in  property,  whether  real  or 

personal,  growing  out  of  the  ownership  or  use  of  or  interest  in  real  or  personal 
property,  also  from  interest,  rent,  dividends  * * * or  gains  * * * 

from  any  source  whatever.” 

2696  Plaintiff  is  the  owner  of  a lot  of  land  in  the  city  of  San  Francisco, 
upon  which,  under  the  terms  of  a lease  made  by  plaintiff  in  1908  for  a 

term  of  26  years,  there  was  erected  by  her  tenant  a class  A steel  and  concrete 
building,  the  lease  providing  that  “in  no  event  shall  the  lessee  hereunder 
have  any  right  to  remove  any  building  from  said  premises.”  The  building 
was  completed  in  1910.  In  1916,  the  tenant  defaulting  in  accrued  rent,  the 
lease  was  by  mutual  arrangement  canceled  and  terminated,  and  possession 
of  the  leased  premises  surrendered  to  plaintiff. 

2697  The  tax  in  question  was  assessed  for  the  year  1916  upon  the  then 
value  of  the  building  erected  under  the  lease,  upon  the  theory  that 

the  structure  represented  “gains,  profits,  and  income”  accruing  to  plaintiff 
for  that  year,  under  an  interpretative  rule  of  the  Treasury  Department,  made 
for  the  guidance  of  taxing  officers,  that: 

“Permanent  improvements  under  lease  or  rental  contracts,  when  improve- 
ments become  a part  of  real  estate,  the  difference  between  cost  of  the  improve- 
ments and  allowable  depreciation  during  the  lease  term,  is  gain  or  profit  to 
the  lessor  at  the  end  of  the  lease  term,  and  is  to  be  accounted  for  as  income 
at  that  time.”  Paragraph  50,  Regulation  No.  33,  Treasury  Dept. 

2698  The  government  claims  that  under  the  provisions  of  the  act,  and 
this  regulation  made  thereunder,  the  tax  was  properly  assessed  and 

collected;  but  I am  unable  to  sustain  this  view.  The  right  to  levy  the  tax 


INC. 


502  TAX 


5-21-20. 


turns  upon  the  question:  When  did  the  title  to  this  building  vest  in  plaintiff 
and  become  a part  of  her  property  for  the  purpose  of  taxation?.  ^ I am  of 
opinion  that  under  well-settled  principles,  aptly  expressed  in  section  1013, 
Civil  Code  of  California,  the  moment  the  building  was^  erected,  which  the 
terms  of  the  lease  show  was  to  become  and  remain  an  integral  part  of  the 
land  upon  which  it  was  constructed,  the  title  thereto  vested  as  completely 
in  the  plaintiff  as  though  constructed  by  the  plaintiff  herself.  The  terms  of 
the  lease  clearly  disclose  that  the  erection  of  the  building  was  a part  of  the 
consideration  for  the  lease,  and  that  it  was  provided  for  and  taken  into  con- 
sideration in  the  rent  reserved.  It  therefore  became,  upon  its  completion,  a 
part  and  parcel  of  plaintiff’s  income-bearing  property,  and  was  subject  to 
taxation  in  her  as  of  that  date.  City  of  Oakland  v.  Albers  Bros.  Milling  Co. 
(Cal.  App.)  184  Pac.  868. 

2699  The  regulation  of  the  Treasury  Department  cannot  be  applied  to 

such  a state  of  facts;  if  so  intended,  it  must  give  way,  as  the  depart- 
ment has  no  power  to  abrogate  a substantive  rule  of  law.  This  conclusion 
is  not  affected  by  the  principles  stated  in  Board  of  Education  v.  Grant,  118 
Cal.  39,  50  Pac.  5,  or  San  Francisco  v.  McGinn,  67  Cal.  110,  7 Pac.  187,  relied 
on  by  defendant.  Nor  do  the  considerations  urged  by  defendant  as  arising 
from  the  relation  of  landlord  and  tenant,  between  plaintiff  and  her  lessee, 
apply  to  the  terms  of  the  lease  here  involved.  ^ 

2700  It  results  that  whatever  accession  of  value  resulted  to  plaintiff  s 
property  from  the  erection  of  the  building  in  question  accrued  and 

became  vested  in  her  in  1910,  and  not  upon  the  termination  of  the  lease.  As 
this  was  prior  to  the  enactment  under  which  the  tax  was  levied,  the  case  falls 
by  analogy  within  the  principles  of  Doyle  v.  Mitchell  Brothers  Co.,  247 
U.  S.  179,  38  Sup.  Ct.  467,  62  L.  Ed.  1054,  and  Hays  v.  Gauley  Mountain 
Coal  Co.,  247  U.  S.  189,  38  Sup.  Ct.  470,  62  L.  Ed.  1061.  Those  cases  dealt  with 
the  act  imposing  a corporation  exci^e^tax,  but,  like  the  present  act,  the  tax 
was  imposed  on  income,  and  not  upon  capital  invested,  or  property  as  such, 
and  it  was  held  that  increase  in  the  value  of  property  invested,  accruing  before 
the  act  took  effect,  could  not  be  taken  into  account  or  treated  as  income  not 
realized  upon  until  after  that  fact. 

2701  The  demurrer  of  the  defendant  will  be  overruled. 


2702  Manner  of  adjusting  corrected  tax  liability  oyer  a period  of  prior 
[i994  years. — Reference  is  made  to  your  undated  inquiry  in  which  you 
2119  set  out  the  following  facts:  Examination  made  of  the  returns  of  an 
individual  filed  for  the  years  1914  to  1918,  inclusive,  disclosed  a fur- 
ther tax  due,  which  has  been  assessed.  Before  the  assessment  is  paid,  the 
individual  finds  that  in  the  1917  return  a bonus  was  reported  as  compensa- 
tion received,  although  the  bonus  was  actually  credited  to  his  account  and 
subject  to  his  withdrawal  in  1916.  You  inquire,  ‘Ts  it  proper  to  file  amended 
returns  for  1916  and  1917  and  file  a claim  for  abatement  as  to  the  assessment 
for  1917  and  pay  the  additional  tax  due  on  account  of  the  1916  return  being 
increased.”  1|In  reply,  you  are  informed  that  neither  the  filing  of  amended 
returns  for  1916  and  1917  nor  the  payment  of  the  additional  tax  alleged  to 
be  due  on  account  of  an  adjustment  of  1916  income  js  necessary.  Upon 
receipt  of  notice  of  assessment  from  the  Collector  covering  the  further  taxes 
for  the  years  1914  to  1918,  inclusive,  the  individual  may  file  a claim  for  abate- 
ment on  Form  47  for  an  amount  representing  the  difference  between  the 
amount  assessed  and  the  tax  which  he  claims  to  be  due.  Such  claim  must 
be  supported  by  an  affidavit  setting  forth  in  detail  the  basis  on  which  the 
claim  is  made.  (Letter  to  M.  R.  Dickey,  the  Cleveland  Trust  Company, 
Cleveland,  O.,  signed  by  Deputy  Commissioner  G.  V.  Newton,  by  B.  G. 
Murphy,  hlead  of  Division,  and  dated  May  5,  1920.) 

INC.  503  TAX 


(T.  D.  3018.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2703  Interest  coupons  presented  without  ownership  certificates. — The 

1704  final  edition  of  Regulations  45  is  amended  by  changing  Article  368, 
to  read  as  follows: 

Art.  368.  Interest  coupons  without  ownership  certificates. — When 
[where]  interest  coupons  are  received  unaccompanied  by  certificates  of  owner- 
ship, the  first  bank  shall  require  of  the  payee  an  affidavit  showing  the  name 
and  address  of  the  payee,  the  name  and  address  of  the  debtor  corporation, 
the  date  of  the  maturity  of  the  interest,  the  name  and  address  of  the  person 
from  whom  the  coupons  were  received,  the  amount  of  the  interest,  and  a state- 
ment that  the  owner  of  the  bonds  is  unknown  to  the  payee.  Such  affidavit 
shall  be  forwarded  to  the  collector  with  the  monthly  return  on  form  1012 
(revised).  The  first  bank  receiving  such  coupons  shall  also  prepare  a certi- 
ficate on  form  1000  (revised),  crossing  out  “owner”  and  inserting  “payee” 
and  entering  the  amount  of  interest  on  line  6 [in  the  space  provided  for  a 
foreign  corporation  having  no  office  or  place  of  business  within  the  United 
States],  and  shall  stamp  or  write  across  the  face  of  the  certificate  “Affidavit 
furnished,”  adding  the  name  of  the  bank.  (T.  D.  3018,  signed  by  Com- 
missioner Wm.  M.  Williams,  and  dated  May  18,  1920.) 


(T.  D.  3019.) 

[Note:  To  hidicate  changes  herein  would  prove  more  confusing  than  helpful ^ 

2704  Premiums  on  business  insurance. — Article  294  of  Regulations  45 
1197  is  hereby  amended  to  read  as  follows: 

Art.  294.  Premiums  on  business  insurance. — Premiums  paid  by 
a taxpayer  on  an  insurance  policy  on  the  life  of  an  officer,  employee  or  other 
Individual  financially  interested  in  the  taxpayer’s  business,  for  the  purpose 
of  protecting  tlie  taxpayer  from  loss  in  the  event  of  the  death  of  the  officer 
or  employee  insured  are  not  deductible  from  the  taxpayer’s  gross  income. 
If,  liowever,  the  taxpayer  is  in  no  sense  a beneficiary  under  such  a policy, 
except  as  he  may  derive  benefit  from  the  increased  efficiency  of  the  officer 
or  employee,  premiums  so  paid  are  allowable  deductions.  See  Articles  33 
[^[889]  and  105  to  108  [beginning  at  •[11210].  In  either  case  the  proceeds  of 
such  policies  paid  upon  the  death  of  the  insured  may  be  excluded  from  gross 
income  if  the  beneficiary  is  an  individual,  but  must  be  included  in  gross 
income  if  the  beneficiary  is  a corporation.  See  Section  213  (b)  (1)  and 
Articles  72  [^[1114]  and  541  [1[809].  (T.  D.  3019,  signed  by  Commissioner 

Wm.  \L  Williams,  and  dated  May  18,  1920.) 

2705  Basis  for  determination  of  gain  or  loss  on  sale  of  securities  by  a 
671  committee  for  an  incompetent. — Reference  is  made  to  your  telegram 

1058  of  May  14,  1920,  wherein  you  make  inquiry  as  to  the  proper  basis 
for  determining  profit  from  the  sale  of  securities  by  a.  committee  of 
an  incompetent. 

In  reply  you  are  informed  that  the  gain  or  loss  to  be  reported  from  the 
sale  of  securities  by  a committee  of  an  incompetent  should  be  the  difference 
between  the  purchase  price  of  the  securities  by  the  incompetent  if  acquired 
subsequent  to  [March  1,  1913,  and  the  sale  price.  If  acquired  prior  to  jMarch 
1,  1913,  the  difference  between  their  fair  market  value  as  of  that  date  and  the 
sale  price  applies.  (Letter  to  [Morris  F.  I rey,  the  Guaranty  Trust  Company, 
New  York,  N.  Y.,  signed  by  Deputy  Commissioner  G.  V.  Newton,  by 
S.  Alexander,  Head  of  Division,  and  dated  [May  17,  1920.) 

504  TAX 


INC. 


6-9-20. 


(T.  D.  3024.) 

2706  Inventories  of  lumber  manufacturers.— Regulations  45  are  hereby 
1092  amended  by  inserting  after  Article  1585  (a)  a paragraph  to  be 

known  as  Article  1585  (b),  reading  as  follows: 

2707  Art.  1585  (b).  Inventories  of  lumber  manufacturers. — 1.  Be- 
cause of  the  impracticability  of  determining  accurately  the  costs 

properl}^  assignable  to  each  species,  grade  and  dimension  of  lumber  making 
up  the  product  of  the  mill,  lumber  manufacturers  may  use  as  a basis  for 
pricing  inventories  the  average  cost  to  the  manufacturer  of  producing  the 
inventoried  products  during  the  taxable  year  for  which  the  return  of  net 
income  is  made. 

2708  2.  If  the  quantity  of  lumber  on  hand  at  the  time  of  inventory  is 
greater  than  the  total  quantity  of  lumber  produced  during  the 

current  taxable  year,  it  is  evident  that  the  excess  stock  has  been  carried 
over  from  the  previous  year’s  production,  and  such  excess  shall  be  valued 
at  the  average  cost  of  production  for  the  preceding  taxable  year. 

2709  3.  A taxpayer  who  regularly  allocates  in  his  books  of  account 
such  average  cost  to  the  different  kinds  and  grades  of  lumber  in 

proportion  to  the  selling  value  of  such  kinds  and  grades  may,  subject  in 
each  case  to  the  approval  of  the  Commissioner  upon  audit  of  the  return, 
make  his  returns  of  net  incouie  on  tliat  basis. 

2710  4.  The  term  lumber  manufacturer,  as  used  in  this  article,  means  a 
person  who  manufactures  lumber  from  logs,  as  distinguislied  from 

a remanufacturer  of  lumber.  (T.  D.  3024,  signed  by  Commissioner  Wm. 
M.  Williams,  and  dated  June  2,  1920.) 


(T.  D.  3028.) 

2711  Concerning  countries  which  do  or  do  not  satisfy  the  simiiar  credit 
1286  requirement  of  Section  222  (a)  (3)  of  the  Revenue  Act  of  1918. 

— The  final  edition  of  Regulations  45  is  amended  by  inserting  imme- 
diately after  Article  384,  a paragraph,  to  be  known  as  Article  385,  as  follow^s: 

Art.  385.  Countries  which  do  or  do  not  satisfy  the  similar  credit  re- 
quirement.— (a)  Tbie  followdng  is  an  inco.mplete  list  of  the  countries  wdiich 
satisfy  the  similar  credit  requirement  of  Section  222  (a)  (3)  of  the  Revenue 
Act  of  1918;  Canada;  Italy;  NewToundland;  Salvador,  (b)  llie  following 
is  an  incomplete  list  of  the  countries  which  do  not  satisfy  the  similar 
credit  requirements  of  Section  222  (a)  (3),  of  the  Revenue  Act  of  1918: 
Argentina;  Bahama;  Belgium;  Bermuda;  Bolivia;  Bosnia;  Brazil;  dule; 
Cliina;  Costa  Rica;  Ecuador,  Egypt;  Finland;  France;  Great  Britain  and 
Ireland;  Guatemala;  Herzegovina;  India;  Jamaica;  Japan;  Montenegro; 
Morocco;  New  Zealand;  Nicaragua;  Panama;  Paraguay;  Persia;  Peru; 
Portugal;  Roumania;  Santo  Domingo;  Serbia;  Siam;  Sweden;  Switzerland; 
Venezuela.  The  form.er  names  of  certain  of  these  territories  are  here  used 
for  convenience  in  spite  of  the  actual  or  possible  clumgc  in  the  name  or 
sovereignty.  A resident  of  the  United  States  who  is  a citizen  or  subject 
of  any  country  in  the  first  list  is  entitled,  for  the  puiqiose  of  the  total  tax 
due  the  United  States,  for  1918  and  subsequent  years,  to  a credit  for  the 
amount  of  any  income,  w^ar  profits  and  excess  profits  taxes  paid  or  accrued 
during  the  taxable  year  to  such  country  upon  income  fiom  sources  therein. 
If  he  is  a citizen  or  subject  of  any  country  in  the  second  list,  he  is  not 
entitled  to  such  credit.  If  he  is  a citizen  or  subject  of  a country  wTich 
is  in  neither  list,  then  to  secure  the  desired  credit,  Ire  must  prove  to  the 

505 


INC. 


TAX 


satisfaction  of  the  Commissioner  that  the  country  of  which  he  is  a citizen  or 
subject  either  imposes  no  income,  war  profits  or  excess  profits  taxes,  or 
in  imposing  such  taxes  allows  to  citizens  of  the  United  States  residing 
in  such  country  a credit  for  the  amount  of  income,  war  profits  or  excess 
profits  taxes  paid  to  the  United  States  on  incomes  derived  from  sources 
therein.  (T.  D.  3028,  signed  by  Commissioner  Wm.  M.  Williams,  and 
dated  June  2,  1920.) 

{Law.) 

Special  exemption  granted  to  owners  of  vessels  documented  under  the 
laws  of  the  United  States  and  built  prior  to  January  1,  1914,  on  the  proceeds 
of  the  sale  thereof. 

Second  paragraph  of  Section  23 
of  the 

“Merchant  Marine  Act,  1920.” 

(Public — No.  261 — 66th  Congress.) 

In  effect  June  5,  1920. 

2712  That  during  the  period  of  ten  years  from  the  enactment  of  this  Act 
90  any  person  a citizen  of  the  United  States  who  may  sell  a vessel  docu- 

804  mented  under  the  laws  of  the  United  States  and  built  prior  to  Janu- 

uary  1,  1914,  shall  be  exempt  from  all  income  taxes  that  would  be 
payable  upon  any  of  the  proceeds  of  such  sale  under  Title  I,  Title  II  and 
Title  III  of  the  Revenue  Act  of  1918  if  the  entire  proceeds  thereof  shall  be 
invested  in  the  building  of  new  ships  in  American  shipyards,  such  ships  to 
be  documented  under  the  laws  of  the  United  States  and  to  be  of  a type 
approved  by  the  board  [i.e.,  the  United  States  Shipping  Board  provided  for 
byj^^Section  3 of  the  Act]. 

“IMerchant  Marine  Act,  1920,”  of  which  the  above  is  the  second  para- 
graph of  Section  23,  approved  by  the  President,  June  5,  1920. 

Important  Note:  To  the  extent  only  that  this  special  legislation  is  in- 
terpreted and  administered  by  the  Bureau  of  Internal  Revenue  in  official 
rules  and  regulations  will  it  be  covered  in  the  Service. — The  Corporation 
Trust  Company. 


{Decision.) 

Salaries  of  United  States  Judges  and  of  the  President  of  the  United  States. 
SUPREME  COURT  OF  THE  UNITED  STATES. 


No.  654. — October  Term,  1919. 

Walter  Evans,  Plaintiff  in  Error,)  In  Error  to  the  District  Court  of  the 
vs.  ^ United  States  for  the  Western 

J.  Rogers  Gore,  Acting  Collector,  etc.]  District  of  Kentucky. 

[June  1,  1920.] 

Mr.  Justice  Van  Devanter  delivered  the  opinion  of  the  Court. 

2713  This  is  an  action  to  recover  money  paid  under  protest  as  a tax  alleged 
89  to  be  forbidden  by  the  Constitution.  The  plaintiff  is  the  United 

803  States  District  Judge  for  the  Western  District  of  Kentucky,  and  holds 

2241  that  office  under  an  appointment  by  the  President  made  in  1899  with 
2669  the  advice  and  consent  of  the  Senate.  The  tax  which  he  calls  in 
question  was  levied  under  the  Act  of  February  24,  1919,  c.  18,  40 

506  TAX 


1% 


INC. 


6-9-20. 


Stat.  1062,  on  his  net  income  for  the  year  1918,  as  computed  under  that  act. 
His  compensation  or  salary  as  District  Judge  was  included  in  the  compu- 
tation. Had  it  been  excluded  he  would  not  have  been  called  on  to  pay  any 
income  tax  for  that  year.  The  inclusion  was  in  obedience  to  a provision  in 
§213  requiring  the  computation  to  embrace  all  gains,  profits,  income  and  the 
like,  “including  in  the  case  of  the  President  of  the  United  States,  the  judges 
of  the  Supreme  and  inferior  courts  of  the  United  States,  [and  others]  . . . 

the  compensation  received  as  such.”  Whether  he  could  be  subjected  to  such 
a tax  in  respect  of  his  salary,  consistently  with  the  Constitution,  is  the  matter 
in  issue.  If  it  be  resolved  against  the  tax  he  will  be  entitled  to  recover  what 
he  paid;  otherwise  his  action  must  fail.  It  did  fail  in  the  District  Court. 
262  Fed.  550  [1[2669]. 

2714  The  Constitution  establishes  three  great  coordinate  departments 
of  the  National  Government, — the  legislative,  the  executive,  and  the 

judicial, — and  distributes  among  them  the  powers  confided  to  that  Govern- 
ment by  the  people.  Each  department  is  dealt  with  in  a separate  Article, 
the  legislative  in  the  first,  the  executive  in  the  second  and  the  judicial  in  the 
third.  Our  present  concern  is  chiefly  with  the  third  Article.  It  defines  the 
judicial  power,  vests  it  in  the  Supreme  court  and  such  inferior  courts  as 
Congress  may  from  time  to  time  ordain  and  establish,  and  declares:  “The 
Judges,  both  of  the  supreme  and  inferior  Courts,  shall  hold  their  Offices 
during  good  Behaviour,  and  shall  at  stated  Times,  receive  for  their  Services, 
a Compensation,  which  shall  not  be  diminished  during  their  Continuance  in 
Office.” 

2715  The  plaintiff  insists  that  the  provision  in  §213  which  subjects  him 
to  a tax  in  respect  of  his  compensation  as  a judge  by  its  necessary 

operation  and  effect  diminishes  that  compensation  and  therefore  is  repug- 
nant to  the  constitutional  limitation  just  quoted. 

2716  Stated  in  its  broadest  aspect,  the  contention  involves  the  power  to 
tax  the  compensation  of  federal  judges  in  general, — and  also  the 

salary  of  the  President,  as  to  which  the  Constitution  (Art.  H,  §1,  cl.  6) 
contains  a similar  limitation.  Because  of  the  individual  relation  of  the 
members  of  this  court  to  the  question,  thus  broadly  stated,  we  cannot  but 
regret  that  its  solution  falls  to  us;  and  this  although  each  member  has  been 
paying  the  tax  in  respect  of  his  salary  voluntarily  and  in  regular  course. 
But  jurisdiction  of  the  present  case  cannot  be  declined  or  renounced.  The 
plaintiff  was  entitled  by  law  to  invoke  our  decision  on  the  question  as  respects 
his  own  compensation,  in  which  no  other  judge  can  have  any  direct  personal 
interest;  and  there  was  no  other  appellate  tribunal  to  which  under  the  law 
he  could  go.  He  brought  the  case  here  in  due  course,  the  Government  joined 
him  in  asking  an  early  determination  of  the  question  involved,  and  both 
have  been  heard  at  the  bar  and  through  printed  briefs.  In  this  situation,  the 
only  course  open  to  us  is  to  consider  and  decide  the  cause, — a conclusion 
supported  by  precedents  reaching  back  many  years.  Aforeover,  it  appears 
that,  when  this  taxing  provision  was  adopted.  Congress  regarded  it  as  of  un- 
certain constitutionality  and  both  contemplated  and  intended  that  the 
question  should  be  settled  by  us  in  a case  like  this.* 


*Scc  House  Report,  No.  767,  p.  29,  65th  Cong.,  2d  Sess.;  Senate  Report,  No.  617, 
p.  6,  65th  Cong.,  3rd  Sess.  And  see  Cong.  Record,  Vol.  56,  p.  10370,  where  the  Chairman 
of  the  House  Committee,  on  asking  the  adoption  of  the  provision,  said:  “I  wish  to  say,  Mr. 
Chairman,  that  while  there  is  considerable  doubt  as  to  the  constitutionality  of  taxing 
Federal  judges’  or  the  President’s  salaries,  ...  we  cannot  settle  it; 
we  have  not  the  power  to  settle  it.  No  power  in  the  world  can  settle  it  except  the  Supreme 
Court  of  the  United  States.  Let  us  raise  it,  as  we  have  done,  and  let  it  be  tested,  and  it 
can  only  be  done  by  some  one  protesting  his  tax  and  taking  an  appeal  to  the  Supreme 


INC. 


507  TAX 


2717  With  what  purpose  does  the  Constitution  provide  that  the  com- 
pensation of  the  judges  “shall  not  be  diminished  during  their  con- 
tinuance in  office?”  Is  it  primarily  to  benefit  the  judges,  or  rather  to  promote 
the  public  weal  by  giving  them  that  independence  which  makes  for  an  im- 
partial and  courageous  discharge  of  the  judicial  function?  ^ Does  the  pro- 
vision merely  forbid  direct  diminution,  such  as  expressly  reducing  the  compen- 
sation from  a greater  to  a less  sum  per  year,  and  thereby  leave  the  way  open 
for  indirect,  yet  effective,  diminution,  such  as  withholding  or  calling  back  a 
part  as  a tax  on  the  whole?  Or,  does  it  mean  that  the  judge  shall  have  a sure 
and  continuing  right  to  the  compensation,  whereon  he  confidently  may  rely 
for  his  support  during  his  continuance  in  office,  so  that  he  need  have  no  appre- 
hension lest  his  situation  in  this  regard  may  be  changed  to  his  disadvantage? 

2718  The  Constitution  was  framed  on  the  fundamental  theory  that  a 
larger  measure  of  liberty  and  justice  would  be  assured  by  vesting 

the  three  great  powers, — the  legislative,  the  executive,  and  the  judicial,— 
in  separate  departments,  each  relatively  independent  of  the  others;  and  it 
was  recognized  that  without  this  independence  if  it  was  not  made  t)Oth 
real  and  enduring — the  separation  would  fail  of  its  purpose.^  All  agreed  that 
restraints  and  checks  must  be  imposed  to  secure  the  requisite  measure  of 
independence;  for  otherwise  the  legislative  department,  inherently  the 
strongest,  might  encroach  on  or  even  come  to  dominate  the  others,  and  the 
judicial,  naturally  the  weakest,  might  be  dwarfed  or  swayed  by  the  other 
two,  especially  by  the  legislative. 

2719  The  particular  need  for  making  the  judiciary  independent  was 
elaborately  pointed  out  by  Alexander  Hamilton  in  the  Federalist, 

No.  78,  from  which  we  excerpt  the  following: 

“The  Executive  not  only  dispenses  the  honors,  but  holds  the  sword  of 
the  community.  The  legislature  not  only  commands  the  purse,  but  prescribes 
the  rules  by  which  the  duties  and  rights  of  every  citizen  are  to  be  regulated. 
The  judiciary,  on  the  contrary,  has  no  Influence  over  either  the  sword  or  the 
purse;  no  direction  either  of  the  strengtii  or  of  the  wealth  of  the  society , 
and  can  take  no  active  resolution  whatever.  It  may  truly  be  said  to  have 
neither  force  nor  will,  but  merely  judgment.  . . . This  simple  view 
of  the  matter  suggests  several  important  consequences.  It  proves  incontest- 
ably that  the  judiciary  is  beyond  comparison  the  weakest  of  the  three  depart- 
ments of  power;  that  it  can  never  attack  with  success  either  of  the  other 
two;  and  that  all  possible  care  is  requisite  to  enable  It  to  defend  Itself  against 
their  attacks.” 

“The  complete  Independence  of  the  courts  of  justice  is  peculiarly  essential 
In  a limited  Constitution.  By  a limited  Constitution  1 understand  one  which 
contains  certain  specified  exceptions  to  the  legislative  authority;  such,  for 
instance,  as  that  It  shall  pass  no  bills  of  attainder,  no  post  facto  laws,  and 
the  like.  Limitations  of  this  kind  can  be  preserved  in  practice  no  other 
way  than  through  the  medium  of  courts  of  justice,  whose  duty  it  must  be  to 
declare  all  acts  contrary  to  the  manifest  tenor  of  the  Constitution  void. 
Without  this,  all  the  reservations  of  particular  rights  or  privileges  would 
amount  to  nothing.” 

2720  At  a later  period  John  IMarshall,  whose  rich  experience  as  lawyer, 
legislator,  and  Chief  Justice  enabled  him  to  speak  as  no  one  else 

could,  tersely  said  (Debates  Va.  Conv.,  1829-1831,  pp.  616,  619): 

“Advert,  Sir,  to  the  duties  of  a Judge.  He  has  to  pass  between  the 

Court.”  And  again:  “I  think  really  that  every  man  who.  has  a doubt  about  this  can 
very  well  vote  for  it  and  take  the  advice  of  the  gentleman  from  Pennsylvania  [Mr.  Grahami, 
which  was  sound  then  and  is  sound  now,  that  this  question  ought  to  be  raised  by  Congress, 
the  only  power  that  can  raise  it,  in  order  that  it  may  be  tested  in  the  Supreme  Court,  the 
only  power  that  can  decide  it.” 


INC. 


508  TAX 


6-9-20. 

Government  and  the  man  whom  that  Government  is  prosecuting:  between 
the  most  powerful  individual  in  the  community,  and  the  poorest  and  most 
unpopular.  It  is  of  the  last  importance,  that  in  the  exercise  of  these  duties 
he  should  observe  the  utmost  fairness.  Need  I press  the  necessity  of  this.? 
Does  not  every  man  feel  that  his  own  personal  security  and  the  security  of  his 
property  depends  on  that  fairness.?  The  Judicial  Department  comes  home 
^very  man  s fireside:  it  passes  on  his  property,  his  reputation, 
his  life,  his  all.  Is  it  not,  to  the  last  degree  important,  that  he  should  be 
rendered  perfectly  and  completely  independent,  with  nothing  to  influence  or 
control  him  but  God  and  his  conscience.?  ...  I have  always  thought, 
from  my  earliest  youth  till  now,  that  the  greatest  scourge  an  angry  Heaven 
ever  inflicted  upon  an  ungrateful  and  a sinning  people,  was  an  ignorant,  a 
corrupt,  or  a dependent  Judiciary.” 

independence  was  illustrated  by 
^ Mr  Wilson,  now  the  President,  in  the  following  admirable  statement: 

It  IS  also  necessary  that  there  should  be  a judicary  endowed  with  sub- 
stantial and  independent  powers  and  secure  against  all  corrupting  or  per- 
verting influences;  secure,  also,  against  the  arbitrary  authority  of  the  ad- 
ministrative heads  of  the  government. 

“Indeed  there  is  a sense  in  which  it  may  be  said  that  the  whole  efficacy 
and  reality  of  constitutional  government  resides  in  its  courts.  Our  definition 
ot  li^berty  is  that  it  is  the  best  practicable  adjustment  between  the  powers 
ot  the  government  and  the  privileges  of  the  individual.” 

Our  courts  are  the  balance-wheel  of  our  whole  constitutional  system* 
and  ours  is  the  only  constitutional  system  so  balanced  and  controlled.  Other 
constitutional  systems  lack  complete  poise  and  certainty  of  operation  be- 
cause they  lack  the  support  and  interpretation  of  authoritative,  undisputable 
courts  ot  law.  It  is  clear  beyond  all  need  of  exposition  tliat  for  the  definite 
maintenance  of  constitutional  understandings  it  is  indispensable,  alike  for  the 
preservation  of  the  liberty  of  the  individual  and  for  the  preservation  of  the 
integrity  ot  the  powers  of  the  government,  that  there  should  be  some  non- 
politica.  lorurn  in  which  those  understandings  can  be  impartially  debated  and 
determined.  That  forum  our  courts  supply.  There  the  individual  may 
as&ert  his  rights;  there  the  government  must  accept  definition  of  its  authority. 

here  the  individual  may  challenge  the  legality  of  governmental  action  and 
have  It  adjudged  by  the  test  of  fundamental  principles,  and  that  test  the 
government  must  abide;  there  the  government  can  check  the  too  aggressive 
sel  -assertion  of  the  individual  and  establish  its  power  upon  lines  which  all 
can  comprehend  and  heed.  The  constitutional  powers  of  the  courts  consti- 
tute the  ultimate  safeguard  alike  of  individual  privilege  and  of  governmental 
prerogative.  It  is  in  this  sense  that  our  judiciary  is  the  balance-wheel  of  our 
entire  system;  it  is  meant  to  maintain  that  nice  adjustment  between  in- 
dividual rights  and  governmental  powers  which  constitutes  political  liberty.” 
Constitutional  Government  in  the  United  States,  pp.  17,  142. 

2722  Coriscious  of  the  nature  and  scope  of  the  power  being  vested  in  the 
courts,  recognizing  that  they  would  be  charged  wdth  res- 
ponsi.bilities  more  delicate  and  important  than  any  ever  before  confided  to 
judicial  tribunals,  and  appreciating  that  they  were  to  be,  in  the  words  of 
George  Washingtoifi,  “the  keystone  of  our  political  fabric,”  the  convention 
with  unusual  accord  incorporated  in  the  Constitution  the  provision  that  the 
judges  shall  hold  their  offices  during  good  behaviour  and  shall  at  stated 
times  receive  for  their  services  a compensation  which  shall  not  be  diminished 
during  their  continuance  in  office.”  Can  there  be  any  doubt  that  the  two 

‘Sparks’  Washington,  Vol.  X,  pp.  35-36. 


INC.  509 


TAX 


things  thus  coupled  in  placc-the  clause  in  respect  of  tenure  during  good 
behavior  and  that  in  respect  of  an  undimimshable  compensation-were 
equally  coupled  in  purpose?  And  is  it  not  plain  that  their  purpose  was  to 
invest  the  judges  with  an  independence  in  keeping  with  the  delicacy  and 
importance  of  their  task  and  with  the  imperative  need  for  its  impartial  and 
fearless  performance?  Mr.  Hamilton  said  in  explanation  and  support  of  the 
provision  (Federalist,  No.  79):  “Next  to  permanency  in  office,  nothing  can 
contribute  more  to  the  independence  of  the  judges  than  a fixed  provision  tor 
their  support.  ...  In  the  general  course  of  human  nature,  a power 
over  a man’s  subsistence  amounts  to  a power  over  hts  will.  ...  e en 
lightened  friends  of  good  government  in  every  state  have  seen  cause  to  lament 
the  want  of  precise  and  explicit  precautions  in  the  state  constitutions  on  this 
head.  Some  of  these  indeed  have  declared  that  permanent  salaries  should  be 
established  for  the  judges;  but  the  experiment  has  in  some  instances  shown  that 
such  expressions  are  not  sufficiently  definite  to  preclude  legis^atn  e evasions. 
Something  still  more  positive  and  unequivocal  has  been  evinced  to  be  requis- 
ite. . . . This  provision  for  the  support  of  the  judges  bears  every 

mark  of  prudence  and  efficacy;  and  it  may  be  safely  affirmed  that,  together 
with  the  permianent  tenure  of  their  offices,  it  affords  a better  prospect  of  their 
independence  than  is  discoverable  in  the  constitutions  of  any  of  the  States 
in  regard  to  their  own  judges.”  The  several  commentators  on  the  Constitu- 
tion have  adopted  and  reiterated  this  view,^ — Judge  Story  adding.  V\  i^I^ou 
this  provision  [as  to  an  undiminishable  compensation],  the  other,  as  to  the 
tenure  of  office,  would  have  been  utterly  nugatory,  and  indeed  a mere 
mockery;”  and  Chancellor  Kent  observing:  “It  tends,  also,  to  secure  a suc- 
cession of  learned  men  on  the  bench,  who,  in  consequence  of  a certain  un- 
diminished support,  are  enabled  and  induced  to  quit  the  lucrative  pursuits 
of  private  business  for  the  duties  of  that  important  station.  . , 

2723  These  considerations  make  it  very  plain,  as  we  think,  that  tie 
primary  purpose  of  the  prohibition  against  diminution  was  not 

to  benefit  the  judges,  but,  like  the  clause  in  respect  of  tenure,  to  attract 
good  and  competent  men  to  the  bench  and  to  promote  that  independence  ot 
action  and  judgment  which  is  essential  to  the  mai:^enance  o t e 
guaranties,  limitations  and  pervading  principles  of  the  Constitution  and 
to  the  administration  of  justice  without  respect  to  persons  and  with  equal 
concern  for  the  poor  and  the  rich.  Such  being  its  purpose,  it  is  to  be  con- 
strued, not  as  a private  grant,  but  as  a limitation  imposed  in  the_  public 
interest;  in  other  words,  not  restrictively,  but  in  accord  with  its  spirit  an 
the  principle  on  which  it  proceeds.  ^ 

2724  Obviously,  diminution  may  be  effected  in  more  ways  than  one. 
Some  may  be  direct  and  others  indirect,  or  even  evasive  as  Mr. 

Hamilton  suggested.  But  all  which  by  their  necessary  operation  and 
withhold  or  take  from  the  judge  a part  of  that  which  has  been  promised  by 
law  for  his  services  must  be  regarded  as  within  the  prohibition.  Nothing 
short  of  this  will  give  full  effect  to  its  spirit  and  principle._  Here  the  plaintiff 
was  paid  the  full  compensation,  but  was  subjected  to  an  involuntary  obliga- 
tion to  pay  back  a part,  and  the  obligation  was  promptly  enforced.  Of  what 
avail  to  him  was  the  part  which  was  paid  with  one  hand  and  then  taken  back 
with  the  other?  Was  he  not  placed  in  practically  the  same  situation  as  if  it 
had  been  withheld  in  the  first  instance?  ^ Only  by  subordinating  substance  to 
mere  form  could  it  be  h.eld  that  his  compensation  was  not  diminished.  ^ Of 
course,  the  conclusion  that  it  was  diminished  is  the  natural  one.  This  is 


12  Story,  §1628;  1 Kent’s  Com.  *294;  1 Wilson’s  Works,  410,  411;  2 Tucker,  §364; 
Miller,  340-343;  1 Carson’s  Supreme  Court,  6. 


INC. 


510 


TAX 


6 9-20. 


illustrated  in  Dobbins  v.  Commissioners  of  Erie  County^  16  Pet.  435,  450, 
which  involved  a tax  charged  under  a law  of  Pennsylvania  against  a revenue 
officer  of  the  United  States  who  was  a citizen  and  resident  of  that  State. 
The  tax  was  adjusted  or  proportioned  to  his  compensation,  and  the  state 
court  sustained  it.  7 Watts  513.  In  reversing  that  decision,  this  court,  after 
showing  that  the  compensation  had  been  fixed  by  a law  of  Congress,  said: 
“Does  not  a tax  then  by  a state  upon  the  office,  diminishing  the  recompense, 
conflict  with  the  law  of  the  United  States,  which  secures  it  to  the  officer  in  its 
entireness. ^ It  certainly  has  such  an  effect;  and  any  law  of  a state  imposing 
such  a tax  cannot  be  constitutional.” 

2725  But  it  is  urged  that  whaUthe  plaintiff  was  made  to  pay  back  wp 
an  income  tax,  and  that  a like  tax  was  exacted  of  others  engaged  in 

private  employment.  ^ ^ • r j 

2726  If  the  tax  in  respect  of  his  compensation  be  prohibited,  it  can  find  no 
justification  in  the  taxation  of  other  income  as  to  which  there  is  no 

prohibition;  for,  of  course,  doing  what  the  Constitution  permits  gives  no 
license  to  do  what  it  prohibits. 

2727  The  prohibition  is  general,  contains  no  excepting  words  and  appears 
to  be  directed  against  all  diminution,  whether  for  one  purpose  or 

another;  and  the  reasons  for  its  adoption,  as  publicly  assigned  at  the  time  and 
commonly  accepted  ever  since,  make  with  impelling  force  for  the  conclusion 
that  the  fathers  of  the  Constitution  intended  to  prohibit  diminution  by  tax- 
ation as  well  as  otherwise, — that  they  regarded  the  independence  of  the 
judges  as  of  far  greater  importance  than  any  revenue  that  could  come  from 
taxing  their  salaries.  ^ 

2728  True,  the  taxing  power  is  comprehensive  and  acknowledges  tew 
exceptions.  But  that  there  are  exceptions,  besides  the  one  we  here 

recognize  and  sustain,  is  well  settled.  In  Collector  v.  Day^  11  Wall.  113,  it 
was  held  that  Congress  could  not  impose  an  income  tax  in  respect  of  the  salay^ 
of  a judge  of  a state  court;  in  Pollock  v.  Farmers'  Loan  & Trust  Co.,  157  U.  S. 
429,  585,  601,  652,  653,  it  was  held— the  full  court  agreeing  on  this  point— 
that  Congress  was  without  power  to  impose  such  a tax  in  respect  of  interest 
received  from  bonds  issued  by  a State  or  any  of  its  counties  or  municipalities; 
and  in  United  States  v.  Railroad  Co.,  17  Wall.  322,  there  was  a like  holding 
as  to  municipal  revenues  derived  by  the  city  of  Baltimore  from  its  ownership 
of  stock  in  a railroad  company.  None  of  those  decisions  was  put  on  any 
express  prohibition  in  the  Constitution,  for  there  is  none;  but  all  recognized 
and  gave  effect  to  a prohibition  implied  from  the  independence  of  the  States 
within  their  own  spheres. 

2729  When  we  consider,  as  was  done  in  those  cases,  what  is  compre- 
hended in  the  congressional  power  to  tax, — where  its  exertion  is  not 

directly  or  impliedly  interdicted, — it  becomes  additionally  manifest  that  the 
prohibition  now  under  discussion  was  intended  to  embrace  and  prevent 
diminution  through  the  exertion  of  that  power;  for,  as  this  court  repeatedly 
has  held,  the  power  to  tax  carries  with  it  “the  power  to  embarrass  and 
destroy;”  may  be  applied  to  every  object  within  its  range  “in  such  measure 
as  Congress  may  determine;”  enables  that  body  “to  select  one  calling  and 
.omit  another,  to  tax  one  class  of  property  and  to  forbear  to  tax  another;” 
and  may  be  applied  in  different  ways  to  different  objects  so  long  as  there  is 
“geographical  uniformity”  in  the  duties,  imposts  and  excises  imposed. 
McCulloch  V.  Maryland,  4 Wheat.  316,  431;  Pacific  Insurance  Co.^  v.  Soule, 
7 Wall.  433,  443;  Austin  v.  The  Aldermen,  7 Wall.  694,  699;  V eaiie  Bank  v. 
Fenno,  8 Wall.  533,  541,  548;  Knowlton  v.  Moore,  178  U.  S.  41,  92,  106; 
Treat  v.  White,  181  U.  S.  264,  268-269;  McCray  v.  United  States,  195  U.  S. 
27,  61;  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  158;  Billings  v.  United 

INC.  511 


TAX 


States,  232  U.  S.  261,  282;  Brushaher  v.  Union  Pacific  R.  R.  Co.,  240  U.  S. 
1,  24-26.  Is  it  not  therefore  morally  certain  that  the  discerning  statesmen 
who  framed  the  Constitution  and  were  so  sedulously  bent  on  securing  the 
independence  of  the  judiciary  intended  to  protect  the  compensation  of  the 
judges  from  assault  and  diminution  in  the  name  or  form  of  a tax.^  Could  not 
the  purpose  of  the  prohibition  be  wholly  thwarted  if  this  avenue  of  attack 
were  left  open.^  Certainly  there  is  nothing  in  the  words  of  the  prohibition 
indicating  that  it  is  directed  against  onel  egislative  power  and  not  another; 
and  in  our  opinion  due  regard  for  its  spirit  and  principle  requires  that  it  be 
taken  as  directed  against  them  all. 

2730  This  view  finds  support  in  rulings  in  Pennsylvania,  Louisiana  and 
North  Carolina  made  under  like  constitutional  restrictions,  Common- 
wealth ex  rel.  v.  Mann,  5 Watts  & Serg.  403,  415,  et  seq.*;  New  Orleans  v. 
Lea,  14  La.  Ann.  197;  48  N.  C.,  Appendix;  N.  C.  Public  Documents  1899, 
Doc.  No.  8,  p.  95;  131  N.  C.  692;  Purnell  v.  Page,  133  N.  C.  125,  and  has 
strong  sanction  in  the  actual  practice  of  the  Government,  to  which  we  now 
advert. 

2731  No  attempt  was  made  to  tax  the  compensation  of  federal  judges 
prior  to  1862.  A statute  of  that  year,  c.  119,  §86,  12  Stat.  472, 

with  is  amendments,  subjected  the  salaries  of  all  civil  officers  of  the  United 
States  to  an  income  tax  of  three  per  cent,  and  was  construed  by  the  revenue 
officers  as  including  the  compensation  of  the  President  and  the  judges.  Chief 
Justice  Taney,  the  head  of  the  judiciary,  wrote  to  the  Secretary  of  the  Treas- 
ury a letter  of  protest  (157  U.  S.  701),  based  on  the  prohibition  we  are  con- 
sidering, and  in  the  course  of  the  letter  said: 

“The  act  in  question,  as  you  interpret  it,  diminishes  the  compensation  of 
every  judge  three  per  cent,  and  if  it  can  be  diminished  to  that  extent  by  the 
name  of  a tax,  it  may  in  the  same  way  be  reduced  from  time  to  time  at  the 
pleasure  of  the  legislature. 

“The  Judiciary  is  one  of  the  three  great  departments  of  the  government, 
created  and  established  by  the  Constitution.  Its  duties  and  powers  are 
specifically  set  forth,  and  are  of  a character  that  requires  it  to  be  perfectly 
independent  of  the  two  other  departments,  and  in  order  to  place  it  beyond  the 
reach  and  above  even  the  suspicion  of  any  such  influence,  the  power  to  reduce 
their  compensation  is  expressly  withheld  from  Congress,  and  excepted  from 
their  powers  of  legislation. 

“Language  could  not  be  more  plain  than  that  used  in  the  Constitution. 
It  is  moreover  one  of  its  most  important  and  essential  provisions.  For  the 
articles  which  limit  the  powers  of  the  legislative  and  executive  branches  of 
the  government,  and  those  wffiich  provide  safeguards  for  the  protection  of 
the  citizen  in  his  person  and  property,  would  be  of  little  value  without  a judici- 
ary to  uphold  and  maintain  them,  which  was  free  from  every  influence, 
direct  or  indirect,  that  might  by  possibility  in  times  of  political  excitement 
warp  their  judgments. 

“Upon  these  grounds  I regard  an  act  of  Congress  retaining  in  the  Treasury 
a portion  of  the  compensation  of  the  judges,  as  unconstitutional  and  void.’’ 

2732  The  collection  of  the  tax  proceeded,  and,  at  the  suggestion  of  the  Chief 
Justice,  this  court  ordered  his  protest  spread  on  its  records.  In 

1869  the  Secretary  of  the  Treasury  referred  the  question  to  the  Attorney 
General  (Judge  Hoar)  and  that  officer  rendered  an  opinion  in  substantial 

*The  tax  condemned  was  levied  under  a provision,  in  a general  revenue  law,  charging 
a tax  of  tw’O  per  cent,  “upon  all  salaries  and  emoluments  of  office,  created  or  held  by  or 
under  the  constitution  or  laws  of  this  commonwealth,  and  by  or  under  any  incorporation, 
institution,  or  company  incorporated  by  the  said  commonwealth,  where  such  salaries  or 
emoluments  exceed  two  hundred  dollars.”  Act  No.  232,  §2,  Penn.  Laws  1840,  p.  613; 
Act  No.  117,  §9,  Penn.  Laws  1841,  p.  310. 

INC.  512  TAX 


t 


6-9-20. 


accord  with  Chief  Justice  Taney’s  protest,  and  also  advised  that  the  tax  on  the 
President’s  compensation  was  likewise  invalid.  13  Op.  A.  G.  161.  The  tax 
on  the  compensation  of  the  President  and  the  judges  was  then  discontinued, 
and  the  amounts  theretofore  collected  were  all  refunded, — a part  through 
administrative  channels  and  a part  through  the  action  of  the  Court  of  Claims 
and  ensuing  appropriations  by  Congress.  W ayne  v.  United  States,  26  Ct. 
Cls.  274;  c.  311,  27  Stat.  306.  Thus  the  Secretary  of  the  Treasury,  the 
accounting  officers,  the  Court  of  Claims  and  Congress  accepted  and  gave 
effect  to  the  view  expressed  by  the  Attorney  General.  In  the  Income  Tax 
Act  of  1894,  c.  349,  §27,  et  seq.,  28  Stat.  509,  nothing  was  said  about  the  com- 
pensation of  the  judges;  but  Mr.  Justice  Field  regarded  it  as  included  and 
gave  that  as  one  reason  for  joining  in  the  decision  holding  the  act  unconstitu- 
tional. 157  U.  S.  604-606.  On  the  rehearing  the  Attorney  General  (Mr. 
Olney)  frankly  said  in  his  brief:  “There  has  never  been  a doubt  since  the 
opinion  of  Attorney  General  Hoar  that  the  salaries  of  the  President  and 
judges  were  exempt.”  The  income  tax  acts  of  1913,  1916  and  1917  (c.  16,38 
Stat.  168;  c.  463,  39  Stat.  758;  c.  63,  40  Stat.  329)  severally  excepted  the 
compensation  of  the  judges  then  in  office, — also  that  of  the  President  for  the 
then  current  term.  In  short,  during  a period  of  more  than  one  hundred  and 
twenty  years  there  was  but  a single  real  attempt  to  tax  the  judges  in  respect 
of  their  compensation,  and  that  attempt  soon^  was^  disapproved  and  pro- 
nounced untenable  by  the  concurring  action  of  judicial,  executive  and  legis- 
lative officers.  And  so  it  is  apparent  that  in  the  actual  practice  of  the  Gov- 
ernment the  prohibition  has  been  construed  as  embracing  and  preventing 
diminution  by  taxation. 

2733  Does  the  Sixteenth  Amendment  authorize  and  support  this^  tax 
and  the  attendant  diminution;  that  is  to  say,  does  it  bring  within 

the  taxing  power  subjects  theretofore  excepted?  The  court  below  answered 
in  the  negative;  and  counsel  for  the  Government  say,  “It  is  not,  in  view  of 
recent  decisions,  contended  that  this  Amendment  rendered  anything  taxable 
as  income  that  was  not  so  taxable  before.”  We  might  rest  the  matter  here, 
but  it  seems  better  that  our  view  and  the  reasons  therefor  be  stated  in  this 
opinion,  even  if  there  be  some  repetition  of  what  recently  has  been  said  in  other 
cases. 

2734  Preliminarily  we  observe  that,  unless  there  be  some  real  conflict 
between  the  Sixteenth  Amendment  and  the  prohibition,  in  Article  III, 

section  1,  making  the  compensation  of  the  judges  undiminishable,  effect  must 
be  given  to  the  latter  as  well  as  to  the  former;  and  also  that  a purpose  to 
depart  from  or  imperil  a constitutional  principle  so  widely  esteemed  and  so 
vital  to  our  system  of  government  as  the  independence  of  the  judiciary  is  not 
lightly  to  be  assumed. 

2735  In  Knowlton  v.  Moore,  supra,  p.  95,  this  court  said:  “The  necessities 
which  gave  birth  to  the  Constitution,  the  controversies  which  pre- 
ceded its  formation,  and  the  conflicts  of  opinion  which  were  seltled  by  its 
adoption,  may  properly  be  taken  into  view  for  the  purpose  of  tracing  to  its 
source  any  particular  provision  of  the  Constitution,  in  order  thereby  to  be 
enabled  to  correctly  interpret  its  meaning.”  This  sound  rule  is  as  applicable 
to  the  Amendments  as  to  the  provisions  of  the  original  Constitution. 

2736  Let  us  turn  then  to  the  circumstances  in  which  this  Amendment 
was  proposed  and  ratified  and  to  the  controversy  it  was  intended  to 

settle.  By  the  Constitution  all  direct  taxes  were  required  to  be  apportioned 
among  the  several  States  according  to  their  population,  as  ascertained  by  a 
census  or  enumeration  (Art.  I,  §2,  cl.  3,  and  §9,  cl.  4),  but  no  such  requirement 
was  imposed  as  to  other  taxes.  And  apart  from  capitation  taxes,  with  which 
we  now  are  not  concerned,  no  rule  was  given  for  determining  what  taxes  were 


INC. 


513  TAX 


direct  and  therefore  to  be  apportioned,  or  what  were  indirect  and  not  within 
that  requirement.  Controversy  ensued  and  ultimately  centered  around  the 
right  classification  of  income  from  taxable  real  estate  and  from  investments 
in  taxable  personal  property.  The  matter  then  came  before  this  court  in 
Pollock  V.  Farmers^  Loan  & Trust  Co.,  157  U.  S.  429;  158  U.  S.  601;  and  the 
decision  when  announced  disclosed  that  the  same  differences  in  opinion, 
existing  elsewhere  were  shared  by  the  members  of  the  court, — five,  the  con- . 
trolling  number,  regarding  a tax  on  such  income  as  in  effect  a direct  tax  on.  the  . 
property  from  which  it  arose  and  therefore  as  requiring  apportionment,  and 
four  regarding  it  as. indirect  and  not  to  be  apportioned.  Much  of  the  law-, 
then  under  consideration  had  been  framed  according  to  the  latter  view  and 
because  of  this  and  the  adjudged  inseparability  of  other  portions  the  entire 
law  was  held  invalid.  Afterwards,  to  enable  Congress  to  reach  all  taxable 
income  more  conveniently  and  effectively  than  would  be  possible  as  to  much 
of  it  if  an  apportionment  among  the  States  were  essential,  the  Sixteenth 
Amendment  was  proposed  and  ratified.  In  other  words,  the  purpose  of  the 
Amendment  was  to  eliminate  all  occasion  for  such  an  apportionment  because  of 
the  source  from  which  the  income  came, — a change  in  no  wise  affecting  the 
power  to  tax  but  only  the  mode  of  exercising  it.  The  message  of  the  Presi- 
dent recommending  the  adoption  by  Congress  of  a joint  resolution  pro- 
posing the  Amendment,  the  debates^  on  the  resolution  . by  which  it  was 
proposed,  and  the  public  appeals® — corresponding  to  those  in  the  Federalist — 
made  to  secure  its  ratification  leave  no  doubt  on  this  point.  And  that  the 
proponents  of  the  Amendmient  in  drafting  it  lucidly  and  aptly  expressed  this 
as  its  object  is  shown  by  its  words: 

‘‘The  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes, 
from  whatever  source  derived,  without  apportionment  among  the  several 
states,  and  without  regard  to  any  census  or  enumeration.” 

2737  True,  Governor  Hughes,  of  New  York,  in  a message  laying  the  Amend- 
ment before  the  legislature  of  that  State  for  ratification  or  rejection, 

expressed  some  apprehension  lest  it  might  be  construed  as  extending  the  . 
taxing  power  to  income  not  taxable  before;  but  his  message  promptly  brought 
forth  from  statesmen  who  participated  in  proposing  the  Amendment  such 
convincing  expositions  of  its  purpose^,  as  here  stated,  that  the  apprehension 
was  effectively  dispelled  and  ratification  followed. 

2738  * Thus  the  genesis  and  words  of  the  Amendment  unite  in  showing  that 

it  does  not  extend  the  taxing  power  to  new  or  excepted  subjects, 
but  merely  removes  all  occasion  otherwise  existing  for  an  apportionment 
among  the  States  of  taxes  laid  on  income,  whether  derived  from  one  source 
or  another^.  And  we  have  so  held  in  other  cases. 

2739  In  Brushaher  v.  Union  Pacific  R.  R.  Co.,  240  U.  S.  1,  where  the 
purpose  and  effect  of  the  Amendment  were  first  drawn  in  question 

the  Chief  Justice  reviewed  at  length  the  legislative  and  judicial  action  which 
prompted  its' adoption  and  then,  referring  to  its  text  and  speaking  for  a unani- 
mous court,  said,  pp.  17-18: 

• “It  is  clear  on  the  face  of  this  text  that  it  does  not  purport  to  confer 
power  to  levy  income  taxes  in  a generic  sense — an  authority  already  possessed 

Tong.  Rec.,  Vol.  44^  p.  3344. 

Tong.  Rec.,  Vol.  44,  pp.  1568-1570,  3377,  3900,  4067,  4105-4107,  4108-4121,  4389-4441. 

Tong.  Rec.,  Vol.  45,  pp.  1694-1699,  2245-2247,  2539-2540. 

. Tong.  Rec.,  Yol  45,  pp.  1694-1699,  2245-2247,  2539-2540. 

®Jn  passing  the  income  tax  law  of  1919  Congress  refused  to  treat  interest  received  from 
bonds  issued  bv  a State  or  anv  of  its  counties  or  municipalities  as  within  the  ta.xing  power, 
Co'ngyRcc.,  col.  57,  pp.  553,  774-777,_ 2988;  ch.  18,  §213,  40_Stat.  1065;  and  in  the  regula- 
tions issued  under  that  law  the  administrative  ofiicers  recogni/.e  that  the  salaries  and  emol'u- 
inents-of  thc.olhccrs  of  a State  and  its  political  subdivisions,  arc  not  taxable  by  the  Uni.te'd 
States.  Reg.  45,  published  1920,  pp.  47,  313. 

INC.  514  TAX 


6-9-20. 


and  never  cuestioned-or  to  limit  and  distinguish  between  one  kind  of  income 
t’xes  and  another,  but  that  the  whole  purpose  of  the  Amendment  was  to 
re'ieve  all  income  taxes  when  imposed  from  apportionment  from  a consider- 
ation of  th^  source  whence  the  income  was  derived.  _ Indeed  in  the  light  of 
th'  historv  which  we  have  given  and  of  the  decision  in  the  Pollock  ®nd 

Ihe  ground  upon  which  the  ruling  in  that  case  was  based  there  is  n°  escape 
fronf  the  condusion  that  the  Amendment  was  drawn  for  fhepypose  of  doing 
awav  for  the  future  with  the  principle  upon  which  the  Pollock  CaiC  wa. 
cided  that  is,  of  determining  whether  a tax  on  income  was  not  b)  a 

consideration  of  the  burden  placed  on  the  taxed  income  upon  which  it  directly 
operated,  but  bv  taking  into  view  the  burden  which  resulted  on  the  Proper-Y 
from  which  the  income  was  derived,  since  in  express  terms  the  Amendment 
provides  that  income  taxes,  from  whatever  source  the  mcome  was  dented, 
shall  not  be  subject  to  the  regulation  of  apportionment.  ^ 

2740  What  was  there  said  was  reaffirmed  and  app'md  m 

Mining  Co.,  240  U.  S.  103,  112-113,  and  Peck  & Co.  y.  Lowe,  247 
U.  S.  leTm  and  in  Eisner  v.  Macon:ber,-V . S.-,  decided  at  the  presen 
term  we  again  held,  citing  the  prior  cases,  that  the  Amendment  did  not 
e.xte:nd  the  faxing  power  to  new  subjects,  but  merely 

which  otherwise  might  exist  for  an  apportionment  among  the  States  ot  taxe 

2741*"  After* further  consideration,  we  adhere  to  that  view  and  accordingly 
hold  that  the  Sixteenth  Amendment  does  not  authorize  or  support 

Apart  frorn  his  salary,  a federal  judge  is  as  mu^  within  the  taxing 
power  as  other- men  are.  If  he  has  a hom-C  or  other  proper  y,  • 
be  taxed  just  as  if  it  belonged  to  another.  If  he  has  an  income  ctheyh^  h s 
salary  it  also  may  be  taxed  in  the  same  way.  And,  speaking  generally,  his 
duties’and  obligations  as  a citizen  areffiot  different  from 

But  for  the  common  good— to  render  him,  in  the  words_  of  John  Marshal 

“perfectly  and  completely  independent,  with  nothing  to 

Ifim  but  God  and  his  conscience”— his  compensation  is  protected 

ution  in  any  form,  whether  by  a tax  or  otherwise,  and  is  assured  to  him  in 

entirety  for  his  support.  ^ >• 

2743  ’The  court  below  concluded  that  the  compensation  was  not  d'- 
minished,  and  regarded  this  as  inferable  ftom  our  decisions  in  Peck 
& Co.  V.  Lowe,  247  U.  S.  165,  174-175,  and  United  States  Glue  Co.  v.  Oak 
Greet  ibid  321  329.  We  think  neither  case  tends  to  support  that  view. 
Each’related  to’a  business-one  to  exportation,  the  other  ^“yt^y^y.ythe 
merce-which  the  taxing  power--of  Congress  m one  case,  of  a State  m the 
other— was  restrained  from  directly  burdening;^  and  the  holding  m both  wa, 
that  an  income  tax  laid,  not  on  the  gross  receipts,  but  on 
remaining  after  all  expenses  were  paid  and  losses  adjusted  tiotdirectly 
burden  the  business,  but  only  indirectly  and  remotely  afccled  it.  "ore  1 1 
Constitution  expressly  forbids  diminution  of  the  ^ ..‘^“^P^erafse’ 

meaning,  as  we  have  shown,  diminution  by  taxation  as  ^ 
the  taxing  act  directs  that  the  compensation— the  full  sum,  ^d^c 

tion  for  expenses-  be  included  in  computing  the  net  income,  on  whic^he  tax 
is  laid  If  the  compensation  be  the  only  income,  the  tax  .alls  on  it  alone, 
and,  if  there  be  other  income,  the  inclusion  of  the  compensation  augments 
tlie  tax  accordingly.  In  eillier  event  the  compensation  suffers  a diminution 
to  the  extent  tliat  it  is  taxed.  ' _ 

2744  We  conclude  tlmt  the  tax  was  imposed  contrary  to  the  constitutional 

prohibition  and  so  must  be  adjudged  invalid. 

‘ Ivdgment  reversed. 


INC. 


515  TAX 


(Dissenting  opinion  in  Evans  vs.  Gore,  above.) 

Mr.  Justice  Holmes,  dissenting. 

2745  This  is  an  action  brought  by  the  plaintiff  in  error  against  an  acting 
89  Collector  of  Internal  Revenue  to  recover  a portion  of  the  income  tax 

803  paid  by  the  former.  The  ground  of  the  suit  is  that  the  plaintiff  is 
entitled  to  deduct  from  the  total  of  his  net  income  six  thousand 
dollars,  being  the  amount  of  his  salary  as  a judge  of  the  District  Court  of  the 
United  States.  The  Act  of  February  24,  1919,  c.  18,  §210,  40  Stat.  1057, 
1062,  taxes  the  net  incomm  of  every  individual,  and  §213,  p.  1065,  requires  the 
compensation  received  by  the  judges  of  the  United  States  to  be  included  in  the 
gross  income  from  which  the  net  income  is  to  be  computed.  This  was  done 
by  the  plaintiff  in  error  and  the  tax  was  paid  under  protest.  He  contends  that 
the  requirement  mentioned  and  the  tax,  to  the  extent  that  it  was  enhanced 
by  consideration  of  the  plaintiff’s  salary,  are  contrary  to  Article  3,  Section  1, 
of  the  Constitution,  which  provides  that  the  compensation  of  the  judges 
shall  not  be  diminished  during  their  continuance  in  office.  Upon  demurrer 
judgment  was  entered  for  the  defendant,  and  the  case  comes  here  upon  the 
single  question  of  the  validity  of  the  above  mentioned  provisions  of  the  act. 

2746  The  decision  below  seems  to  me  to  have  been  right  for  two  distinct 
reasons:  that  this  tax  would  have  been  valid  under  the  original 

Constitution,  and  that  if  not  so,  it  was  made  lawful  by  the  Sixteenth  Amend- 
ment. In  the  first  place  I think  that  the  clause  protecting  the  compensation 
of  judges  has  no  reference  to  a case  like  this.  The  exemption  of  salaries  from 
diminution  is  intended  to  secure  the  independence  of  the  judges,  on  the  ground, 
as  it  was  put  by  Hamilton  in  the  Federalist,  (No.  79,)  that  ‘a  power  over  a 
man’s  subsistence  amounts  to  a power  over  his  will.’  That  is  a very  good 
reason  for  preventing  attempts  to  deal  with  a judge’s  salary  as  such,  but 
seems  to  me  no  reason  for  exonerating  him  from  the  ordinary  duties  of  a citi- 
zen, which  he  shares  with  all  others.  To  require  a man  to  pay  the  taxes  that 
all  other  men  have  to  pay  cannot  possibly  be  made  an  instrument  to  attack 
his  independence  as  a judge.  I see  nothing  in  the  purpose  of  this  clause 
of  the  Constitution  to  indicate  that  the  judges  were  to  be  a privileged  class, 
free  from  bearing  their  share  of  the  cost  of  the  institutions  upon  which  their 
well-being  if  not  their  life  depends. 

2747  I see  equally  little  in  the  letter  of  the  clause  to  indicate  the  intent 
supposed.  The  tax  on  net  incomes  is  a tax  on  the  balance  of  a mutual 

account  in  which  there  always  are  some  and  may  be  many  items  on  both 
sides.  It  seems  to  me  that  it  cannot  be  affected  by  an  inquiry  into  the  source 
from  which  the  items  more  or  less  remotely  are  derived.  Obviously  there  is 
some  point  at  which  the  immunity  of  a judge’s  salary  stops,  or  to  put  it  in  the 
language  of  the  clause,  a point  at  which  it  could  not  be  said  that  his  com- 
pensation was  diminished  by  a charge.  If  he  bought  a house  the  fact  that  a 
part  or  the  whole  of  the  price  had  been  paid  from  his  compensation  as  judge 
would  not  exempt  the  house.  So  if  he  bought  bonds.  Yet  in  such  cases  the 
advantages  of  his  salary  would  be  diminished.  Even  if  the  house  or  bonds 
were  bought  with  other  money  the  same  would  be  true,  since  the  money  would 
not  have  been  free  for  such  an  application  if  he  had  not  used  his  salary  to 
satisfy  other  more  peremptory  needs.  At  some  point,  I repeat,  money  re- 
ceived as  salary  loses  its  specific  character  as  such.  Money  held  in  trust 
loses  its  identity  by  being  mingled  with  the  general  funds  of  the  owner. 
I see  no  reason  why  the  same  should  not  be  true  of  a salary.  But  I do  not 
think  that  the  result  could  be  avoided  by  keeping  the  salary  distinct.  I 
think  that  the  moment  the  salary  is  received,  whether  kept  distinct  or  not,  it 
becomes  part  of  the  general  income  of  the  owner,  and  is  mingled  with  the 
rest,  in  theory  of  law,  as  an  item  in  the  mutual  account  with  the  United 

516 


INC. 


TAX 


6-9-20. 


States.  I see  no  greater  reason  for  exempting  the  recipients  while  they  still 
have  the  income  as  income  than  when  they  have  investeci  it  in  a house  or  bond. 

2748  The  decisions  heretofore  reached  by  this  Court  seem  to  me  to  justify 
my  conclusion.  In  Peck  & Co.  v.  Lowe^  247  U.  S.  165,  a tax  was 

levied  by  Congress  upon  the  income  of  the  plaintiff  corporation.  More  than 
two-thirds  of  the  income  were  derived  from  exports  and  the  Constitution  in 
terms  prohibits  any  tax  on  articles  exported  from  any  State.  By  construc- 
tion it  had  been  held  to  create  ‘a  freedom  from  any  tax  which  directly  burdens 
the  exportation,’  Fairbank  v.  United  States,  181  U.  S.  283,  293.  The  pro- 
hibition was  unequivocal  and  express,  not  merely  an  inference  as  in  the  present 
case.  Yet  it  was  held  unanimously  that  the  tax  was  valid.  “It  is  not  laid 
on  income  from  exportation  in  a discriminative  way,  but  just  as  it  is  laid  on 
other  income.  . . . There  is  no  discrimination.  At  most,  exportation 

is  affected  only  indirectly  and  remotely.  The  tax  is  levied  . . . after 
the  recipient  of  the  income  is  free  to  use  it  as  he  chooses.  Thus  what  is 
taxed — the  net  income  is  as  far  removed  from  exportation  as  are  articles  in- 
tended for  export  before  the  exportation  begins.”  247  U.  S.  174,  175.  All 
this  applies  with  even  greater  force  when,  as  I have  observed,  the  Constitu- 
tion has  no  words  that  forbid  a tax.  In  United  States  Glue  Co.  v.  Oak  Creek, 
247  U.  S.  321,  329,  the  same  principle  was  affirmed  as  to  interstate  com- 
merce and  it  was  said  that  if  there  was  no  discrimination  against  such 
commerce  the  tax  constituted  one  of  the  ordinary  burdens  of  Government 
from  which  parties  were  not  exempted  because  they  happened  to  be  engaged 
in  commerce  among  the  States. 

2749  A second  and  independent  reason  why  this  tax  appears  to  me  valid 
is  that,  even  if  I am  wrong  as  to  the  scope  of  the  original  document, 

the  Sixteenth  Amendment  justifies  the  tax,  whatever  would  have  been  the  law 
before  it  was  applied.  By  that  amendment  Congress  is  given  power  to 
“collect  taxes  on  incomes  from  whatever  source  derived.”  It  is  true  that  it 
goes  on  “without  apportionment  among  the  several  States,  and  without 
regard  to  any  census  or  enumeration,”  and  this  shows  the  particular  difficulty 
that  led  to  it.  But  the  ortly  cause  of  that  difficulty  was  an  attempt  to  trace 
income  to  its  source,  and  it  seems  to  me  that  the  Amendment  was  intended  to 
put  an  end  to  the  cause  and  not  merely  to  obviate  a single  result.  I do  not 
see  how  judges  can  claim  an  abatement  of  their  income  tax  on  the  ground  that 
an  item  in  their  gross  income  is  salary,  when  the  power  is  given  expressly  to 
tax  incomes  from  whatever  source  derived. 

I 


Mr.  Justice  Brandeis  concurs  in  this  opinion. 


INC, 


517 


TAX 


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XAT 


.0X1 


8-16-20. 


(T.  D.3029.) 

2754  Losses  incurred  outside  of  one’s  principal  regular  business  (Act 
(1310)  of^l913). — The^appendcd  decision  [beginningat  ^2755]  of  the  United 

States  Circuit  Court  of  Appeals,  for  the  Second  Circuit,  in  the 
case  of  Eugene  W.  Mente  vs.  Mark  Eisner,  Collector,  is  published  not  as  a 
ruling  but  for  the  information  of  internal  revenue  officers  and  others  concerned. 
(T.  D.  3029,  signed  by  Commissioner  Wm.  M.  Williams,  and  dated  June  9, 
1920.) 

{The  opinion  referred  to  in  T.  D.  3029,  112754,  follozvs.) 

United  States  Circuit  Court  of  Appeals  for  the  Second  Circuit. 

Eugene  W.  Mente,  Plaintiff-in-Error  vs.  Mark  Eisner,  Collector  of  Internal 
Revenue,  Defendant-in-Error. 

(May  3,  1920.) 

WARD,  Circuit  Judge: 

2755  Section  II  subdivision  2B  of  the  Act  of  October  3,  1913,  provides 
that  in  computing  net  income  for  purposes  of  normal  tax  there 

shall  be  allowed  as  a deduction  * * Fourth:  I.osses  actually  sustained 

during  the  year,  incurred  in  trade,  or  arising  from  fires,  storms  or  shipwreck 
and  not  compensated  for  by  insurance  or  otherwise.” 

27  56  Mente,  a member  of  the  firm  of  Mente  & Company,  engaged  in  the 
business  of  manufacturing  jute  bags  and  bagging,  cotton  bags  and 
materials  for  covering  cotton  bales,  filed  his  income  returns  for  the  year 
March  1 to  December  31,  1913,  and  for  the  whole  year  of  1914.  He  had 
for  some  three  years  been  buying  and  selling  cotton  on  the  Cotton  Exchange 
for  his  individual  account,  in  no  way  connected  with  the  business  of  Alente 
& Company,  and  he  deducted  from  his  gross  income  in  each  year  losses 
sustained  in  the  year  resulting  from  these  transactions  as  “losses  incurred 
in  trade.” 

27  57  Eisner,  as  Collector  of  Internal  Revenue  for  the  Third  District 
of  the  State  of  New  York,  assessed  an  additional  tax  upon  these  de- 
ductions which  Mente  paid  under  protest,  taking  an  appeal  to  the  Com- 
missioner of  Internal  Revenue  under  Secs.  3220  and  3228  U.  S.  Rev.  Stat. 
and  the  Regulations  of  the  Secretary  of  the  Treasury  in  pursuance  thereof, 
who  rejected  his  claim.  Thereupon  Mente  began  this  action  against  Eisner 
as  Collector  to  recover  the  amounts  so  paid  with  interest  and  costs. 

2758  Treasury  Decision  2090,  dated  October  14,  1914,  reads: 

“Loss,  to  be  deductible,  must  be  an  absolute  loss,  not  a speculative 
or  fluctuating  valuation  of  continuing  investment,  but  must  be  an 
actual  loss,  actually  sustained  and  ascertained,  during  the  tax  year 
for  which  the  deduction  is  sought  to  be  made;  it  must  be  incurred  in 
trade  and  be  determined  and  ascertained  upon  an  actual,  a completed,  a 
closed  transaction.  The  term  dn  trade’  as  used  in  the  law,  is  held  to 
mean  the  trade  or  trades  in  which  the  person  making  the  return  is 
engaged;  that  is,  in  which  he  has  invested  money  otherwise  than  for 
the  purpose  of  being  employed  in  isolated  transactions,  and  to  which  he 
devotes  at  least  a part  of  his  time  and  attention.  A person  may  engage 
in  more  than  one  trade,  and  may  deduct  losses  incurred  in  all  of  them; 
provided,  that  in  each  trade  the  above  requirements  are  met.  As  to 
losses  on  stocks,  grain,  cotton,  etc.,  if  these  are  incurred  by  a person 
engaged  in  trade  to  which  the  buying  and  selling  of  stocks,  etc.,  arc 
incident  as  a part  of  the  business,  as  by  a member  of  a stock,  grain. 


INC. 


519  TAX 


or  cotton  exchange,  such  losses  may  be  deducted.  A person  can  be 
engaged  in  more  than  one  business,  but  it  must  be  clearly  shown  in  such 
cases  that  he  is  actually  a dealer,  or  trader,  or  manufacturer,  or  what- 
ever the  occupation  may  be,  and  is  actually  engaged  in  one  or  more 
lines  of  recognized  business,  before  losses  can  be  claimed  with  respect 
to  either  or  more  than  one  line  of  business,  and  his  status  as  such  dealer 
must  be  clearly  established.’’ 

2759  Both  parties  having  moved  for  the  direction  of  a verdict,  Judge 
Grubb  directed  a verdict  in  favor  of  the  defendant. 

2760  We  think  that  the  language  “losses  incurred  in  trade”  are  correctly 
construed  by  the  Treasury  Department  as  meaning  in  the  actual 

business  of  the  taxpayer  as  distinguished  from  isolated  transactions.  If  it 
had  been  intended  to  permit  all  losses  to  be  deducted  it  would  have  been  easy 
to  say  so.  Some  effect  must  be  given  to  the  words  “in  trade.” 

2761  There  is  an  inconsistency  in  making  profits  derived  from  such  trans- 
actions a part  of  the  taxpayer’s  gross  income  and  on  the  other  hand 

allowing  him  no  deduction  for  losses.  But  tax  laws  are  not  required  to  be 
perfect  or  even  consistent.  It  must  be  determined  from  the  facts  in  each  case 
whether  or  not  the  losses  claimed  to  be  deducted  have  been  incurred  in  a 
business. 

2762  In  this  case  the  court  must  be  taken  to  have  found  as  matter  of  fact 
that  these  transactions  in  1913  and  1914  did  not  constitute  a business. 

Such  a finding  is  binding  upon  us. 

Judgment  affirmed. 


(T.  D.  3032.) 

[Matter  in  italics  is  new;  that  in  hold  face  brackets  [ ] is  old  matter  cut  out.] 

2763  Change  in  accounting  period : Article  26,  Regulations  45,  amended. — 

801  Article  26  of  Regulations  45  is  hereby  amended  to  read  as  follows: 

Art.  26.  Change  in  accounting  period. — If  a taxpayer  changes  his 
accounting  period,  and  not  merely  his  taxable  year  to  conform  with  his 
existing  accounting  period,  he  shall  as  soon  as  possible  give  to  the  collector 
for  transmission  to  the  Commissioner  written  notice  of  such  change  and  of  his 
reasons  therefor.  The  Commissioner  will  not  approve  a change  of  the  basis 
of  computing  net  income  unless  such  notice  is  given  at  a time  which  is  both 
(a)  at  least  thirty  days  before  the  due  date  of  the  taxpayer’s  return  on  the 
basis  of  his  existing  taxable  year  and  (b)  at  least  thirty  days  before  the  due 
date  of  his  separate  return  [on  the  basis] /or  the  period  between  the  close  of  the 
existing  taxable  year  and  the  date  designated  as  the  close  of  the  proposed  taxable 
year.  The  due  date  of  the  separate  return  for  such  period  is  the  fifteenth  day  of 
the  third  month  following  the  close  of  that  period.  If  the  change  in  the  basis  of 
computing  the  net  income  of  the  taxpayer  is  approved  by  the  Commissioner, 
the  taxpayer  shall  thereafter  make  his  returns  upon  the  basis  of  the  new 
accounting  period  in  accordance  with  the  requirements  of  section  226  of  the 
statute  and  his  net  income  shall  be  computed  as  therein  provided.  See 
Article  431  [1fl862].  (T.  D.  3032,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  June  11,  1920.) 


INC. 


520  TAX 


7-8-20. 


2764  Substitution  by  collecting  agent  of  proper  certificate  for  improper 
1659  form  accompan3ring  item  presented  for  collection.  Receipt  is  ac- 
knowledged  of  your  letter  dated  May  5,  1920,  stating  that  numerous 
coupons  are  received  by  you  attached  to  the  wrong  forms  o owners  ip 
certificates,  which  are  returned  to  the  owners  with  the  request  that  proper 
forms  be  substituted.  As  this  practice  results  m a large  number  ot  coupons 
being  held  by  you,  it  is  suggested,  in  case  an  item  comes  to  your  bank  tor 
collection,  accompanied  by  an  erroneous  form  of  certificate,  t a you  v, 
permitted  to  transfer  the  necessary  information  from  the  erroneous  to  the 
proper  form,  and  the  following  be  stamped  in  the  lower  left-hand  corner: 

(Name  of  bank) 


By; Assistant  Cashier.” 

2765  You  are  advised  that  the  method  of  procedure  suggested  has  the  ap- 
proval of  this  office,  and  you  are  permitted  to  execute  certificates  ot 
ownership  in  such  cases,  provided  that  you  forward  the  original  certificate 
which  was  erroneously  executed  on  the  wrong  form  with  the  proper  torm 
executed  by  you,  the  original  certificate  bearing  a notation  substantially  as 

follows:  “Superseded  by  ownership  certificate.  Form  , designating 

the  form  of  certificate  executed  by  you  as  agent.  (Letter  to  a s^ubscriber, 
signed  by  Commissioner  Wm.  M.  Williams,  and  dated  June  10,  1920.)  _ 
*Comment.  It  is  to  be  noted  that  the  permission  granted  as  above  indi- 
cated is  in  response  to  a specific  request  for  authority.  The  Corporation 
Trust  Company. 


(T.  D.  3037.) 

2766  [Comment:  T.  D.  3037,  incorporating  a decision  of  the ^ United 
2713  States  Supreme  Court,  in  the  case  of  Walter  Evans,  Plmntm  in 
Error,  vs.  J.  Rogers  Gore,  Acting  Collector  of  Internal  Revenue 
for  the  District  of  Kentucky,  (Taxability  of  Salaries  of  President  and  federal 
Judges)  [1I2713I,  is  published  not  as  a ruling  of  the  Treasury  Department, 
but  for  the  information  of  Internal  Revenue  officers  and  others  concerned. 
— The  Corporation  Trust  Company,  June  21,  1920.] 


(T.  D.  3042). 


2767  Procedure  relative  to  service  of  warrants  of  distraint.— Section  250  (f) 

2016  of  the  Revenue  Act  of  1918  provides:  ^ 

“In  any  case  in  which  in  order  to  enforce  payment  of  a tax  it  > 
is  necessary  of  a collector  to  cause  a warrant  of  distraint  to  be  served,  ^ 
there  shall  also  be  added  as  part  of  the  tax  the  sum  of  $5.”_ 

2768  The  $5.00  added  as  a part  of  the  tax,  under  the  provisions^  contained 
in  Section  250(f)  of  the  Revenue  Act  of  1918,  where  it  becomes 

necessary  for  a collector  to  cause  a warrant  of  distraint  to  be  served,  is  ap- 
plicable only  to  income,  war  profits  and  excess  profits  taxes. 

2769  The  following  procedure,  therefore,  is  prescribed  with  respect  to 
the  service  of  warrants  of  distraint: 

“In  serving  distraint  warrants  the  mode  of  procedure  followe^ 
should  conform  to  the  mode  of  procedure  prescribed  by  the  State 
Territory,  in  which  the  warrant  of  distraint  is  to  be  served  for  the 
process.”  (T.  D.  3042  signed  by  Acting  Commissioner 
Paul  F.  Myers,  and  dated  July  1,  1920.) 


INC. 


521 


TAX 


(T.  D/3043.) 


2770  Decision  of  court— Act  of  1916 — Retrospective  law — Following  assets 
1818  of  corporation  into  hands  of  stockholders  for  purpose  of  collecting 

the  tax. — The  appended  decision  [^2771  below]  of  the  District 
Court  of  the  United  States,  for  the  District  of  Montana,  in  the  case^  of 
United  States  vs.  John  J.  McHatton  et  ah,  is  published  for  the  information 
of  internal  revenue  officers  and  others  concerned.  (T.  D.  3043,  signed  by 
Acting  Commissioner  Paul  F.  Myers,  and  dated  July  2,  1920.) 

District  Court  of  the  United  States,  District  of  Montana. 
United  States  vs.  John  J.  McHatton  et  al. 

(May  16,  1920). 

(Revenue  Act  of  1916.) 

2771  BOURQUIN,  J.:  Herein,  the  demurrer  to  the  complaint  is  overruled. 

2772  When  the  corporation  was  in  being  and  at  dissolution,  it  owed  the 
duty  to  pay  all  taxes  lawfully  imposed  upon  it  for  income  during 

its  life,  at  any  time.  Taxes  could  be  lawfully  imposed  by  retrospective  law, 
and  were  [see  \1212\.  If  material,  the  law  speaks  of  and  from  a time  anterior 
to  the  dissolution,  takes  effect  as  though  enacted  prior  to  the  dissolution. 
Taxes  are  not  debts  nor  government  a creditor,  in  strict  sense.  Th^y  are 
of  higher  nature.  But  no  reason  is  perceived  why  they  are  not  within  the 
principle  that  those  who  gratuitously  receive  a debtor’s  property,  to  the 
extent  thereof  are  liable  for  his  debts  and  obligations  then  inchoate  or  vested; 
within  this  principle  otherwise  known  as  the  “trust  fund”  doctrine  in  respect 
to  corporations. 

2773  Accordingly,  when  this  corporation  without  consideration  dis- 
tributed part  of  its  assets  to  these  defendants,  it  was  under  obliga- 
tion to  plaintiff  to  pay  any  taxes  that  might  thereafter  be  imposed.  Defen- 
dants received  the  assets  subject  thereto  and  to  the  principles  aforesaid. 
The  obligation  was  contingent,  the  plaintiff’s  right  inchoate.  The  con- 
tingency happened,  the  right  vested.  And  the  corporation’s  assets  so  dis- 
tributed, may  be  pursued  in  the  hands  of  these  defendants,  by  virtue  of  the 
principles  aforesaid. 

2774  In  principle,  the  case  is  very  like  the  Brady  case,  240  Fed.  665  [^[688]. 


% 


% 


¥ 


INC.  522  TAX 


7-15-20. 


2775  Adjustment  of  accounts  and  amended  returns  on  account  of  refund 
1198  by  Government  in  one  year  of  excess  taxes  (duties)  paid  in  prior 
1254  years  and  reflected  in  cost  of  goods  sold:  Attorney’s  fees  in  con- 
1263  nection  with  refund. — Reference  is  made  to  your  letter  of  June  2, 

1920,  in  which  you  state  that  during  the  years  1915,  1916  and  1917 

— Company  paid  customs  duties  on  imported  merchandise  on  the  basis 

of  an  exchange  rate  of  a franc  at  19.3  cents  instead  of  the  lower  rate  prevailing 
at  the  time  of  importation.  It  appears  that  the  amount  so  paid  as  duties 
were  included  in  the  income  and  profits  tax  returns  as  part  of  the  cost  of  goods 
sold^uring  the  years  1915,  1916  and  1917  and  the  surplus  reduced  each  year 
to  the  extent  of  the  duties  paid.  During  the  year  1919  the  company  re- 
ceived a refund  of  the  amount  so  paid  as  customs  duties  which  was  in  excess 
of  the  amount  due  on  the  basis  of  the  exchange  rate  prevailing  at  the  time  of 
importation  of  the  French  merchandise. 

2776  You  submit  for  consideration  the  following  inquiries  relative  to  the 
treatment  of  the  transaction  for  income  tax  purposes: 

(a)  How  should  the  transaction  be  treated  in  computing  the  annual 
net  income  for  the  years  involved.? 

(b)  Is  not  the  amount  allowed  as  a refund  for  duties  overpaid  in  each  year 
a credit  to  surplus  for  that  year? 

(c)  Is  not  the  attorney’s  fee  and  expense  of  collection  an  item  of  neces- 
sary business  expense  incurred  in  1919  when  the  liability  accrued  and 
was  paid? 

2777  In  reply  you  are  advised  that  the  law  contemplates  that  each  year’s 
return  both  as  to  gross  income  and  deductions  therefrom  shall  be 

complete  in  itself.  The  effect  of  the  Treasury  Decision  under  which  the  claim 
for  refund  of  excess  duties  paid  was  allowed  is  to  indicate  that  the  excess 
revenue,  which  was  paid  during  the  years  1915,  1916  and  1917  and  for  which 
the  company  received  a refund  during  the  year  1919,  is  an  amount  which 
has  been  erroneously  deducted  in  computing  net  income  for  the  years  1915, 
1916  and  1917  respectively  rather  than  an  amount  which  represents  income 
for  the  year  1919. 

2778  Accordingly  the  company  should  amend  its  returns  for  the  years 
1915,  1916  and  1917,  respectively,  excluding  from  the  cost  of  goods 

sold  during  each  year  the  excess  duties  paid  during  such  year.  The  surplus 
account  for  those  years  should  also  be  adjusted  by  restoring  to  such  account 
the  amount  paid  as  revenue  in  excess  of  the  true  liability  for  those  years. 

2779  The  attorney’s  fees  and  cost  of  collection  of  the  refund  are  a neces- 
sary business  expense  for  the  year  in  which  the  liability  accrued  and 

was  paid,  which  appears  to  be  the  year  1919.  (Letter  to  S.  D.  Leidesdorf 
& Company,  New  York,  N.  Y.,  signed  by  Paul  F.  Myers,  Acting  Commis- 
sioner, and  dated  June  26,  1920.) 


2780  Foreign  corporations  or  countries  having  fiscal  or  paying  agents  in 
1645  this  country  under  no  obligation  to  withhold  on  their  tax-free- 
2750  covenant  bond  interest  in  case  of  domestic  or  resident  foreign  cor- 
poration bondholders. — Receipt  is  acknowledged  of  your  letter 
dated  June  16,  1920,  stating  that  apparently  it  is  the  intent  of  Treasury 
Decision  3031  [^[2750]  to  require  a domestic  corporation  owning  bonds  of  a 
foreign  country,  containing  a tax-free  covenant,  to  file  ownership  certificate. 
Form  1000  Revised,  and  thereby  obtain  the  credit  of  two  per  cent  tax  paid 
at  the  source,  and  desiring  a ruling  on  this  point. 


INC. 


523  TAX 


2781  In  reply  you  are  advised  that  Treasury  Decision  3031  was  issued  to 
amplify  the  provisions  of  Article  1078,  so  as  to  impose  upon  the 

paying  agent  in  the  United  States,  of  a foreign  country  or  a foreign  corpora- 
tion which  has  issued  bonds  containing  a tax-free  covenant  clause,  the 
liability  to  withhold  as  provided  in  Section  221  (b)  of  the  Revenue  Act  of 
1918,  as  the  original  Article  1078  contemplated  such  withholding  only  in 
case  the  foreign  debtor  had  a fiscal  agent  in  the  United  States,  ignoring  the 
possibility  that  a foreign  corporation  or  a foreign  country  might  appoint 
as  its  agent  in  this  country,  a mere  paying  agent  charged  only  with  disbursing 
monies. 

2782  Article  1078  treats  primarily  of  the  form  of  ownership  certificate 
required  to  be  used  in  connection  with  foreign  items,  which  is  Form 

100 1-A  Revised,  unless  the  item  is  an  interest  paymicnt  on  bonds  containing 
a tax-free  covenant  clause  issued  by  a foreign  country  or  a foreign  corpo- 
ration having  a fiscal  agent  in  this  country  in  which  case  the  provisions  of 
Section  221  (b)  can  be  enforced  against  the  resident  agent  in  the  United 
States  of  the  foreign  organization.  Since  that  section  of  the  statute  (Section 
221  (b)  ),  provides  for  withholding  from  the  interest  on  tax-free  bonds,  when 
the  bonds  are  owned  by  citizens  or  residents  or  nonresident  alien  individuals, 
partnerships  and  nonresident  alien  corporations  (Section  221  (b)  being 
extended  to  cover  nonresident  alien  corporations  by  Section  237),  no  article 
of  the  regulations  or  any  amendment  thereof  could  alter  the  provisions  of  the 
statute  by  requiring  withholding  in  the  case  of  interest  on  tax-free  bonds 
owned  by  a domestic  or  resident  corporation. 

2783  A resident  fiscal  agent  or  resident  paying  agent  of  a foreign  corporation 
or  a foreign  country  which  has  issued  bonds  containing  a tax-free 

covenant  clause,  is  required  to  withhold  the  norm.al  tax  of  two  per  cent  from 
the  interest  on  such  bonds  when  ownership  certificates.  Form  1000  Revised, 
are  presented,  which  certificate  should  be  executed  in  the  following  instances: 
When  the  owner  of  the  bonds  is  a citizen  or  resident  of  the  United  States 
who  does  not  wish  to  claim  exemption  from  having  tax  paid  at  tne  source: 
When  the  owner  of  the  bonds  is  a domestic  or  resident  partnership  or  a per- 
sonal service  corporation:  When  interest  coupons  from  such  bonds  are 
presented  unaccompanied  by  a certificate  of  ownership.  (Letter  to  Franklin 
Carter,  Jr.,  The  Equitable  Trust  Company  of  New  York,  New  York  City, 
signed  by  Paul  F.  Myers,  Acting  Commissioner,  and  dated  July  7,  1920.) 


(T.  D.  3044) 

2784  Change  in  taxable  year — loss  in  inventory — Opinion  of  Attorney 

800  General. — 1.  The  A company  earned  a large  income  during  the 

1101  fiscal  year  ended  September  30,  1918,  and  suffered  a net  loss  during 

2763  the  year  ended  September  30,  1919.  The  company  in  1920  re- 
quested permission  to  change  its  accounting  period  for  1918  to  the 
calendar  year  basis  and  then  to  be  allowed  to  deduct  the  net  loss  from  the 
taxable  income  for  1918  under  Section  204  of  the  Revenue  Act  of  1918. 
Held,  that  the  accounting  period  for  which  the  tax  liability  had  accrued  and 
the  method  of  accounting  during  that  period  were  accomplished  facts  which 
could  not  thereafter  be  changed  by  the  Commissioner. 

2785  2.  The  company  further  contended  that  it  was  entitled  to  a deduc-' 
1472  tion  for  inventory  loss  under  subdivision  14,  Section  234  (a)  of  the 

Revenue  Act  of  1918,  because  of  certain  noncancellable  contracts 
for  the  future  delivery  of  material  which  were  not  completed  by  delivery 
prior  to  the  termination  of  the  fiscal  year,  the  value  of  this  material  having 

524  TAX 


INC. 


7-15-20. 


been  greatly  decreased  as  a result  of  the  signing  of  the  armistice  on  Novem- 
ber 11,  1918.  Held,  that  as  the  company  did  not  own  the  material  on  Sep- 
tember 30,  1918,  but  had  only  a contract  for  its  purchase,  no  deduction  could 
be  allowed  as  a loss  on  inventory  based  on  such  contracts. 

2786  Below  is  given  a synopsis  of  an  opinion  rendered  by  the  Attorney 
General  on  May  28,  1920.  The  opinion  is  not  to  be  published  in 

full  as  its  publication  might  disclose  unnecessarily  the  private  affairs  of  the 
taxpayer.  The  following  may  be  taken  as  a fair  statement  of  facts  to  which 
the  ruling  applies: 

2787  The  A company  earned  a large  income  during  the  fiscal  year  ended 
September  30,  1918,  and  suffered  a net  loss  during  the  year  ended 

September  30,  1919.  The  company  is  now  requesting  permission  to  change 
its  accounting  period  for  1918  to  the  calendar  year  basis,  and  then  to  be 
allowed  to  deduct  a net  loss  for  1919  from  the  taxable  income  for  1918  under 
Section  204  of  the  Revenue  Act  of  1918.  As  an  alternative,  it  contends  that 
it  is  entitled  to  a deduction  for  inventory  loss  under  subdivision  14  of  Sec- 
tion 234(a)  of  the  Revenue  Act  of  1918,  because  of  certain  noncancellable 
contracts  for  the  delivery  of  X material,  which  were  not  comipleted  by  the 
delivery  of  the  X material  prior  to  the  termination  of  the  fiscal  year;  the 
value  of  this  material  having  been  very  greatly  decreased  as  a result  of  the 
armistice  signed  on  November  11,  1918.  The  Commissioner  of  Internal 
Revenue  has  ruled  that  he  is  without  power  to  now  allow  the  requested  change 
in  an  accounting  period  for  1918,  or  to  allow  the  deduction  for  inventory 
loss.  The  company  in  its  manufacture  uses  unusually  large  quantities  of 
certain  material.  During  the  war  the  company’s  plant  was  entirely  devoted 
to  war  production.  In  August,  1918,  acting  upon  information  obtained  that 
there  would  be  a shortage  in  X material,  and  that  it  was  important  therefore 
for  the  company  to  buy  for  its  current  needs,  this  company  entered  into  con- 
tracts for  the  future  delivery  of  a large  quantity  of  such  material;  the  quan- 
tity ordered  being  reasonably  necessary  for  a six  months’  supply  on  the  basis 
of  the  then  current  Government  demand  for  its  product.  On  the  signing  of 
the  armistice  the  market  price  of  this  material  fell  to  a very  low  figure.  The 
company’s  contracts  were  legally  binding  and  noncancellable  and  as  a result 
the  company  subsequent  to  November  11,  1918,  suffered  a loss  on  these  con- 
tracts. The  company’s  taxable  year  ended  September  30,  1918.  Its  earn- 
ings for  that  year  were  considerable  and  the  tax  levied  thereon  correspond- 
ingly large.  In  making  its  tax  return  the  company  paid  a portion  of  the  tax 
assessed  and  filed  a claim  in  abatement  for  the  balance,  asking  that  this  claim 
be  allowed  as  a loss  on  inventory,  because  of  this  loss  on  X material  arising 
from  contracts  made  during  1918.  This  claim  was  denied  by  the  Income 
Tax  Unit  apparently  on  the  ground  that  the  claim  could  not  be  treated  as  a 
loss  on  inventory,  because  X material  contracts  for  future  delivery  entered 
into  in  1918  were  not  inventoried  September  30,  1918. 

2788  Since  its  claim  was  denied  the  company’s  1919  taxable  year  ended 
September  30,  1919.  It  later  definitely  ascertained  that  during  its 

taxable  year  1919  the  company  suffered  an  operating  loss,  a large  part  of 
which  was  due  to  the  money  losses  actually  suffered  on  the  above  mentioned 
X material  contracts  of  1918.  Coupling  together  these  two  taxable  years 
in  this  manner  the  company’s  tax  would  exceed  the  earnings  for  these  two 
years.  I'he  fiscal  year  ending  September  30  had  been  determined  and  fixed 
at  the  time  of  its  incorporation  in  1912,  and  Section  204(b)  was  enacted 
subsequent  to  the  date  when,  under  existing  regulations,  it  could  have  secured 
a change  in  its  accounting  period.  Attention  was  directed  to  the  fact  that 
the  company  incurred  its  losses  on  these  contracts,  not  because  of  any  error 


INC.  525 


TAX 


of  business  judgment,  but  because  it  acted  upon  the  information  which  it 
received  from  the  War  Industries  Board  and  in  a desire  to  hasten  produc- 
tion. Further,  because  of  the  slowness  with  which  the  material  was  being 
delivered  it  was  not  possible  to  make  contracts  therefor  containing  cancella- 
tion privileges,  nor  was  it  possible  to  obtain  deliveries  short  of  several  months 
after  order. 

2789  Upon  substantially  these  facts  the  following  questions  were  submitted 
to  the  Attorney  General. 

2790  First:  Does  the  statute  authorize  the  Commissioner  to  approve  a 
change  by  this  company  at  this  time  (January,  1920)  in  Its  account- 
ing records  for  the  fiscal  year  ended  September  30,  1918,  so  that  its  account- 
ing period  for  1918  will  be  changed  to  a calendar-year  basis,  solely  because 
of  a tax  advantage? 

2791  Second:  Are  the  regulations  promulgated  by  the  Commissioner  with 
the  approval  of  the  Secretary,  requiring  notice  of  a change  of  account- 
ing periods  and  forbidding  retroactive  changes,  valid  regulations? 

2792  Third:  Does  the  statute  authorize  a deduction  by  this  company  under 
Section  234(a),  subdivision  14,  by  treating  this  loss  on  the  X mate- 
rial contracts  as  a loss  which  Is  of  the  ‘‘character”  of  an  inventory  loss? 

2793  The  Attorney  General  disposed  of  the  questions  as  follows: 

“It  will  be  seen  that  the  company’s  taxes  for  1918  have  been  assessed 
upon  the  basis  of  its  return  made  as  of  September  30,  1918,  the  close  of  its 
fiscal  year.  In  other  words,  its  taxes  have  been  assessed  on  the  basis  of  its 
financial  condition  on  that  date  as  compared  with  its  financial  condition 
12  months  previously.  The  result  reached  was  based — in  part,  of  course — 
upon  an  inventory  of  all  its  property  owned  at  that  date.  It  then  had  out- 
standing contracts  for  the  purchase  and  delivery  of  X material  to  be  used 
in  its  manufacturing  operations  during  succeeding  months.  The  amounts 
which  would  be  payable  under  these  contracts  upon  delivery  of  the  X material 
were  not  listed  as  liabilities,  nor  was  the  X material  which  was  to  be  there- 
after delivered  included  in  the  inventory  of  property  owned  by  the  company* 
At  that  time  the  war  was  in  progress.  The  company  was  not  using  X mate- 
rial in  carrying  out  contracts  with  the  Government.  It  was,  however,  using 
it  in  the  manufacture  of  articles  which  were  sold  to  and  used  by  others  who 
had  war  contracts  with  the  Government.  The  Immediate  demand  for  and 
value  of  the  products  in  which  X material  was  used  depended  very  largely 
upon  the  continuance  of  the  war.  When  the  armistice  was  signed  in  Novem- 
ber this  demand  ceased  and  the  value  of  the  X material  which  the  company 
had  contracted  to  buy  immediately  dropped,  making  it  inevitable  that  when 
the  X material  should  be  delivered  and  paid  for  a heavy  loss  would  imme- 
diately ensue. 

2794  It  is  clear  that  the  assessment  was  made  upon  a return  which  clearly 
reflected  the  income  and  profits  of  the  company  on  September  30, 

1918.  The  theory  of  the  income  tax  laws  is  that  income  and  profits  are  to 
be  determined  and  taxed  annually.  Ordinarily,  therefore,  when  he  pays 
taxes  for  a given  year  upon  the  net  income  shown  by  a proper  accounting  a,t 
the  end  of  that  year  he  is  not  entitled  to  relief  even  though  it  happens  that 
he  suffers  a net  loss  during  the  succeeding  year  in  excess  of  the  net  income 
for  the  first  year. 

2795  The  Revenue  Act  of  1918  was  not,  in  fact,  passed  until  February, 
1919.  During  the  time  that  it  was  under  consideration  by  Congress 

the  armistice  had  been  signed.  There  were  many  individuals  and  corpora- 
tions in  the  country  conducting  business  requiring  large  capital  and  de- 
pendent in  large  measure  upon  the  continuation  of  the  war.  It  was  therefore 
obvious  when  the  Act  was  passed  that  much  property — such  as  plants,  build- 
ings, machinery,  and  equipment  valuable  for  war  work — had  been  at  once 

526  TAX 


INC. 


7-15-20. 


greatly  reduced  in  value  by  the  signing  of  the  armistice.  It  was  also  evident 
that  business  profitable  because  of  the  war  would,  in  many  instances,  be 
conducted,  if  at  all,  during  the  following  year  at  a loss.  Congress  apparently 
felt  that  persons  and  corporations  so  situated  should  be  given  some  relief. 
Accordingly,  section  204  (b)  is  as  follows: 

‘If,for  any  taxable  year  beginning  after  October  31,  1918,  and  end- 
ing prior  to  January  1,  1920,  it  appears  upon  the  production  of  evi- 
dence satisfactory  to  the  Commissioner  that  any  taxpayer  has 
sustained  a net  loss,  the  amount  of  such  net  loss  shall  under  regula- 
tions prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary  be  deducted  from  the  net  income  of  the  taxpayer  for  the 
preceding  taxable  year;  and  the  taxes  imposed  by  this  title  and  by 
Title  III  for  such  preceding  taxable  year  shall  be  redetermined 
accordingly.’ 

Net  loss  as  used  in  this  provision  is  defined  in  Section  204(a)  to  be  only 
‘net  losses  resulting  from  either  (1)  the  operation  of  any  business  regularly 
carried  on  by  the  taxpayer,  or  (2)  the  bona  fide  sale  by  the  taxpayer  of  plant, 
buildings,  machinery,  equipment  or  other  facilities,  constructed,  installed  or 
acquired  by  the  taxpayer  on  or  after  April  6,  1917,  for  the  production  of 
articles  contributing  to  the  prosecution  of  the  present  war.’  It  will  be  seen 
that  this  relief  was  not  extended  to  all  corporations  which  had  been  assessed 
for  taxes  during  the  year  1918,  but  is  limited  to  those  whose  fiscal  or  tax  year 
began  after  October  31,  1918.  Apparently,  so  far  as  this  provision  was  con- 
cerned, Congress  decided  to  leave  without  relief  those  individuals  and  cor- 
porations whose  taxes  for  1918  had  been  assessed  upon  the  basis  of  a tax 
year  ending  prior  to  the  date  mentioned — that  is,  prior  to  the  month  in  which 
the  armistice  was  signed.  The  fiscal  or  tax  year  of  the  A company  ended 
September  30,  1918.  It  clearly,  therefore,  did  not  come  within  the  terms 
of  section  204,  and  the  question  is  whether  it  can  now  be  permitted  to  bring 
itself  within  the  terms  of  that  section  by  changing  its  accounting  period  or 
tax  year. 

2796  Section  212  of  the  Act  of  1918,  applying  to  individuals,  but  made 
applicable  to  corporations  by  section  232,  provides; 

“(b)  The  net  income  shall  be  computed  upon  the  basis  of  the 
taxpayer’s  annual  accounting  period  (fiscal  year  or  calendar  year, 
as  the  case  may  be)  in  accordance  with  the  method  of  accounting 
regularly  employed  in  keeping  the  books  of  such  taxpayer;  but  if 
no  such  micthod  of  accounting  has  been  so  employed,  or  if  the 
method  employed  does  not  clearly  reflect  the  income,  the  computa- 
tion shall  be  made  upon  such  basis  and  in  such  manner  as  in  the 
opinion  of  the  Commissioner  does  clearly  reflect  the  income.  If  the 
taxpayer’s  annual  accounting  period  is  other  than  a fiscal  year  as 
defined  in  section  200  or  if  the  taxpayer  has  no  annual  accounting 
period  or  does  not  keep  books,  the  net  income  shall  be  computed  on 
the  basis  of  the  calendar  year. 

If  a taxpayer  changes  his  accounting  period  from  fiscal  year 
to  calendar  year,  from  calendar  year  to  fiscal  year,  or  from  one 
fiscal  year  to  another,  the  net  income  shall,  with  the  approval  of 
the  Commissioner,  be  computed  on  the  basis  of  such  new  account- 
ing period,  subject  to  the  provisions  of  section  226.’ 

2797  This  clearly  expresses  the  purpose  that  if  there  is  in  the  conduct 
of  a business  a regular  accounting  period  the  tax  shall  be  computed 

for  that  period  and  in  accordance  with  the  method  of  accounting  regularly 
employed  in  keeping  the  books  of  the  taxpayer,  provided  that  method  of 
bookkeeping  clearly  reflects  the  income.  If  the  income  is  not  thus  clearly 

527  TAX 


INC. 


reflected,  the  Commissioner  is  given  authority  to  compute  the  tax  in  such 
manner  as  will  clearly  reflect  the  income.  I am  of  opinion,  however,  that 
whether  the  regular  method  of  keeping  the  books  or  some  other  method  of 
computation  is  made  the  basis  it  is  compulsory  that  the  taxes  be  computed 
for  the  taxpayer’s  regular  accounting  period. 

2798  The  A company’s  regular  accounting  period  ended  September  30, 
1918.  The  assessment  against  it  was  made  for  a period  of  12  months 

ending  on  that  date,  and  was  presumably  based  upon  the  method  of  account- 
ing regularly  employed  by  the  company  in  keeping  its  books.  The  Act  of 
1918  was  not  passed  until  some  months  after  this  date.  The  accounting 
period  for  which  the  tax  liability  had  accrued  and  the  method  of  accounting 
during  that  period  were  accomplished  facts  which,  in  the  very  nature  of 
things,  could  not  thereafter  be  changed.  Congress,  of  course,  might  have 
authorized  a change  and  directed  a recomputation  of  the  taxes,  but  it  did 
not  do  so.  On  the  contrary,  I think  it  clear  that  by  limiting  the  relief  granted 
by  section  204  to  taxpayers  whose  tax  year  should  begin  after  October  31, 
1918,  it  unequivocally  expressed  the  intent  that  no  taxpayer  whose  tax  year 
for  1919  began  prior  to  that  date  should  take  any  benefit  under  section  204. 
To  permit  now,  therefore,  a change  in  the  accounting  period  for  1918  of  this 
company  would  be  to  bring  it  within  the  terms  of  section  204  in  the  face  of 
the  expressed  intent  of  Congress  that  that  section  should  not  apply  to  it. 

I am  of  the  opinion  that  the  Commissioner  is  without  power  to  permit  the 
change  of  the  accounting  period  as  requesting  by  the  company.  ^ 

2799  Section  204,  however,  does  not  contain  all  the  relief  which  Congress 
thought  should  be  given  on  account  of  losses  resulting  from  the 

armistice.  Section  234  (14)  is  as  follows: 

‘(a)  At  the  time  of  filing  return  for  the  taxable  year  1918  a 
taxpayer  may  file  a claim  in  abatement  based  on  the  fact  that  he  has 
sustained  a substantial  loss  (whether  or  not  actually  realized  by  sale 
or  other  disposition)  resulting  from  any  material  reduction  (^^^^ 
due  to  temporary  fluctuation)  of  the  value  of  the  inventory  for  such 
taxable  year,  or  from  the  actual  payment  after  the  close  of  such 
taxable  year  of  rebates  in  pursuance  of  contracts  entered  into  dur- 
ing such  year  upon  sales  made  during  such  year,  * * * (b)  If  no 
such  claim  is  filed,  but  it  is  shown  to  the  satisfaction  of  the  Com- 
missioner that  during  the  taxable  year  1919  the  taxpayer  has  sus- 
tained a substantial  loss  of  the  character  above  described  then  the 
amount  of  such  loss  shall  be  deducted  from  the  net  income  for  the 
taxable  year  1918  and  the  taxes  imposed  by  this  title  and  by  Title 
III  for  such  year  shall  be  redetermined  accordingly.’ 

This  section,  unlike  section  204,  applies  to  all  corporations  paymg  taxes  lor 
the  year  1918.  In  the  scope  of  the  relief  granted,  however,  it  is  narrower 
than  that  section.  It  permits  a deduction  from  the  net  income  shown  tor 
the  year  1918  not  of  all  losses  sustained  during  the  year  1919  but  only  such 
as  result  either  from  (1)  a material  reduction  of  the  value  of  the  inventory 
for  the  tax  year  1918  or  (2)  from  the  actual  payment  after  the  close  ot  the 
tax  year  1918  of  rebates  in  pursuance  of  contracts  entered  into  during  that 
year  upon  sales  made  during  that  year.  On  September  30,  1918,^ 
the  X material  on  account  of  which  losses  were  subsequently  sustained  had 
been  delivered  to  the  company,  and  hence  none  was  included  in  the  inven- 
tory on  which  the  assessment  for  1918  was  made.  The  company  did  not 
at  that  time  own  this  X material,  and  presumably  much  of  it  had  not  even 
been  produced.  The  company  did  not  own  it  but  only  had  a contract  lor  its 
purchase.  It  could  not,  therefore,  have  properly  been  included  in  an  in- 
ventory of  the  company’s  property  as  of  that  date.  It  is  not,  as  I under- 
stand, insisted  that  if  subsection  14(a)  stood  alone  the  loss  on  this  X mate- 

528  TAX 


INC. 


7-28-20. 


rial  could  not  be  allowed  as  a reduction  of  the  value  of  the  inventory  for  1918, 
but  it  is  insisted  that  subsection  14(b)  is  broader  in  its  scope,  and  that  the 
A expression  therein  ‘loss  of  the  character  above  described  includes  such  a 

^ loss  as  that  sustained  on  this  X material.  I am  unable  to  agree  with  this 

insistence.  Subsection  14(a)  specifically  describes  the  losses  for  which  de- 
ductions may  be  ma.de;  and  when  (b)  of  the  same  subsection  speaks  of  a 
‘loss  of  the  character  above  described’  I do  not  think  the  language  can  be 
construed  to  include  anything  which  is  not  included  in  (a).  This  view  seems 
to  me  unavoidable  when  it  is  remembered  that  (a)  provides  for  a claim  in 
abatement  to  be  made  at  the  time  of  the  filing  of  a return  for  1918,  that  the 
^ Act  was  not  passed  until  February,  1919,  after  the  time  of  many  taxpayers 

for  filing  a return  for  1918  had  expired  and  after  it  was  impossible  for 
taxpayers  to  file  a claim  in  abatemient  at  the  time  of  filing  their  return.  The 
provision  in  (b)  was  obviously  for  the  benefit  of  taxpayers  who  had  filed  their 
returns  before  the  Act  was  passed  or  who  thereafter  for  any  reason  failed  to 
file  a claim  in  abatement  at  the  time  of  filing  returns.  The  two  provisions 
manifestly  apply  to  exactly  the  same  losses,  and  these  are  specifically  de- 
t scribed  in  (a).  The  loss  for  which  a deduction  is  now  claimed  does  not  con- 

sist of  a reduction  in  the  value  of  the  inventory  upon  which  the  taxes  for 
1918  were  assessed,  and  I am  constrained  to  the  opinion  that  it  does  not  come 
within  the  terms  of  section  234  (14).  _ ^ 

2800  Answering  the  questions  submitted  specifically,  I advise; 

2801  1st.  The  statute  does  not  authorize  the  Commissioner  to  appro vm 
a change  by  this  company  at  this  time  in  its  accounting  records  for 

the  fiscal  year  ending  September  30,  1918,  so  that  its  accounting  period  for 
1918  will  be  changed  to  a calendar-year  basis.  _ _ , • i 

2802  2d.  The  answer  to  question  1 is  conclusive  of  this  company  s right 
to  now  change  its  accounting  period  for  1918,  and  a specific  answer 

t to  question  2,  which  would  involve  a more  extended  examination  of  the 

regulations  referred  to,  would  therefore  seem  to  be  unnecessary.  ^ 

2803  3d.  The  statute  does  not  authorize  a deduction  by  this  company 
under  section  234,  subdivision  14,  -by  treating  the  loss  on  the  X 

material  contracts  as  a loss  which  is  of  the  character  of  an  inventory  loss. 
(T.  D.  3044,  signed  by  Acting  Commissioner  Paul  F.  Myers,  and  dated  July 
9,  1920.) 


2804  Basis  in  determining  profit  (or  loss,  if  properly  deductible)  on  Uis- 

j 1058  position  of  homestead  by  original  entryman.  Receipt  is  acknowl- 

^ 1310  edged  of  your  letter  of  Alarcli  22,  1920,  and  your  letter  of  March  24. 

1920,  relative  to  the  basis  for  determining  gain  or  loss  from  the  sale 
of  a homestead  acquired  from  the  government.  You  refer  to  Office  Decision 
386,  page  8,  Bureau  Bulletin  No.  7-20,  and  ask  whether  the  ruling  there 
given  means  that  if  a homestead  is  acquired  from  the  government  in  1918 
at,  say,  $1.00  an  acre,  and  is  sold  in  1919  for  $100.00  an  acre,  the  gam  or  loss 
will  be  figured  upon  the  fair  market  value  of  the  land  acquired  at  the  date  of 
^ acquisition  irrespective  of  cost. 

2805  In  reply,  you  are  advised  that  profit  made  on  the  sale  of  property  is 
income  subject  to  tax,  and  under  the  provisions  of  the  Federal  income 

tax  acts  in  effect  since  March  1,  1913,  this  office  has  consistently  held  that, 
in  the  case  of  the  sale  of  property,  the  basis  for  computing  gam  or  loss  is  tne 
cost  of  the  property  if  acquired*  subsequent  to  March  1,  1913,  or  its  fair 
market  value  as  of  March  1,  1913,  if  acquired  prior  to  that  date. 
t 2806  In  the  case  of  property  acquired  by  gift,  bequest,  devise,  or  descent, 

the  basis  is  the  fair  market  price  or  value  of  the  property  at  the  time 


INC. 


529  TAX 


of  acquisition  or  as  of  March  1,  1913,  if  acquired  prior  to  that  date.  A 
“public  grant’'  is  in  the  nature  of  a gift  from  the  government,  and  on  the 
sale  of  a homestead  acquired  by  “public  grant”  the  basis  for  determining 
gain  or  loss  is  the  fair  market  price  or  value  of  the  homestead  at  the  date  ot 
acquisition  or  as  of  March  1,  1913,  if  acquired  prior  to  that  date  Ihe 
date  of  acquisition  of  a homestead  acquired  by  public  grant  is  the  date  o 
the  entry  upon  the  land,  as  the  patent,  which  is  evidence  of  legal  title  to  the 
land  relates  back  to  the  tim.e  when  entry  was  made.  The  above  relates  only 
to  the  basis  of  determining  gain  or  loss  from  the  sale  of  a homestead  by  the 
original  entryman  and  has  no  application  to  the  case  of  those  acquiring 
government  lands  in  any  other  way  than  under  the  homestead  laws. 
to  The  Corporation  Trust  Company,  signed  by  Acting  Commission  Faul  t. 
Myers,  and  dated  July  8,  1920.) 


2807  Deductibility  of  losses  sustained  in  connection  with  wagering  on 
1310  horse  races:  Winnings  to  be  included  in  gross  income.  Reference 
2507  is  made  to  vour  letter  dated  March  1,  1920,  with  which  was  enclosed 

a copy  of  a ktter  dated  March  1,  1920,  from  the  Collector  of  Internal 
Revenue  at  New  York,  N.  Y.,  addressed  to  the  Maryland  State  k air,  50 
Fairview  Avenue,  Orange,  N.^  J.  In  the  Collector’s  letter  it  is  stated  that 

the  following  is  a recent  decision  of  this  office:  v i • u 

“Total  losses  from  race  track  gambling  may  be  credited  against  the 
total  winnings,  and  the  net  gain  should  be  reported  as  income.  it, 
however,  the  losses  exceed  the  winnings,  the  net  losses  cannot  be  de- 
ducted from  the  gross  income  from  other  sources  in  computing  the  net 

income  subject  to  tax.”  r mio 

2808  You  are  advised  that  Section  213  (a)  of  the  Revenue  Act  of  1918  ^ 

provides  that  gross  income  includes  “*  * * gains  or  profits  and 

income  derived  from  any  source  whatever.”  . i • j 

2809  Under  the  provisions  of  Section  214  (a)  5 of  the  Act,  losses  incurred 
in  any  transaction  entered  into  for  profit,  though  not  connected  vath 

the  trade  or  business  of  the  taxpayer,  constitute  allowable  deductions,  but 
losses  in  illegal  transactions  are  not  deductible  (Regulations  45,  Article  141). 

Whether  betting  or  gambling  is  an  illegal  transaction  depends  upon  the  law 
of  the  state  in  which  the  wagering  contract  is  made.  If  the  laws  jke  state 
in  which  the  wagering  contract  is  made  prohibit  betting  or  gambling,  such 
transactions  are  illegal,  but  if,  under  the  laws  of  the  state,  betting  or  gambling 
is  not  prohibited,  such  transactions  are  legal.  r • • r ^ 

2810  It  is  accordingly  held  that:  (1)  The  entire  amount  of  winnings  from 
806  all  wagering  contracts  should  be  returned  in  gross  income  under 

Section  213  (a)  of  the  Revenue  Act  of  1918,  irrespective  of  the  nature 
of  the  transaction,  whether  legal  or  illegal  and  notwithstanding  the  laws  of 
the  state  in  which  such  contracts  are  made.  [Read  ^1215.] 

281  1 (2)  If,  under  the  laws  of  the  state  in  which  the  wagering  contract  is 

made  betting  or  gambling  is  prohibited,  such  transactions  are  illegal 
and  no  deduction  may  be  claimed  under  Section  214  (a)  5 of  the  statute  for 
losses  sustained  in  such  illegal  transactions,  but  if  the  laws  of  the  state  in 
which  the  wagering  contract  is  made  do  not  prohibit  betting  or  gambling, 
such  transactions  are  lawful  and  the  entire  amount  of  the  losses  sustained  m 
the  transactions  may  be  deducted  from  gross  income  under  Section  214  (a)  5. 

2812  Copies  of  this  letter  are  being  furnished  the  Maryland  State  Fair  and 

the  Collector  of  Internal  Revenue  for  the  Second  District  of  New  ^ 

York  for  their  information.  (Letter  to  The  Corporation  Trust  Company,  | 

signed  by  Acting  Commissioner  Paul  F.  Myers,  and  dated  July  12,  1920.) 


INC. 


530  tax 


7-28r20. 


2813  Salaries  of  United  States  Judges  appointed  subsequent  to  February 
803  24,  1919. — [Comment:  The  (acting)  Attorney-General  in  an 

2713  opinion  rendered  on  June  21,  1920,  states,  in  part:  “I  am  unable  to 
see,  therefore,  that  there  is  anything  in  the  recent  opinion  of  the 
Supreme  Court  which  relieves  a judge  appointed  since  the  enactment  of  the 
income  tax  law  from  paying  the  tax  imposed  by  that  law.” — The  Corporation 
Trust  Company.] 


2814  Returns  by  the  Alien  Property  Custodian : Satisfaction  of  tax  liability 
1854  on  income  on  account  of  property  taken  over  by  him.— [Comment: 
2497  The  (acting)  Attorney-General,  on  June  21,  1920,  rendered  an  opinion 
2503  to  the  effect  that  the  Alien  Property  Custodian  is  not  liable,  as  a 
trustee  or  otherwise,  to  make  income  tax  returns  in  connection  with 
any  income  arising  on  account  of  any  property  taken  over  by  him;  that  the 
vesting  in  him  of  the  powers  of  a common-law  trustee  constitutes  him  a trustee 
for  the  United  States  rather  than  for  any  person  who  may  ultimately  become 
entitled  to  or  have  an  interest  in  the  property;  and  that  in  any  event  such 
trustee  powers  are  limited  strictly  to  property  other  than  money,  all  actual 
money  received  by  the  Alien  Property  Custodian  from  any  source  on  account 
of  property  taken  over  by  him  being  immediately  covered  into  the  United 
States  Treasury.  The  income  resulting  from  the  investment  of  such  money 
does  not  come  into  the  custodian’s  hands  and  of  it,  including  its  amount,  he 
has  no  knowledge.  “Whatever  net  income  the  custodian  receives  from 
property  under  his  control  comes  to  him,  of  course,  as  money.  To  say  that 
out  of  such  money  he  must  pay  income  taxes  would  be  to  require  him  to  make 
a disposition  of  funds  coming  to  his  hands  different  from  that  expressly  re- 
quired by  the  Act  of  Congress.”  The  concluding  paragraph  of  the  opinion 
reads  as  follows:  “This  does  not  mean  that  if  property  or  income  shall  be 
returned  to  the  former  owners,  and  the  amounts  received  by  them  include  any 
income  that  may  have  accrued  during  the  time  the  property  was  held  b ythe 
custodian,  such  former  owners  are  not  liable  for  income  taxes.  Undoubtedly, 
before  paying  out  any  funds  which  represent  such  income  the  Treasury 
Department  may  ascertain  the  taxes  due  thereon  and  require  them  to  be  paid. 
I merely  mean  to  say  that,  in  my  opinion,  the  law  does  not  require  the  cus- 
todian to  make  such  returns  or  pay  such  taxes.”  — The  Corporation  Trust 
Company.] 


(T.  D.  3046.) 

2815  Reprint  of  opinion  in  The  Penn  Mutual  Life  Insurance  Company 
2673  case. — [This  Treasury  Decision,  released  July  21,  1920,  merely  in- 
corporated the  decision  of  the  Supreme  Court  of  the  United  States  in 
the  case  of  the  Penn  Mutual  Life  Insurance  Company  v.  Ephraim  Lederer, 
Collector  of  Internal  Revenue,  and  is  published  not  as  a ruling  of  the  Treasury 
Department,  but  for  the  information  of  Internal  Revenue  officers  and  others 
concerned. — The  Corporation  Trust  Company.] 


2816  Substitution  by  collecting  agent  of  proper  certificate  for  improper 
2764  form  accompanying  item  presented  for  collection. — Banks  may  adopt 

in  similar  cases  procedure  outlined  in  office  letter  [1[2764]  quoted  in 
your  letter  July  9,  in  regard  execution  ownership  certificates  where  wrong 
certificate  attached  to  interest  coupons.  (Telegram  to  The  National  City 
Bank  of  New  York,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner 
G.  V.  Newton,  and  dated  July  14,  1920.) 

INC.  531 


TAX 


2817  Interest  on  tax-free  covenant  bonds  sold  between  interest  dates: 
869  Ownership  certificates;  withholding;  credit  for  tax  withheld;  account- 
903  ing  for  interest  income. — Reference  is  made  to  your  letters  of  Feb- 
1722  ruary  5 and  March  12,  1920,  in  which  you  state  that  numerous 

subscribers  of  your  service  have  made  inquiries  regarding  the  interest 
on  tax-free  covenant  bonds  sold  between  interest  dates.  You  direct  atten- 
tion to  the  established  ruling  of  the  Department  that  when  a tax-free  cove- 
nant bond  is  sold  between  dates,  the  purchaser  pays  as  a part  of  the  pur- 
chase price  the  amount  of  interest  accrued  since  the  last  interest  date,  and 
such  interest  is  income  to  the  seller.  When  the  purchaser  collects  his  in- 
terest the  ruling  has  been  that  only  so  much  of  that  interest  as  has  accrued 
since  the  date  of  the  purchase  is  income  to  him.  The  question  presented  is 
how  the  interest  accruing  to  the  vendor  and  purchaser,  respectively,  m such 
case,  should  be  treated  for  income  tax  purposes.  . . 

2818  In  this  connection,  you  are  advised  that  this  office  has  consistently 
held  that  where  bonds  are  purchased  between  interest  dates,  the 

interest  accrued  to  the  time  of  purchase  (advanced  by  purchaser)  is  not 
to  be  accounted  for  as  income  by  the  purchaser  and  that  only  the  amount  o 
interest  assignable  to  the  portion  of  the  interest  period  subsequent  to  the 
purchase  has  the  status  of  income  for  the  purpose  of  return  and  tax  by  the 
purchaser.  The  amount  of  accrued  interest  so  advanced  by  the  purchaser 
is  taxable  income  to  be  accounted  for  in  the  return  of  the  vendor.  j i ^ 

2819  The  foregoing  ruling  is  embodied  in  paragraphs  15  [11903]  and  16 

[1[904]  of  Article  4,  Regulations  33  (Revised)  issued  under  the  Rev- 
enue Act  of  1916,  as  amended  by  the  Revenue  Act  of  1917,  and  is  also  applica- 
ble under  the  provisions  of  the  Revenue  Act  of  1918.  ^ ^ ^ 

2820  In  accordance  with  Article  364  [1[1659]  of  Regulations  45,  it  is  neces- 
sary when  interest  coupons  are  presented  for  payment  of  interest  on 

bonds  or  other  obligations,  whether  or  not  containing  tax-free  covenaiU, 
issued  by  domestic  or  resident  foreign  corporations,  that  such  coupons  be 
accompanied  by  ownership  certificates.  . 

2821  Therefore,  where  interest  coupons  are  presented  for  payment  oi  in- 
terest on  bonds  which  have  been  sold  between  interest  dates,  the 

coupons  should  be  accompanied  by  the  separate  ownership  certificates  of 
both  the  vendor  and  the  purchaser.  The  certificate  of  the  vendor^  should 
cover  the  interest  accrued  upon  the  bond  to  the  date  of  sale  and  the  interest 
accrued  from  the  date  of  sale  to  the  maturity  of  the  coupon  should  be  covered 
by  the  certificate  of  the  purchaser.  The  certificates  should  be  on  Form  1000 
(Revised),  or  Form  1001  (Revised),  dependent  upon  whether  or  not  exeinption 
is  claimed  from  having  the  tax  paid  at  the  source.  The  ownership  certificate 
of  the  vendor  should  be  obtained  by  the  purchaser  at  the  time  of  the  sale  ot 
the  bond  and  presented,  together  with  the  purchaser’s  certificate,  when  the 
coupon  is  cashed.  Unless  the  separate  certificates  of  the  vendor  and  pur- 
chaser, showing  the  amount  of  interest  accrued  to  each,  respectively,  accom- 
pany the  coupon  when  it  is  presented  for  payment,^  the  entire  amount  ot 
interest  represented  by  the  coupon  will  be  treated  as  interest  accrued  to  me 
purchaser.  In  that  event,  however,  the  vendor  will  not  be  relieved  of  his 
liability  for  return  and  payment  of  the  tax  upon  the  portion  of  the  interest 
accrued  to  him.  (Letter  to  The  Corporation  Trust  Company,  signed  b\ 
Commissioner  Wm.  M.  Williams,  and  dated  July  21,  1920.) 


8-2-20. 


2822  Sale  of  personal  property  on  installment  plan;  Procedure  on  chang- 

914  ing  method  of  reporting  profit  to  an  apportioning  basis. — Reference 

915  is  made  to  office  letter  to  yon  dated  June  28,  1919,  in  regard  to  the 
steps  which  should  be  taken  by  a taxpayer  engaged  in  merchandis- 
ing upon  the  installment  plan,  who  has  made  returns  upon  the  basis  of  treat- 
ing the  profit  upon  installment  sales  as  realized  as  at  the  date  of  sale  and 
now  desires  to  change  to  the  basis  of  reporting  the  profit  as  being  realized 
as  at  the  date  of  collection  of  the  outstanding  accounts. 

2823  The  procedure  outlined  therein  has  been  reconsidered  and  as  a result 
of  such  reconsideration  the  following  has  been  adopted  where  a tax- 
payer engaged  in  merchandising  upon  the  installment  plan  who  has  here- 
tofore made  returns  upon  the  basis  of  treating  the  profit  upon  installment 
sales  as  realized  as  at  the  date  of  sale  and  now  wishes  to  change  to  the  basis 
of  reporting  the  profit  as  being  realized  as  at  the  date  of  collection  of  the 
outstanding  accounts. 

2 824  1.  In  accordance  with  the  provision  of  Article  42  [11914]  (as  amended 

[sic])  of  Regulations  45,  the  balance  sheet  as  at  the  beginning  of  the 
taxable  year,  which  shall  be  filed  as  a part  of  the  return,  shall  carry  the  in- 
stallment sales  contracts  unliquidated  and  remaining  in  force  as  at  the  date 
that  this  system  of  accounting  is  adopted  and  made  effective  by  the  tax- 
payer, as  accounts  receivable,  such  unliquidated  installment  sales  contracts 
having  been  inventoried  and  determined  as  at  that  date.  Cash  collections 
on  account  of  such  contracts  will  be  credited  directly  to  such  accounts  re- 
ceivable and  no  part  of  such  collections  will  be  included  in  computing  real- 
ized profits  for  the  taxable  year. 

2825  2.  As  from  the  beginning  of  the  taxable  year,  the  following  accounts 
should  be  set  up: 

2826  (a)  Goods  purchased,  which  will  be  charged  with  the  amount  of 
inventory  of  the  goods  on  hand  at  the  beginning  of  the  taxable  year 

and  with  the  expenditures  for  goods  purchased  during  the  year. 

2 827  (b)  Goods  sold  (cost  value),  which  will  be  credited  with  the  cost 

value  of  all  goods  sold  during  the  year. 

2828  (c)  Installment  sales  contracts — (year  date),  which  will  be  charged 

only  with  the  amount  of  installment  sales  contracts  made  during 
the  year  specified.  This  account  for  each  year  will  be  credited  with  all  cash 
collected  during  that  year,  or  in  subsequent  years,  upon  installment  sales 
contracts  for  that  year  only^  and  wdth  the  unpaid  installments  of  defaulted 
or  canceled  contracts  for  that  year. 

2829  (d)  Unrealized  gross  profits  on  installment  sales  contracts — (year 
date),  which  will  be  credited  only  with  the  amount  of  unrealized 

gross  profits  upon  installment  sales  contracts  made  during  the  year  speci- 
fied. 'riiis  amount  will  be  the  total  of  the  installment  sales  contracts  for 
that  year  reduced  by  the  cost  or  inventory  value  (as  carried  in  account  (a) 
GOODS  PURCHASED),  of  the  actual  goods  sold  and  covered  by  the  con- 
tracts; the  balance  remaining  being  the  amount  of  the  unrealized  gross 
profits.  The  proforma  monthly  (or  annual)  journal  entry  would  be: 


Dr.  Cr. 

Installment  sales  contract  (year  date) $ 

To  goods  sold  (cost  value) $ 

Unrealized  gross  profits  on  installment  sales  con- 
tracts (year  date) 


2830  (e)  Realized  profits  on  installment  sales  contracts,  which  will  be 

credited  from  month  to  month  (or  at  the  end  of  the  Year),  with  the 
profits  realized  by  cash  collections  upon  all  installment  sales  contracts  of  any 
year.  Such  profits  should  be  computed  by  taking  the  same  percentage  of 


INC. 


533 


TAX 


cash  collections  made  during  the  taxable  year  on  account  of  installment 
sales  contracts  of  either  that  or  prior  years,  as  the  total  unrealized  profits 
on  installment  sales  contracts  for  the  year  against  ivhich  the  collection  ap- 
plies, bear  to  the  total  installment  sales  made  during  that  respective  year. 
Corresponding  debits  should  be  made  to  UNREALIZED  GROSS  PROFIT^. 
ON  INSTALLMENT  SALES  CONTRACTS  for  the  year  affected  by  such 
collections.  If  adjustments  to  any  or  all  of  these  various  accounts  become 
necessary  in  order  that  it  or  they  may  accurately  reflect  the  facts,  such  ad- 
justment may  be  made  either  monthly  or  as  at  the  end  of  the  taxable  year. 

2831  It  is  believed  that  sufficient  has  been  said  above  to  indicate  the  use 
that  is  to  be  made  of  these  special  accounts,  and  it  is  not  necessary 

to  discuss  any  of  the  other  accounts  which  would  normally  be  maintained. 

2832  It  will  be  noted  that  the  foregoing  plan  which  will  be  permitted  upon 
an  explicit  statement  of  facts  made  to  the  Commissioner  of  Internal 

Revenue  by  a taxpayer  engaged  in  merchandising  upon  the  installment  plan 
is  not  a change  from  an  accrual  basis  to  a cash  received  and  paid  basis.  In 
the  opinion  of  this  office,  the  income  of  a merchandising  concern  can  not  be 
correctly  reflected  upon  the  latter  basis,  as  the  use  of  inventories  is  abs(> 
lutely  essential.  The  plan  herein  outlined  is,  therefore,  merely  such  a modi- 
fication or  adaptation  of  the  ordinary  accrual  method  of  accounting  as  in 
the  opinion  of  this  office  will  enable  the  accounts  of  the  taxpayer  clearly  to 
reflect  his  net  income.  Where  in  the  past  another  method  has  been  used 
that  has  failed  to  reflect  the  taxpayer’s  net  income  an  amended  return  or 
returns  for  such  year  may  be  made.  ^ ^ 

2833  In  cases  where  the  taxpayer  has  in  the  past  exercised  the  option  of 
reporting  the  profit  as  realized  as  at  the  date  of  sale  and  now  wishes 

to  change  to  a basis  of  reporting  the  profit  as  realized  as  at  the  date  of  col- 
lection of  the  outstanding  installments,  either  of  which  method  is  allowable 
under  Article  42  of  Regulations  45,  amended  returns  for  years  prior  to  the 
date  that  the  above  outlined  system  of  accounting  is  adopted  and  made 
effective  by  the  taxpayer,  will  not  be  required  or  allowed  unless  in  the  opin- 
ion of  the  Commissioner  such  former  method  has  failed  to  reflect  the  net 
income.  (Letter  to  Greenbaum,  Wolff  and  Ernst,  New  York,  N.  Y.,  signed 
by  Acting  Commissioner  Paul  F.  Myers,  and  dated  July  17,  1920.) 


(T.  D.  3047.)  ^ 

[Matter  in  italics  is  new;  that  in  hold  face  brackets  [ ] ts  old  matter  cut  otiti\ 

2834  Inventories  at  market. — Article  1584,  Regulations  45  is  hereby 
1094  amended  to  read  as  follows: 

Art.  1584.  Inventories  at  market. — Market  means  the  current  bid 
price  prevailing  at  the  date  of  the  inventory  for  the  particular  merchandise,  _ 

and  is  applicable  to  goods  purchased  and  on  hand  ^ and  to  basic  W 

materials  in  goods  in  process  of  manufacture  and  in  finished  goods  on 
hand,  exclusive,  however,  of  goods  on  hand  or  in  process  of  manu- 
facture for  delivery  upon  firm  sales  contracts  at  fixed  prices  entered  into  before 
the  date  of  the  inventory,  which  goods  must  he  inventoried  at  cost.  Where  no 
open  market  quotations  are  available  the  taxpayer  must  use  such  evidence 
of  a fair  market  price  at  the  date  or  dates  nearest  the  inventory  as  may  be 
available  to  him,  such  as  specific  transactions  in  reasonable  volume  entered  ^ 

into  in  good  faith,  or  compensation  paid  for  cancellation  of  contracts  for 
purchase  commitments.  The  burden  of  proof  will  rest  upon  the  taxpayer 


INC. 


534  TAX 


in  each  ease  to  satisfy  the  Commissioner  of  the  correctness  of  the  prices 
adopted  It  IS  recognized  that  in  the  latter  part  of  1918,  by  reason  among 
•thtr  things  of  governmental  control  not  having  been  relinquished,  con- 
ditions were  abnormal  and  in  many  commodities  there  was  no  such  scale  of 
trading  as  to  establish  a free  market.  In  such  a case,  when  a market  has  been 
established  during  the  succeeding  year,  a claim  may  be  filed  for  any  loss 
accordance  with  the  provisions  of  section  214  (a)  (12)  or  section 
334  (a)  (14)  of  the  statute.  See  articles  261-268  [for  losses  in  1918  inventories 
and  from  rebates,  ^1477].  (T.  D.  3047,  signed  by  Commissioner  Wm.  M. 

VVilliams,  and  dated  July  24,  1920.) 


(T.  D.  3049.) 


2836 

803 

2713 

3813 


Compensation  of  Federal  Judges.  Opinion  of  the  Attorney-General. 

^ Evans  v.  Gore,  T.  D.  3037,  the  Supreme  Court 

held  that  salaries  of  Federal|Judges,  appointed  before  the  incidence 
or  the  Revenue  Act  of  1918,  arc  not  subject  to  payment  of  income 
f u The  Attorney  General  in  response  to  a request 

from  the  Secretary  of  the  Treasury  has  advised  that  the  salary  of  a Federal 
judge  may  be  subjected  to  a Federal  income  tax  where  the  Act  imposing  such 
tax  ^ passed  prior  to  the  time  the  judge  in  question  took  office.  A copy  of 
the  Upinion  of  the  Acting  Attorney  General  is  published  herewith  [112837 
bclowj  for  your  information. 

2836  This  office  will  be  governed  by  the  Opinion  of  the  Acting  Attorney 
General.  (T.  D.  3049,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  July  27,  1920.) 


(Opinion  rffgrred  to  in  T,  D,  3049,  1f2835.) 

Department  of  Justice, 

w Pk  -j  p Tj  Washington,  June  21,  1920. 

Hon.  David  h . Houston, 

Secretary  of  the  Treasury, 

Washington,  D.  C. 

Dear  Mr.  Secretary; 

2837  I have  the  honor  to  acknowledge  receipt  of  your  request  to  be  advised 
whether  in  view  of  the  Supreme  Court’s  decision  in  the  case  of 
V,  Gore  [1[2713],  to  refrain  fromfthe  collection  of  income  taxes  under 
he  Revenue  Act  of  1918  from  judges  and  the  President  taking  office  after 
e passage  of  the  Act  as  well  as  from  those  in  office  when  the  law  was  passed. 
838  In  the  opinion  of  the  Solicitor  accompanying  your  request  certain 
quotations  are  made  from  the  opinion  of  the  court  in  the  case  above 
referred  to  as  indicating  that  the  court  intended  to  hold  that  the  salary 
of  no  federal  Judge  could  constitutionally  be  included  in  his  taxable  income 
regardless  of  whether  he  became  a judge  before  or  after  the  passage  of  the 
Act.  1 do  not  thmk,  however,  that  anything  that  was  said  in  that  opinion 
can  fairly  bear  this  construction.  That  question  was  not  before  the  court. 

e judge  then  contesting  the  constitutionality  of  the  law  was  appointed  many 
years  ago,  and  the  rights  of  one  appointed  subsequent  to  the  enactment  of 
the  law  were  in  no  wise  involved.  The  only  question  was  whether  the  re- 
(juirement  that  a judge’s  salary  should  be  included  in  his  taxable  income  was, 
of  the  Constitution,  a diminution  of  his  compensation 
as  It  had  been  fixed  by  Act  of  Congress  prior  to  the  enactment  of  this  tax 


INC. 


535  TAX 


law.  Congress  has  the  same  power  to  fix  the  compensation  of  judges  ^at 
It.  has  to  levy  taxes,,  except;  that  it  has  no.  power;  during  the  term  of  omce 
of  a judge  to. fix  his  compensation  at  a sum  less  than  it  was  when  he  became 
a judge.  The  effect  of  the  recent  decision  is  .to  hold  that  the  levying  of  a 
tax  upon  the  compensation  thus  fixed  is  a diminution  of  that  compensation 
in  the  constitutional  sense.  In  fixing  the  compensation,  however,  which 
judges  hereafter  appointed  shall  receive  there  is  no  limration  upon  the  power 
[oi  Congress.  It  may  fix  the  compensation  of  such  judges  at  a fipre  less 
,phan  that  now  received  by  judges  of  the  same  rank,  and  whicii  the  lattei 
will  -be  entitled  to  receivg  during  the  remainder  of  their  service.  In  fixing 
such  compensation,  I see  no  reason  why  Congress  may  not  say  that  ^ the 
compensation  shall  be  a certain  amount  less  a fixed  percentage  thereof  which 
shall  be  paid  or  retained  as  an  income  tax.  When,  therefore,  after  the  salary 
of  the  judges  has  been  fixed  by  law  and  another  Act  has  been  passed  making 
those  salaries  subject  to  a fixed  and  definite  income  tax,  a judge  who  is 
appoifited  takes  his  office  with  his  actual  compensation  fixed  at  the  amount  of 
the  salary  less  the  am.ount  of  income  tax.  Upon  assuming  the  duties'  of 
the  office  he  is  entitled  to  receive  no  more  than  this;  and  when  he  pays  the 
tax  previously  fixed  by  law  there  has  been  no  diminution  of  the  compensa- 
tion to  which  he  was  entitled  at  the  beginning  of  his  term  of  service.  1 am 
unable  to  see,  therefore,  that  there  rs  anything  in  the  recent  opinion  of  the 
Supreme  Court  which  relieves  a judge  appointed  since  the  enactment  of  the 
■income  tax  law  from  paying  the  tax  imposed  by  that  law. 

’ Respectfully, 

Wm.  L.  Frierson, 

Acting  Attorney  General. 


(T.  D.  3050.) 

2839  Decision  of  Court^ — Deductibility  of  New  York  inheritance  tax  in 

1264  computing  income  of  legatee. — The  tax  imposed  by  the  State  of 

1265  New  York  on  the  transfer  of  decedent’s  estate  is  a tax  on  the  right 
of  disposition  of  the  property,  and  is  not  a tax  on  the  privilege  of 

the  legatee  to  receive  it.  Therefore  in  computing  the  net  income  of  the  legatee 
subject  to  the  income  tax,  the  New  York  inheritance  tax  is  not  a proper 
deduction  from  gross  income  under  the  provisions  of  Section  2,  Paragraph  B, 
of  the  Act  of  October  3,  1913.  _ 

2840  T.  D.  3050,  approved  July  27,  1920,  of  which  the  above,  ■j.28u9, 
isUhe  caption,  merely  incorporates  a decision  of  the  United  States 

Circuit  Court  of  Appeals  for  the  Second  Circuit,  in  the  case  of  Elizabeth 
S.‘  Prentiss  v.  \Iark  Eisner,,  Collector,  Third  District  of  New  A ork,  affirming 
the  judgment  of  the  lower  court  (260  Fed.  589,  T.  D.  2933  [^[1265])  is  pubp 
fished  not  as  a ruling  of  the  Treasury  Department,  but  for  the  informatipa 
of  Internal  Revenue  officers. and  others  concerned.  (Caption  of  T.  D.  3050, 
dated  July  27,  1920.) 


4 


4 


4 

INC.  53i  TAX 


8-18^0. 


(T.  D.  3052.) 

2841  Stock  dividends:  Some  applications  Of  the  decision  of  the  Supreme 
2575  Court  of  the  United  States  in  the  case  of  Eisner  v.  Macomber, 

rendered  Mar.  8,  1920,  in  the  determination  of  the  taxability  of 
dividends. — The  following  applications  of  the  decision  of  the  Supreme  Court 
of  the  United  States  in  the  case  of  Eisner  v.  Macomber  in  the  determination 
of  the  taxability  of  dividends  declared  by  corporations  are  published  for  the 
information  and  guidance  of  internal  revenue  officers  and  others  concerned: 

2842  1.  Where  a corporation,  being  authorized  so  to  do  by  the  laws  of 
2644  the  state  in  which  it  is  incorporated,  transfers  a portion  of  its  surplus 
2653  to  capital  account,  issues  new  stock  representing  the  amount  of  the 

surplus  so  transferred,  and  distributes  the  stock  so  issued  to  its 
stockholders,  such  stock  is  not  income  to  the  stockholders  and  the  stock- 
holders incur  no  liability  for  income  tax  by  reason  of  its  receipt. 

2843  2.  Where  a corporation,  being  thereunto  lawfully  authorized, 
increases  its  capital  stock,  and  simultaneously  declares  a cash  divi- 
dend equal  in  amount  to  the  increase  in  its  capital  stock,  and  gives  to  its 
stockholders  a real  option  either  to  keep  the  money  for  their  own  or  to 
reinvest  it  in  the  new  shares,  such  dividend  is  a cash  dividend  and  is  income 
to  the  stockholders  whether  they  reinvest  it  in  the  new  shares  or  not. 

2844  3.  Where  a corporation,  which  is  not  permitted  under  the  laws  of 
the  state  in  which  it  is  incorporated  to  issue  a stock  dividend,  increases 

its  capital  stock  and  at  the  same  time  declares  a cash  dividend  under  an 
agreement  with  the  stockholders  to  reinvest  the  money  so  received  in  the  new 
issue  of  capital  stock,  such  dividend  is  subject  to  tax  as  income  to  the  stock- 
holder. 

2846  4.  Where  a corporation,  having  a surplus  accumulated  in  part  prior 

to  March  1,  1913,  and  being  thereunto  lawfully  authorized,  trans- 
fers to  its  capital  account  a portion  of  its  surplus,  issues  new  stock  representing 
the  amount  so  transferred  to  the  capital  account  and  then  declares  a dividend 
payable  in  part  in  cash  and  in  part  in  shares  of  the  new  issue  of  stock,  that 
portion  of  the  dividend  paid  in  cash  will,  to  the  amount  of  the  surplus  accumu- 
lated since  March  1,  1913,  be  deemed  to  have  been  paid  out  of  such  surplus, 
and  be  subject  to  tax,  but  the  portion  of  the  dividend  paid  in  stock  will  not 
be  subject  to  tax  as  income. 

2846  5.  A dividend,  paid  in  stock  of  another  corporation  held  as  a part 

2378  of  the  assets  of  the  corporation  paying  the  dividend,^  is  income  to 

the  stockholder  at  the  time  the  same  is  made  available  for  distri- 
bution to  the  full  amount  of  the  then  market  value  of  such  stock  (Peabody 
V.  Eisner,  247  U.  S.  347  [1[2378]);  and  if  such  stock  be  subsequently  sold  by 
the  stockholder,  the  difference  between  its  market  value  at  date  of  receipt 
and  the  price  for  which  it  is  sold  is  additional  income  or  loss  to  him,  as  the 
case  may  be. 

2847  6.  The  profit  derived  by  a stockholder  upon  the  sale  of  stock  re- 

865  ceived  as  a dividend  is  income  to  the  stockholder  and  taxable  as 

2655  such  even  though  the  stock  itself  was  not  income  at  the  time  of  its 

[receipt  by  the  stockholder.  For  the  purpose  of  determining  the 
amount  of  gain  or  loss  derived  from  the  sale  of  stock  received  as  a dividend 
or  of  the  stock  with  respect  to  which  such  dividend  was  paid,  the  cost  of  each 
share  of  stock  (provided  both  the  dividend  stock  and  the  stock  with  respect 
to  which  it  is  issued  have  the  same  rights  and  preferences)  is  the  quotient 
of  the  cost  of  the  old  stock  (or  its  fair  market  value  as  of  March  1,  1913,  if 
acquired  prior  to  that  date)  divided  by  the  total  number  of  shares  of  the  old 
and  new  stock.  (T.  D.  3052,  signed  by  Commissioner  Wm.  M.  Williams, 
and  dated  August  4,  1920.) 

INC.  537  TAX 


(T.  D.  3050.) 

2848  Decision  of  court. — Deductibility  of  New  York  Inheritance  Tax  in 

1264  computing  income  of  legatee.— The  tax  imposed  by  the  State  of 

1265  New  York  on  the  transfer  of  decedent’s  estate  is  a tax  on  the  right 
2839  of  disposition  of  the  property,  and  is  not  a tax  on  the  privilege  of 

the  legatee  to  receive  it.  Therefore  in  computing  the  net  income  of 
the  legatee  subject  to  the  income  tax  the  New  York  inheritance  tax  Is  not  a 
proper  deduction  from  gross  Income  under  the  provisions  of  section  2,  para- 
graph B,  act  of  October  3,  1913.  The  appended  decision  [beginning  at  112849] 
of  the  United  States  Circuit  Court  of  Appeals  for  the  Second  Circuit  in  the 
case  of  Elizabeth  S.  Prentiss  v.  Mark  Eisner,  collector,  third  district  of 
New  York,  affirming  the  judgment  of  the  lower  court  (260  Fed.  589,  T.  D. 
2933  [111265]),  Is  published  for  the  Information  of  Internal-revenue  pfficers 
and  others  concerned.  (T.  D.  3050,  signed  by  Commissioner  Wm.  M.  W illiams, 
and  dated  July  27,  1920.) 

{The  opinion  referred  to  in  T.  D.  3050,1(2839  and  1[2848, /o/Zom^j.) 

United  States  Circuit  Court  of  Appeals  for  the  Second  Circuit. 

Elizabeth  S.  Prentiss^  plaintiff  in  error  {plaintiff  below),  v.  Mark  Eisner, 
collector  of  internal  revenue,  third  district  of  Nezu  York,  defendant  in 
error  {defendant  below). 

(June  16,  1920.) 

Before  Rogers,  Hough,  and  Manton,  Circuit  Judges. 

This  cause  comes  here  on  writ  of  error  to  the  United  States  District 
Court  for  the  Southern  District  of  New  York. 

The  facts  are  stated  in  the  opinion. 

Rogers,  Circuit  Judge: 

2849  This  is  an  action  to  recover  from  the  defendant  the  sum  of  $7,432.88 
with  interest,  which  amount  the  plaintiff  alleges  she  was  wrongfully 

compelled  to  pay  to  the  defendant  as  collector  of  internal  revenue. 

2850  It  appears  that  the  plaintiff  and  the  then  husband,  since  deceased, 
filed  with  the  defendant  a joint  return  of  their  net  Income  for  the 

year  1913,  pursuant  to  the  act  of  Congress  approved  October  3,  1913 
(U.  S.  Stat.  L.,  vol.  38,  pt.  1,  ch.  16,  Sec.  II,  p.  166). 

2851  The  aforesaid  act  of  Congress,  In  paragraph  B,  page  167,  provided 
as  follows: 

That,  subject  only  to  such  exemptions  and  deductions  as  herein- 
after allowed,  the  net  Income  of  a taxable  person  shall  include  gains, 
profits,  and  income,  Including  * * * but  not  the  value  of  property 

acquired  by  gift,  bequest,  devise,  or  descent  * * * ^ 

That  in  computing  the  net  income  for  the  purpose  of  the  normal 
taxes  there  shall  be  allowed  as  payment;  * * * third,  all  national. 

State,  county,  school,  and  municipal  taxes  paid  within  the  year,  not 
including  those  assessed  against  local  benefits. 

2852  And  in  paragraph  D,  page  168,  It  provided  as  follows: 

The  said  tax  shall  be  computed  upon  the  remainder  of  said  net 
income  of  each  person  subject  thereto  accruing  during  each  preceding 
calendar  year  ending  December  thirty-first:  Provided,  however.  That 
for  the  year  ending  December  thirty-first,  nineteen  hundred  and  thir- 
teen, said  tax  shall  be  computed  on  the  net  income  accruing  from  March 
first  to  December  thirty-first,  nineteen  hundred  and  thirteen,  both  dates 


# 


INC. 


538  tax 


8-13-20. 


inclusive,  after  deducting  five-sixths  only  of  the  specific  exemptions  and 
deductions  herein  provided  for. 

2853  It  appears,  too,  that  in  the  year  1913  the  plaintiff  inherited  a portion 
of  her  father’s  estate  and  that  on  the  inheritance  thus  received  by 

her  the  State  of  New  York  assessed  against  her  an  inheritance  tax  of  $259,- 
805.71,  which  amount  she  paid  on  December  11,  1913. 

2854  The  plaintiff  in  making  her  income  return  under  the  act  of  Congress 
included  therein  as  a deduction  five-sixths  of  the  inheritance  tax 

which  she  had  paid  to  the  State  of  New  York,  which  amounted  to  $216,504.75. 
This  deduction  was  not  allowed  by  the  Commissioner  of  Internal  Revenue 
and  he  levied  and  assessed  against  her  an  additional  tax  of  $7,432.88.  There- 
upon she  instituted  this  action  to  recover  back  the  amount  so  paid. 

2855  The  complaint  was  demurred  to  upon  the  ground  that  it  did  not  state 
facts  sufficient  to  constitute  a cause  of  action.  The  court  below 

sustained  the  demurrer  and  dismissed  the  complaint. 

2856  The  question  of  law  thus  presented  is  whether  the  payment  by  the 
plaintiff  of  the  inheritance  tax  to  the  State  of  New  \ ork  was  a proper 

deduction  from  her  income  tax  return  for  the  year  1913.  That  is  the  sole 
question  herein  involved.  The  plaintiff’s  contention  is  that  the  inheritance 
tax  which  she  paid  to  the  State  of  New  York  was  a tax  paid  to  a State,  and 
therefore  under  the  act  of  Congress  the  plaintiff  was  entitled  to  make  the 
deduction  of  five-sixths  of  the  amount  so  paid  in  making  her  income  return. 

2857  The  Commissioner  of  Internal  Revenue  in  making  the  ruling  to  which 
reference  has  been  made  stated  that — ■ 

A collateral  inheritance  tax  levied  under  the  laws  of  the  State  of  New 
York  being,  as  it  is,  a charge  against  the  corpus  of  the  estate,  does  not 
constitute  such  an  item  as  can  be  allowed  as  a deduction  in  computing 
income  tax  liability  to  either  the  estate  or  beneficiary  thereof. 

2858  The  district  judge  in  sustaining  the  demurrer  states  that  he  did  not 
regard  the  New  York  transfer  tax  ‘‘as  imposing  a tax  upon  the 

plaintiff’s  right  of  succession  which  is  deductible  in  her  income  tax  returns.” 

2859  Material  provisions  of  the  New  York  transfer  tax  act  may  be  found  in 
the  margin. 

2860  The  New  York  act  reads  as  follows  in  section  220  of  Article  X: 

A tax  shall  be  and  is  hereby  imposed  upon  the  transfer  of  * * * 

property  * * * to  persons  or  corporations  in  the  following  cases 

* * * : (1)  When  the  transfer  is  by  will  or  by  the  interstate  laws  of 
this  State  * * * when  the  transfer  is  by  deed  * * * in- 
tended to  take  effect  in  possession  or  enjoyment  at  or  after  such  death. 

* * * The  tax  imposed  hereby  shall  be  upon  the  clear  market  value 

of  such  property  at  the  rates  hereinafter  prescribed. 

2861  Section  224  reads  as  follows: 

Lien  of  tax  and  collection  by  executors^  administrators ^ and  trustees. — ■ 
Kver>'  such  tax  shall  be  and  remain  a lien  upon  the  property  transferred 
until  paid  and  the  person  to  whom  the  property  is  so  transferred,  and  the 
executors,  admiinistrators,  and  trustees  of  every  estate  so  transferred  shall 
be  personally  liable  for  such  tax  until  its  payment.  Every  executor, 
administrator,  or  trustee  shall  have  full  power  to  sell  so  much  of  the 
property  of  the  decedent  as  will  enable  him  to  pay  such  tax  in  the  same 
manner  as  he  might  be  entitled  by  law  to  do  for  the  payment  of  the  debts 
of  the  testator  or  intestate.  Any  such  executor,  administrator,  or  trustee 
having  in  charge  or  in  trust  any  legacy  or  property  for  distribution 
subject  to  such  tax  shall  deduct  the  tax  therefrom  and  shall  pay  over  the 
same  to  the  State  comptroller  or  county  treasurer,  as  herein  provided. 

If  such  legacy  or  property  be  not  in  money,  he  shall  collect  the  tax  thereon 

539  TAX 


INC. 


upon  the  appraised  value  thereof  from  the  person  entitled  thereto.  He 

shall  not  deliver  or  be  compelled  to  deliver  any  specific  legacy  or  property 

subject  to  tax  under  this  article  to  any  person  until  he  shall  have  collected  W 

the  tax  thereon.  If  any  such  legacy  shall  be  charged  upon  or  payable 

out  of  real  property,  the  heir  or  devisee  shall  deduct  such  tax  therefrom 

and  pay  it  to  the  executor,  administrator,  or  trustee,  and  the  tax  shall 

rem.ain  a lien  or  charge  on  such  real  property  until  paid;  and  the  payment 

thereof  shall  be  enforced  by  the  executor,  administrator,  or  trustee,  in 

the  same  manner  that  payment  of  the  legacy  might  be  enforced,  or  by 

the  district  attorney  under  section  two  hundred  arid  thirty-five  of  this 

chapter.  If  any  such  legacv  shall  be  given  in  money  to  any  such  person 

for  a limited  period,  the  executor,  administrator,  or  trustee  shall  retain 

the  tax  upon  the  whole  amount,  but  if  it  be  not  in  money,  he  shall  make 

application  to  the  court  having  jurisdiction  of  an  accounting  by  hirn, 

to  make  an  apportionment,  if  the  case  require  it,  ot  the  sum  to  be  paid 

into  his  hands  by  such  legatee,  and  for  such  further  order  relative  thereto 

as  the  case  may  require.  ^ ^ % 

2862  The  right  to  dispose  of  property  by  will  is  statutory.  The  matter 
has  always  been  recognized  as  within  the  legislative  control.  In  the 

reign  of  Henry  II  (1154-1189)  a man’s  personal  property  was,  at  his  death, 
divided  into  three  equal  parts,  if  he  died  leaving  a wife  and  children:  ^ne 
part  went  to  his  wife,  another  to  his  children,  and  only  the  remaining 
could  be  disposed  of  by  his  will.  And,  at  least  after  the  establishment  of  the 
feudal  system  and  prior  to  the  enactment  of  the  statute  of  wills  (32  Henry 
VIIIX  the  right  to  make  a will  of  real  estate  was  not  known  to  the  English 
law. 

2863  There  has  been  and  still  is  a difference  of  opinion  among  the  courts 
as  to  the  exact  nature  of  an  inheritance  tax.  It  is  generally  agreed 

that  such  a tax  is  not  upon  the  property  or  money  bequeathed.  The  dispute 
is  over  the  question  whether  the  tax  is  laid  on  the  privilege  of  receiving  the 
property  so  transmitted.  The  right  to  transmit  and  the  right  to  receive 
are  distinct,  and  each  is  alike  under  the  legislative  control.  The  distinction 
between  the  right  to  transmit  and  the  right  to  receive  is  important  and  upon 
the  distinction  depends  the  right  to  deduct  or  not  to  deduct  the  amount  of 
the  tax  in  the  income  return  submitted  to  the  Federal  Government. 

2864  The  Circuit  Court  of  Appeals  in  the  Third  Circuit  has  recently  de- 
cided Lederer  v.  Northern  Trust  Co.  (262  Fed.  52).  In  that  case  the 

question  arose  as  to  the  right  to  deduct  a tax  paid  under  the  collateral  inheri- 
tance  tax  act  of  the  State  of  Pennsylvania.  The  answer  to  be  given  to  that 
question  depended  upon  whether  the  Pennsylvania  tax  was  an  estate^  tax, 
the  burden  of  which  was  imposed  upon  the  estate  of  a decedent  as  claimed 
by  the  executors,  or  was  a legacy  tax,  the  burden  of  which  was  imposed 
upon  the  legatee  or  beneficiary.  It  happened  that  the  supreme  court  of 
Pennsylvania  in  Jackson  v.  Myers  (257  Pa.,  104)  had  squarely  decided  that 
the  collateral  inheritance  tax  of  that  State  was  not  levied  upon  an  inheri- 
tance or  legacy,  but  upon  the  estate  of  the  decedent,  and  had  held^that  what  ^ 

passed  to  the  legatee  was  simply  the  portion  of  the  estate  remammg  after 
the  State  had  been  satisfied  by  receiving  the  tax.  The  Circuit  Court  of 
Appeals  held  that  the  decision  of  the  supreme  court  of  Pennsylvania  constru- 
ing the  inheritance  tax  law  of  that  State  was  binding  on  the  Federal  courts, 
and  that  inasmuch  as  the  tax  was  held  by  that  court  as  a tax  on  the  estate 
and  not  a tax  on  the  inheritance  the  amount  of  the  tax  so  paid  was  properly 
deductible  in  computing  the  net  estate  under  the  act  of  Congress  of  Septernber  ^ 

8,  1916.  Under  a like  state  of  facts  we  should  have  no  difficulty  in  reaching 
a like  conclusion.  But  the  case  with  which  we  are  dealing  presents  a dif- 


INC. 


540  TAX 


8-18-20. 


ferent  question,  involving  as  it  does  the  tax  law  not  of  Pennsylvania  but  of 
New  York. 

2866  In  1900  the  Supreme  Court  in  Knowlton  v.  Moore  (178  U.  S.,  41) 
had  under  consideration  a tax  imposed  under  the  war  revenue  act 
of  June  13,  1898  (20  Stat.,  448).  The  opinion  in  that  case  is  exhaustive  and 
occupies  about  70  pages.  It  deals  with  the  subject  of  death  duties  and  sus- 
tains the  constitutional  right  of  Congress  to  impose  death  duties.’  In  the 
course  of  the  opinion,  which  was  written  by  Justice  (now  Chief  Justice) 
White,  it  was  said: 

Thus,  looking  over  the  whole  field,  and  considering  death  duties  in 
the  order  in  which  we  have  reviewed  them — that  is,  in  the  Roman  and 
ancient  law;  in  that  of  modern  France,  Germany,  and  other  continental 
countries;  in  England  and  those  of  her  colonies  where  such  laws  have 
been  enacted,  in  the  legislation  of  the  United  States  and  the  several 
States  of  the  Union — the  following  appears:  although  different  modes 
of  assessing  such  duties  prevail,  and  although  they  have  different 
accidental  names,  such  as  probate  duties,  stamp  duties,  taxes  on  the 
transaction,  or  the  act  of  passing  of  an  estate  or  a succession,  legacy 
taxes,  estate  taxes,  or  privilege  taxes,  nevertheless  tax  laws  of  this 
nature  in  all  countries  rest  in  their  essence  upon  the  principle  that 
death  is  the  generating  source  from  which  the  particular  taxing  power 
takes  its  being  and  that  it  is  the  power  to  transmit,  or  the  transmission 
from  the  dead  to  the  living,  on  which  such  taxes  are  more  immediately 
rested. 

2866  It  thus  appears,  as  the  opinion  of  the  court,  that  in  general  death 
duties  are  imposed  on  the  power  to  transmit.  However,  the  immed- 
iate question  with  which  we  are  now  concerned  is  whether  the  so-called 
tax  which  the  New  York  law  has  imposed,  and  which  is  herein  involved,  is 
a tax  upon  the  power  to  transmit  or  is  laid  on  the  power  to  receive.  In  1889 
a testator  within  the  State  of  New  York  died  and  devised  and  bequested 
all  his  estate,  both  real  and  personal,  to  the  Government  of  the  United 
States.  The  surrogate’s  court  imposed  an  inheritance  tax  upon  the  personal 
property.  The  case  was  taken  on  appeal  to  the  general  term  of  the  supreme 
court  of  New  York  and  later  to  the  New  York  Court  of  Appeals,  by  each  of 
which  it  was  affirmed.  It  was  then  taken  to  the  Supreme  Court  of  the  United 
States,  by  which  it  was  in  like  manner  affirmed.  The  question  was  whether 
the  personal  property  bequeathed  to  the  United  States  was  subject  to  an 
inheritance  tax  under  the  laws  of  New  York.  The  Supreme  Court 
held  the  property  to  be  subject  to  the  tax.  (United  States  v.  Perkins,  163 
U.  S.,  625.)  In  the  course  of  its  opinion  the  court  said:  ‘‘In  this  view  the 
so-called  inheritance  tax  of  the  State  of  New  York  is  in  reality  a limitation 
upon  the  power  of  a testator  to  bequeath  his  property  to  whom  he  pleased; 
a declaration  that,  in  the  exercise  of  that  power,  he  shall  contribute  a certain 
percentage  to  the  public  use;  in  other  words,  that  the  right  to  dispose  of 
his  property  by  will  shall  remain,  but  subject  to  a condition  that  the  State 
has  a right  to  impose.  Certainly,  if  it  be  true  that  the  right  of  testamentary 
disposition  is  purely  statutory,  the  State  has  a right  to  require  a contribution 
to  the  public  treasury  before  the  bequest  shall  take  effect.  Thus  the  tax  is 
not  upon  property,  in  the  ordinary  sense  of  the  term,  but  upon  the  right  to 
dispose  of  it,  and  it  is  not  until  it  has  yielded  its  contribution  to  the  State 
that  it  becomes  the  property  of  the  legatee.”  And  the  court  went  on  to 
say:  “That  the  tax  is  not  a tax  upon  the  property  itself,  but  upon  its  trans- 
mission by  will  or  by  descent,  is  also  held  both  in  New  York  and  in  several 
other  States.”  We  find  no  case  in  the  subsequent  decisions  of  the  New 
York  Court  of  Appeals  in  which  that  court  disclaims  the  construction  placed 

541  TAX 


INC. 


by  the  Supreme  Court  of  the  United  States  on  the  New  York  decisions,  or  in 
any  way  qualifies  or  overrules  the  proposition  that  the  “tax”  under  the 
New  York  law  is  not  one  upon  the  property,  but  is  one  upon  the  right  to 
dispose  of  it  by  will  or  by  descent.  In  the  absence  of  such  a decision  it 
seems  to  be  our  duty  to  follow  the  law  as  it  is  laid  down  in  the  Perkins  case 
unless  there  can  be  found  in  the  New  York  statute  in  force,  when  the  present 
tax  was  laid,  some  substantial  difference  from  the  statute  in  force  when  that 
case  was  decided  in  the  particular  now  being  considered.  If  such  a difference 
exists  we  have  failed  to  detect  it,  and  learned  counsel  have  failed  to  point 
out  in  what  it  consists. 

2867  The  New  York  Court  of  Appeals  in  1919  in  matter  of  Watson,  226  N. 

Y.,  384,  399,  the  court,  in  discussing  a provision  in  the  New  York  inheri- 
tance tax  law  imposing  tax  upon  the  transfer  of  property  at  the  time  of  death 
which  had  not  theretofore  paid  any  tax,  local  or  State,  said;  “The  beneficiary 
has  no  claim  to  the  property  of  an  ancestor  except  as  given  by  law,  and,  if 
the  State  has  a right  to  impose  a tax  at  all  upon  the  passing  of  property, 
the  transferee  takes  only  what  is  left  after  the  tax  is  paid.”  The  opinion 
quotes  at  page  396  from  the  opinion  of  the  Supreme  Court  of  the  United  States 
in  the  matter  of  Penfield,  216  N.  Y.,  163,  167,  (1915),  that  under  the  New 
York  law  the  inheritance  tax  is  not  upon  the  property  but  upon  the  right  to 
dispose  of  it.  There  is  not  one  word  of  criticism,  not  one  word  of  dissent, 
and  not  the  slightest  suggestion  of  disapproval  of  that  proposition  anywhere 
in  the  opinion. 

2868  In  matter  of  Penfield,  supra,  the  New  York  court  declares  what  it 
had  several  times  before  stated  that  “the  transfer  tax  is  not  a tax 

upon  property,  but  upon  the  right  of  succession  to  property.”  The  language 
of  the  statute  is  that  the  tax  is  “due  and  payable  at  the  time  of  the  transfer;” 
that  is,  at  the  death  of  the  decedent.  It  accrues  at  that  time. 

2869  Now  a succession  tax  is  a tax  upon  a transfer  of  property  in  general 
and  as  such  is  distinguishable  from  a legacy  duty,  which  is  a tax 

upon  a specific  bequest.  Under  the  New  York  law  the  succession  tax  creates 
a lien  upon  the  estate  of  the  decedent  at  the  moment  of  his  death.  The  right 
of  the  State  to  the  amount  of  this  lien  attaches  at  that  time  and  it  must  be 
paid  before  the  transferee,  legatee,  or  devisee  ever  gets  anything,  and  the 
executor  or  administrator  is  personally  liable  for  the  tax  until  it  has  been  paid. 
Under  such  a law  we  do  not  see  that  the  transferee  pays  the  tax.  In  stating 
this  conclusion  we  have  not  overlooked  what  was  said  in  the  matter  of 
Gihon,  169  N.  Y.,  443,  447,  where  it  is  said  that  “though  the  administrator 
or  executor  is  required  to  pay  the  tax,  he  pays  it  out  of  the  legacy  for  the 
legatee,  not  on  account  of  the  estate.  The  requirement  of  the  statute  that 
the  executor  or  administrator  shall  make  the  payment  is  prescribed  to  secure 
such  payment,  because  the  Government  is  unwilling  to  trust  solely  to  the 
legatee.”  The  fact,  however,  remains  that  if  a legacy  left  by  a will  is  $10,000 
and  the  executor  has  paid  to  the  State  on  its  account  a tax  of  $500  and  then  has 
turned  over  to  the  legatee  $9,500,  the  legatee  has  received  not  $10,000  but 
$9,500,  and  the  legatee  has  been  enriched  only  to  the  extent  of  the  amount 
which  he  has  himself  received,  and  he  has  not  paid  the  tax  nor  has  it  been  paid 
by  his  authority,  nor  by  anyone  representing  him.  The  payment  has  been 
made  by  the  personal  representative  of  the  deceased,  and  in  making  it  he 
has  acted  under  authority  of  the  statute. 

2870  As  was  said  by  Judge  Gray  in  matter  of  Swift,  137  N.  \ .,  77,  “What 
has  the  State  done,  in  effect,  by  the  enactment  of  this  tax  law.^  It 

reaches  out  and  appropriates  for  its  use  a portion  of  the  property  at  the 
moment  of  its  owner’s  decease;  allowing  only  the  balance  to  pass  in  the  way 
directed  by  llie  testator,  or  permitted  by  its  intestate  law.” 


INC. 


542 


TAX 


( % 


% 


8-16>20. 


2871  We  admit  that  the  New  York  cases  on  the  subject  of  taxable  transfers 
are  confused  and  not  always  clear  and  consistent.  But  until  the  New 
York  Court  of  Appeals  authoritatively  states  that  the  law  of  New  York  is 
not  what  the  Supreme  Court  of  the  United  States  said  it  was  in  the  Perkins 
case,  this  court  has  no  alternative  but  to  hold  that  the  New  York  transfer 
act  does  not  impose  a tax  on  a legatee’s  right  of  succession  which  is  deductible 
in  her  income  tax  return.  The  legacy  which  the  plaintiff  herein  received 
under  the  will  of  her  father  did  not  become  her  property  until  after  it  had 
suffered  a diminution  to  the  amount  of  the  tax,  and  the  tax  that  was  paid 
thereon  was  not  a tax  paid  out  of  the  plaintiff’s  individual  estate  but  was  a 
payment  out  of  the  estate  of  her  deceased  father  of  that  part  of  his  estate 
which  the  State  of  New  York  had  appropriated  to  itself  which  payment 
was  the  condition  precedent  to  the  allowance  by  the  State  of  the  vesting  of 
the  remainder  in  the  legatee. 

Judgment  affirmed. 


2872  Taxability  of  discount  on  non-interest-bearing  obligations  of  a state 
■ 1130  or  municipality. — Reference  is  made  to  your  letters  of  July  8 and  July 
^1135  27,  1920,  and  to  a recent  conference  between  your  representative, 

Mr.  Robert  R.  Reed,  and  officials  of  the  Bureau,  relative  to  the 
taxability  of  discount  on  non-interest-bearing  obligations  of  a municipality, 
^You  are  advised  that  profit  derived  from  state  and  municipal  securities 
purchased  at  a discount  and  held  until  maturity  is  not  taxable  where  it 
clearly  appears  that  the  return  from  the  investment  in  the  hands  of  the 
taxpayer  is,  due  solely  to  the  compensation  received  from  the  state  or  muni- 
cipality in  lieu  of  interest  for  the  use  of  the  taxpayer’s  money.  In  no  case 
may  such  ex^ption  exceed  the  total  discount  at  which  the  securities  were 
originally  sold  by  the  state  or  municipality.  (Letter  to  Messrs.  Reed, 
Dougherty  and  Hoyt,  New  York,  N.  Y.,  signed  by  Acting  Commissioner 
Paul  H.  Myers,  and  dated  August  9,  1920.) 


(T.  D.  3053.) 

[Note:  To  indicate  the  change which  are  in  subdivision  {b)  only,  would 
prove  more  confusing  than  helpful.] 

2873  Gross  income  of  life  insurance  companies:  Article"" 549  of  Regu- 
987  lations  45  amended. — Article  549  of  Regulations  45  is  hereby  amended 

to  read  as  follows: 

Art.  549.  Gross  income’^ of  life-insurance^ companies. — A life  insurance 
company  shall  not  include  in  gross  income  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  is  paid  back  or 
credited  to  or  treated  as  an  abatement  of  premium  of  such  policyholder 
within  the  taxable  year.  (a)  “Paid  back”  means  paid  in  cash, 
(b)  “Credited  to”  means  applied  by  way  of  credit  to  the  payment  of 
the  premium  for  the  taxable  year.  It  does  not  include  dividends  applied 
to  purchase  additional  paid-up  insurance  or  annuities,  or  to  shorten  the 
endowment  or  premium  paying  period,  or  in  any  way  that  does  not 
actually  reduce  the  premium-receipts  of  the  company  for  the  taxable 
year,  (c)  “Treated  as  an  abatement  of  premium”  means  of  the 
premium  for  the  taxable  year.  Where  the  dividend  paid  back  is  in 
excess  of  the  premium  received  from  the  policyholder  within  the  taxable 
year  there  may  be  excluded  from  gross  income  only  the  amount  of  such 

543  TAX 


INC. 


premium  received,  and  where  no  premium  is  received  from  the  policy- 
holder within  the  taxable  year  the  company  is  not  entitled  to  exclude 
from  its  premiums  received  from  other  policy-holders  any  amount  in 
respect  of  such  dividend  payment.  (T.  D.  3053,  signed  by  Acting 
Commissioner  Paul  F.  Myers,  and  dated  August  10,  1920.) 


[Note:  To  indicate  changes  herein  would  prove  more  confusing  than  helpful.] 

(T.  D.  3055.) 

2874  Computation  of  depletion  allowance  for  combined  holdings  of  oil 

1420  and  gas  wells:  Article  214,  Regulations  45,  amended. — Article 

1421  214  of  Regulations  45  is  hereby  amended  to  read  as  follows: 

Art.  214.  Computation  of  depletion  allowance  for  combined  holdings 
of  oil  and  gas  wells —{\)  The  recoverable  oil  belonging  to  the  taxpayer  shall 
be  estimated  for  each  property  separately.  The  capital  account  for  each 
property  shall  include  the  cost  or  value,  as  the  case  may  be,  of  the  oil  or 
gas  lease  or  rights  plus  all  incidental  costs  of  development  not  charged 
as  expense  nor  returnable  through  depreciation.  The  unit  value  of  the 
recoverable  oil  or  gas  for  each  property  is  the  quotient  obtained  by  dividing 
the  capital  account  recoverable  through  depletion  for  each  property  by  the 
estimated  number  of  units  of  recoverable  oil  or  gas  on  that  property.  This 
unit  for  each  separate  property  multiplied  by  the  number  of  units  of  oil  or 
gas  produced  within  the  year  by  the  taxpayer  upon  such  property  will 
determine  the  amount  which  may  be  deducted  for  depletion  from  the  gross 
income  of  that  year  for  that  property.  The  total  allowance  for  depletion 
of  all  the  oil  or  gas  properties  of  the  taxpayer  will  be  the  sum  of  the  amounts 
computed  for  each  property  separately:  Provided, 

2875  (2)  That  in  the  case  of  gas  properties  the  depletion  allowance  for 

1421  each  pool  may  be  computed  by  using  the  combined  capital  account 

returnable  through  depletion  of  all  the  tracts  of  gas  land  owned  by 
the  taxpayer  in  the  pool  and  the  average  decline  in  rock  pressures  of  all 
the  taxpayer’s  wells  in  such  pool  in  the  formula  given  in  Article  211  [Tfl417]. 
The  total  allowance  for  depletion  in  the  gas  properties  of  the  taxpayer  will  be 
the  sum  of  the  amounts  computed  for  each  pool.  (T.  D.  3055,  signed  by 
Acting  Commissioner  Paul  F.  Myers,  and  dated  August  12,  1920.) 


INC, 


544 


TAX 


8-19-20. 


(T.  D.  3056.) 

2876  Coiicemmg  the  creation  of  a sinking  tund  by  a corporation  in  order 

636  to  secure  the  payment  of  its  bonds  or  other  indebtedness. — The  final 

809  edition  of  P^egulations  45  is  amended  by  inserting  immediately 

1697  after  Article  541  a paragraph,  to  be  .known  as  Article  541  (a),  as 

follows: 

Art.  541  (a).  Creation  of  sinking  fund. — If  a corporation,  in  order  solely 
to  secure  the  payment  of  its  bonds  or  other  indebtedness,  places  property  in 
trust,  or  sets  aside  certain  amounts  in  a sinking  fund  under  the  control  of 
a trustee,  who  may  be  authorized  to  invest  and  reinvest  such  surns  from 
time  to  time,  the  property  or  fund  thus  set  aside  by  the  corporation  and 
held  by  the  trustee  is  an  asset  of  the  corporation,  and  any  gain  arising  there- 
from is  income  of  the  corporation  and  shall  be  included  as  such  in  its  annual 
return.  The  trustee,  however,  is  not  taxable  as  such  on  account  of  the 
property  or  fund  so  held.  See  Section  219  and  Articles  341  to  347  [as  to 
estates  and  trusts,  beginning  at  ^[636].  If  such  fund  is  invested  by  the 
trustee  in  whole  or  in  part  in  bonds,  the  trustee  when  presenting  coupons 
from  the  bonds  for  payment  shall  file  ownership  certificates,  Form  1001, 
revised,  whether  or  not  the  bonds  contain  a tax  free  covenant  clause.  See 
Article  366  [for  form  of  certificate  where  no  withholding  required,  ^1697]. 
(T.  D.  3056,  signed  by  Acting  Commissioner  Paul  F.  Myers,  and  dated 
August  14,  1920.) 

(T.  D.  3058.) 

2877  Section  203,  Revenue  Act  of  1918:  Inventories  of  retail  dry  goods 

1090  dealers. — Regulations  45  are  hereby  amended  by  inserting  Article 
1092  1588,  reading  as  follows: 

2878  Art.  1588.  Inventories  of  retail  dry  goods  dealers.— (1)  Retail 

dry  goods  dealers  who  emiploy  the  “retail  method,”  which  is  essen- 
tially a “cost”  method  of  valuing  inventories,  will  be  permitted  to  make  their 
returns  upon  that  basis,  provided  (a)  that  the  use  of  such  method  is  designated 
upon  the  return,  (b)  that  accurate  accounts  are  kept,  and  (c)  that  such 
m.ethod  be  adhered  to  in  subsequent  years,  unless  a change  is  authorized 
by  the  Commissioner.  The  “retail  method”  consists  in  computing  the  cost 
of  goods  on  hand  from  the  “percentage  of  purchase  mark-up”  and  the  “retail 
value”  of  goods  on  hand. 

2879  (2)  A taxpayer  employing  the  “retail  method”  of  valuing  inventories 
shall  maintain  and  preserve  in  permanent  form,  for  the  inspection 

(■)f  iniernal  revenue  officers,  the  accounts  and  records  of  each  year,  together 
with  a schedule  of  all  mark-downs  in  each  department,  and  such  mark-downs 
shall  not  be  included  in  the  computation  of  the  retail  value  of  goods  on  hand 
unless  the  goods  so  marked  down  have  been  actually  sold. 

2880  (3)  The  follov/ing  general  plan  of  taking  an  inventory  by  the  “retail 
method”  will,  it  is  believed,  be  found  readily  adaptable  to  the  require- 
ments of  most  retail  dry  goods  dealers: 

2881  (A)  4'he  percentage  of  purchase  mark-up  is  computed  as  follows: 
4 'he  value  of  all  merchandise,  as  received,  is  recorded  by  departments 

at  two  prices,  (a)  invoice  cost  plus  transportation,  and  (b)  original  retail 
sale  })rice,  4'hese  cost  and  retail  values  are  accumulated  as  recorded  during 
the  year.  I’he  total  retail  value  minus  tlie  total  cost  value  equals  the 
total  purchase  mark-up,  which  divided  by  the  total  retail  \alu(‘  gives  the 
percentage  of  purchase  mark-up. 

2882  (B)  'The  reta  I value  of  goods  on  hand  is  computed  as  follows;  A recc)rd 
is  kejat  of  (a)  the  amounts  of  all  sah's  at  retail,  (b)  any  variations  trom 

545  TAX 


INC. 


the  inventory  prices  of  the  preceding  year  of  goods  carried  over  from  that 
year,  and  (c)  any  variations  from  the  original  sale  prices,  such  as  subsequent 
mark-ups  or  mark-downs  (note  paragraph  2).  The  retail  value  of  the  opening 
inventories  plus  the  retail  value  of  the  purchases  (plus  or  minus  the  algebraic 
sum  of  all  subsequent  mark-ups,  and  mark-downs  in  the  case  of  goods  actually 
sold)  minus  the  retail  value  of  the  sales  equals  the  retail  value  of  the  book 
inventory  of  goods  on  hand.  'Physical  inventories  by  departments  are  taken 
of  goods  on  hand  at  retail  at  the  close  of  the  taxable  year,  and  the  retail  value 
(')f  the  book  inventory  of  goods  on  hand  is  adjusted  accordingly. 

2883  (C)  The  cost  of  goods  on  hand  is  computed  by  subtracting  from  one 

hundred  per  cent  the  percentage  of  purchase  mark-up,  which  gives  th.e 
percentage  of  cost,  and  multiplying  the  retail  value  of  goods  on  hand  by  such 
percentage  of  cost.  (T.  D.  3058  signed  by  Acting  Commissioner  Paul  F. 
Myers,  and  dated  August  16,  1920.) 


(T.  D.  3059.) 

2884  Stock  dividends:  Article  1545,  Article  1546,  and  Article  1642  of 
849  Regulations  45  revoked,  and  Article  1547  amended. — In  accord- 

859  dance  with  the  recent  decision  of  the  Supreme  Court  of  the  United 

860  States  in  the  case  of  Eisner  v.  Macomber  (T.  D.  3010)  [^[2575], 
865  holding  that  a stock  dividend  is  not  taxable  income  to  the  stock- 

2575  holder.  Article  1545  [11849],  Article  1546  [1[859],  and  Article  1642 
2841  [11860]  of  Regulations  45  are  hereby  revoked,  and  Article  1547 

[1[865]  is  amended  to  read  as  follows: 

2885  Art.  1547.  Sale  of  stock  received  as  dividend. — Stock  received  as  a 
865  dividend  does  not  constitute  taxable  income  to  the  stockholder, 

2653  but  any  profit  derived  by  the  stockholder  from  the  sale  of  such  stock 
is  taxable  income  to  him.  For  the  purpose  of  ascertaining  the  gain 
or  loss  derived  from  the  sale  of  such  stock,  or  from  the  sale  of  the  stock  with 
respect  to  which  it  is  issued,  the  cost  (used  to  include  also,  where  required, 
the  fair  market  value  as  of  March  1,  1913)  of  both  the  old  and  new  shares 
is  to  be  determined  in  accordance  with  the  following  rules: 

2886  (1)  Where  the  stock  issued  as  a dividend  is  all  of  substantially  the 
same  character  or  preference  as  the  stock  upon  which  the  stock 

dividend  is  paid,  the  cost  of  each  share  of  both  the  old  and  new  stock  v/ill  be 
the  quotient  of  the  cost,  or  fair  market  value  as  of  March  1,  1913,  if  acquired 
prior  to  that  date,  of  the  old  shares  of  stock  divided  by  the  total  number  of 
the  old  and  new  shares. 

2887  (2)  Where  the  stock  issued  as  a dividend  is  in  whole  or  in  part  of  a 
character  or  preference  materially  different  from  the  stock  upon  which 

the  stock  dividend  is  paid,  the  cost,  or  fair  m.arket  value  as  of  March  1,  1913, 
if  acquired  prior  to  that  date,  of  the  old  shares  of  stock  shall  be  divided 
between  such  old  stock  and  the  new  stock,  or  classes  of  new  stock,  in  pro- 
portion, as  nearly  as  may  be,  to  the  respective  values  of  each  class  of  stock, 
old  and  new,  at  the  time  the  new  shares  of  stock  are  issued,  and  the  cost 
of  each  share  of  stock  will  be  the  quotient  of  the  cost  of  the  class  to  which  such 
share  belongs  divided  by  the  number  of  shares  in  that  class. 

2888  (3)  Where  the  stock  with  respect  to  which  a stock  dividend  is  issued 
was  purchased  at  different  times  and  at  different  prices  and  the 

identity  of  the  lots  cannot  be  determined,  any  sale  of  the  original  stock 
will  be  charged  to  the  earliest  purchases  of  such  stock  (See  Art.  39  [1[911, 
for  sale  of  stock  and  rights.]),  and  any  sale  of  dividend  stock  issued  with 
respect  to  such  stock  will  be  presumed  to  have  been  made  from  the  stock 
issued  with  respect  to  the  earliest  purchased  stock,  to  the  amount  of  the 
dividend  chargeable  to  such  stock.  (T.  D.  3059,  signed  by  Acting  Com- 
missioner Paul  F.  Myers,  and  dated  August  16,  1920.) 

546  TAX 


INC. 


8-30-20. 


2889  Interest  on  bonds  sold  between  interest  dates. — Ownership  cer- 

2817  tificates.— Ruling  of  July  21,  1920  [112821]  held  [in  abeyance.— Refer- 

ence is  made  to  the  letter  from  this  office  addressed  to  you  under  date 

of  July  21,  1920,  relative  to  the  filing  of  ownership  certificates  where  interest 
coupons  are  presented  for  payment  of  interest  on  bonds  which  have  been  sold 
between  interest  dates. 

2890  In  the  letter  of  July  21,  the  following  ruling  was  given: — ‘‘Where  inter- 
2821  est  coupons  are  presented  for  payment  of  interest  on  bonds  which  have 

been  sold  between  interest  dates,  the  coupons  should  be  accompanied 
by  the  separate  ownership  certificates  of  both  the  vendor  and  the  purchaser. 
The  certificate  of  the  vendor  should  cover  the  interest  accrued  upon  the  bond 
to  the^  date  of  sale  and  the  interest  accrued  from  the  date  of  sale  to  the 
maturity  of  the  coupon  should  be  covered  by  the  certificate  of  the  purchaser. 
The  certificates  should  be  on  Form  1000  (Revised),  or  Form  1001  (Revised), 
dependent  upon  whether  or  not  exemption  is  claimed  from  having  the  tax 
paid^  at  the  source.  The  ownership  certificate  of  the  vendor  should  be 
obtained  by  the  purchaser  at  the  time  of  the  sale  of  the  bond  and  presented, 
together  with  the  purchaser’s  certificate,  when  the  coupon  is  cashed.  Unless 
the  separate  ownership  certificates  of  the  vendor  and  purchaser  showing 
the  amount  of  interest  accrued  to  each,  respectively,  accompany  the  coupon 
when  it  is  presented  for  payment,  the  entire  amount  of  interest  represented 
by  the  coupon  will  be  treated  as  interest  accrued  to  the  purchaser.  In  that 
event,  however,  the  vendor  will  not  be  relieved  of  his  liability  for  return 
and  payment  of  the  tax  upon  the  portion  of  the  interest  accrued  to  him.” 

2891  You  are  advised  that  the  subject  of  the  letter  of  July  21  is  being 
reconsidered  by  this  office  and  the  enforcement  of  the  above  ruling 

will  be  held  in  abeyance  pending  final  determination  of  the  matter.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Acting  Commissioner 
Paul  F.  Myers,  and  dated  August  17,  1920.) 


(T.  D.  3060.) 

[Mattgr  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2892  Concerning  countries  which  do  or  do  not  satisfy  the  similar  credit' 
1286  requirement  of  Section  222  (a)  (3)  of  the  Revenue  Act  of  1918.— 
2711  The  final  edition  of  Regulations  45  is  amended  by  inserting  imme- 
diately after  Article  384,  a paragraph  to  be  known  as  Article  385, 
as  follows: 

Art.  385.  Countries  which  do  or  do  not  satisfy  the  similar  credit  re- 
quirement. (a)  The  following  is  an  incomplete  list  of  the  countries  which 
satisfy  the  s’iniilar  credit  requirement  of  Section  222  (a)  (3)  of  the  Revenue 
Act  of  1918,  either  by  allowing  to  citizens  of  the  United  States  residing  in  such 
countries  a credit  for  the  amount  of  income,  war  profits  or  excess  profts  taxes 
paid  to  the  United  States  upon  incomes  derived  from  sources  therein,  or  in 
imposing  such  taxes,  by  exempting  from  taxation  the  incomes  received  from 
sources  within  the  United  States  by  citizens  of  the  United  States  residing  in 
such  countries:  Bulgaria,  Canada,  Italy,  Newfoundland,  Salvador,  (b)  The 
following  is^  an  incomplete  list  of  the  countries  which  do  not  satisfy  the 
similar  credit  requirement  of  Section  222  (a)  (3),  of  the  Revenue  Act  of  1918, 
either  by  allowing  no  credit  to  citizens  of  the  United  States  residing  in  such 
countries,  for  the  amount  of  income,  war  profits  or  excess  profits  taxes  paid  to 
the  United  States  upon  incomes  derived  from  sources  therein,  or  because  such 


IMC. 


547  TAX 


coufitfics  do  Tvot  ifnposc  ciuy  incoftiSy  wdt  pTofits  ov  excess  peofits  taxes'.  Argentina., 
Bahama,  Belgium,  Bermuda,  Bolivia,  Bosnia,  Brazil,  Chile,  China,  Costa 
Rica,  Equador,  Egypt,  Finland,  France,  Great  Britain  and  Ireland,  Guate- 
mala’, Herzegovina,  India,  Jamaica,  Japan,  Montenegro,  Morocco,  New 
Zealand,  Nicaragua,  Panama,  Paraguay,  Persia,  Peru,  Portugal,  Roumania, 
Santo  Domingo,  Serbia,  Siam,  Sweden,  Switzerland,  Venezuela.  The  former 
names  of  certain  of  these  territories  are  here  used  for  convenience  in  spite  of 
the  actual  or  possible  change  in  the  name  or  sovereignty.  A resident  of 
the  United  States  who  is  a citizen  or  subject  of  any  country  in  the  first  list 
is  entitled,  for  the  purpose  of  the  total  tax  due  the  United  States,  for  1918 
and  subsequent  years,  to  a credit  for  the  amount  of  any  income,  war  profits 
and  excess  profits  taxes  paid  or  accrued  during  the  taxable  year  to  such 
countrv  upon  income  from  sources  therein.  If  he  is  a citizen  or  subject  of 
any  country  in  the  second  list,  he  is  not  entitled  to  such  credit.  If  he  is  a 
citizen  or  subject  of  a country  which  is  in  neither  list,  then  to  secure  the 
desired  credit,  he  must  prove  to  the  satisfaction  of  the  Commissioner  that 
his  country  satisfies  the  similar  credit  requirement  of  the  statute  [the  country 
of  which  he  is  a citizen  or  subject  either  imposes  no  income,  war  profits  or 
excess  profits  taxes,  or  in  imposing  such  taxes  allows  to  citizens  of  the  United 
States  residing  in  such  country  a credit  for  the  amount  of  income,  war  profits 
or  excess  profits  taxes  paid  to  the  United  States  on  incomes  derived  from 

sources  therein].  . , , » • 

2093  T.  D.  3028  11[271ll  is  hereby  revoked.  (T.  D.  3060,  signed  by  Acting 
Commissioner  Paul  F.  Myers,  and  dated  August  25,  1920.) 


(T.  D.  3061.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2894  Deductions  allowed:  Depreciation.  Article  166,  Regulations  45, 
|l359  Amended. — Article  166  of  Regulations  45  is  hereby  amended  to  read 
^ as  follows:  . 

Art.  166.  Modification  of  method  of  computing  depreciation. — If  it 

develops  that  the  useful  life  of  the  property  has  been  underestimated,  the 
plan  of  computing  depreciation  should  be  modified  and  the  balance  of  the  cost 
of  the  property,  or  its  fair  market  value  as  of  March  1,  1913,  not  already 
provided  for  through  a depreciation  reserve  or  deducted  from  book  value, 
should  be  spread  over  the  estimated  remaining  life  of  the  property.  Inasmuch 
as  under  the  provisions  of  the  hicome  tax  Acts  in  effect  prior  to  Revenue  Act 
of  1918  deductions  for  obsolescefice  of  property  were  not  allowed  except  as  a loss 
for  the  year  in  which  the  property  was  sold  or  permanently  abandoned^  a tax- 
payer [A  taxpayer  who  in  computing  depreciation  allowances  in  returns^  for 
years  prior  to  1918  has  not  taken  ordinary  obsolescence  into  consideration] 
may  for  [the  year]  1918  and  subsequent  years  revise  the  estimate  of  the  use- 
ful life  of  any  property  so  as  to  allow  for  such  future  obsolescence  as  may  be 
expected  from  experience  to  result  from  the  normal  progress  of  the  art. 
No  modification  of  the  method  should  be  made  on  account  of  changes  in  the 
market  value  of  the  property  from  time  to  time,  such  as,  on  the  one  hand, 
loss  in  rental  value  of  the  buildings  due  to  deterioration  of  the  neighborhood, 
or,  on  the  other,  appreciation  due  to  increased  demand.  The  conditions 
affecting  such  market  values  should  be  taken  into  consideration  only  so 
far  as  they  affect  the  estimated  [of  the]  useful  life  of  the  property.  (T.  D. 
3061,  signed  by  Commissioner  Wm.  M.  Williams,  and  dated  August  27, 
1920.) 


9-3-20. 


2896  Suggested  method  of  identifying  dividend  checks  of  resident  foreign 
1517  corporations  as  domestic  items. — Reference  is  made  to  your  letter 

1744  dated  July  22,  1920,  stating  that  the , a Canadian  corporation 

2482  doing  business  in  the  United  States  and  paying  an  income  tax  to  the 
United  States  Government,  on  practically  all  of  its  earnings,  pays 
its  dividends  with  checks  drawn  on  its  New  York  banking  institution. 
Understanding  that  it  is  necessary  for  checks  representing  dividends  of  a 
foreign  corporation  to  be  accompanied  by  ownership  certificates,  you  inquire 
whether  this  corporation  may  obviate  the  necessity  of  having  its  dividend 
checks  accompanied  by  such  certificates  by  the  attachment  of  the  following 
notice: 

“This  Company  carries  on  its  manufacturing  operations  within  the 
United  States,  and  under  the  U.  S.  Income  Tax  law,  it  is  termed  a Resident 
Foreign  Corporation.  This  dividend  check,  therefore,  is  not  a foreign 
item,  and  need  not  be  accompanied  by  a United  States  ownership 
certificate.” 

2896  You  are  advised,  that  as  the is  required  to  pay  the  normal 

tax  on  its  net  earnings,  the  dividends  derived  therefrom  are  only 

subject  to  surtaxes  in  the  hands  of  the  stockholders.  As  such  dividends 
are  regarded  as  domestic  dividends  for  income  tax  purposes,  ownership  certi- 
ficates are  not  required  to  accompany  the  dividend  checks  for  collection. 

2897  The  proposed  notation  submitted  by  you  has  the  approval  of  this 
Bureau  and  will  undoubtedly  have  the  effect  of  identifying  the 

dividend  checks  as  domestic  items.  (Letter  to  A.  H.  Whan  & Company, 
New  York,  N.  Y.,  signed  by  Deputy  Commissioner  G.  V.  Newton,  by  H. 
A.  Haywood,  Acting  Head  of  Division,  and  dated  August  23,  1920.) 


(T.  D.  3062.) 

[Comment;  Differences  between  old  and  new  Arts.  48  and  109,  being 
many,  are  not  shown;  in  Art.  164  the  only  change  is  the  addition  of  the  new 
matter  shown  in  italics.] 

2898  Income  to  lessors  of  improvements  made  upon  real  estate  by  lessees 
— Articles  48,  109  and  164  of  Regulations  45  amended. — Articles  48, 

109  and  164  of  Regulations  45  are  hereby  amended  to  read  as  follows: 

2899  Art.  48.  Rents  and  royalties. — When  buildings  are  erected  or  im- 
939  provements  are  made  by  a lessee  in  pursuance  of  an  agreement  with 

2695  the  lessor,  and  such  buildings  or  improvements  are  not  subject  to 
removal  by  the  lessee,  the  lessor  receives  income  at  the  time  when  such  build- 
ings or  improvements  are  completed,  to  the  extent  of  the  fair  market  price 
or  value  of  such  buildings  or  improvements  subject  to  the  lease.  This  amount 
would  ordinarily  be  the  difference  between  the  value  of  the  land  free  from 
the  lease  without  such  improvements  and  the  value  of  the  land  subject  to  the 
lease  with  such  improvements.  If,  for  any  other  reason  than  a bona  fide 
purchase  from  the  lessee  by  the  lessor,  the  lease  is  terminated,  so  that  the 
lessor  comes  into  possession  and  control  of  the  property  prior  to  the  time 
originally  fixed  for  the  termination  of  the  lease,  the  lessor  receives  additional 
income  for  the  year  in  which  the  lease  is  so  terminated  to  the  extent  that  the 
value  of  such  buildings  or  improvements  when  he  became  entitled  to  such 
possession  exceeds  the  fair  market  price  or  value  thereof  to  him  as  determ  ned 
when  the  same  completed  became  part  of  the  realty.  No  appreciatio  in 
value  due  to  causes  other  than  the  premature  termination  of  the  lease  shall 
be  included.  Conversely,  if  the  buildings  or  improvements  are  dest  oyed 

549  TAX 


INC. 


prior  to  the  termination  of  the  lease  the  lessor  is  entitled  to  deduct  as  a loss 
of^the  year  when  such  destruction  takes  place  the  fair  market  price  or  value 
of^such  buildings  or  improvements  subject  to  the  lease  as  determined  when 
the  same  completed  became  a part  of  the  realty,  or  the  value  thereof  subject 
to  the  lease  on  March  1,  1913,  less  any  salvage  value  subject  to  the  lease, 
to  the  extent  that  such  loss  was  not  compensated  by  insurance.  (See  Articles 
109  [1(2900],  164  [1(2901].) 

2900  Art.  109.  Rentals. — Where  a leasehold  is  acquired  for  business  pur- 

1231  poses  for  a specified  sum,  the  purchaser  may  take  as  a deduction  in 

his  return  an  aliquot  part  of  such  sum  each  year,  based  on  the  num- 
ber of  years  the  lease  has  to  run.  Taxes  paid  by  a tenant  to  or  for  a landlord 
for  business  property  are  additional  rent  and  constitute  a deductible  item 
to  the  tenant  and  taxable  income  to  the  landlord,  the  amount  of  the  tax 
being  deductible  by  the  latter.  The  cost  borne  by  a lessee  in  erecting  build- 
ings or  making  permanent  improvements  on  ground  of  which  he  is  lessee  is 
held  to  be  a capital  investment  and  not  deductible  as  a business  expense.  In 
order  to  return  to  such  taxpayer  his  investment  of  capital,  an  annual  deduc- 
tion may  be  made  from  gross  income  of  an  amount  equal  to  the  total  cost 
of  such  improvements  divided  by  the  number  of  years  remaining  of  the  term 
of  lease,  and  such  deduction  shall  be  in  lieu  of  a deduction  for  depreciation. 
If  the  remainder  of  the  term  of  lease  is  greater  than  the  probable  life  of  the 
buildings  erected,  or  of  the  improvements  made,  this  deduction  shall  take 
the  form  of  an  allowance  for  depreciation.  (See  Article  48  [1(2899].) 

2901  Art.  164.  Capital  sum  recoverable  through  depreciation  allowances. 

1348  The  capital  sum  to  be  replaced  by  depreciation  allowances  is  the  cost 

of  the  property  in  respect  of  which  the  allowance  is  made,  except  that 
in  the  case  of  property  acquired  by  the  taxpayer  prior  to  March  1,  1913,  the 
capital  sum  to  be  replaced  is  the  fair  market  value  of  the  property  as  of  that 
date.  In  the  absence  of  proof  to  the  contrary,  it  will  be  assumed  that  such 
value  as  of  March  1,  1913,  is  the  cost  of  the  property  less  depreciation  up 
to  that  date.  To  this  sum  should  be  added  from  time  to  time  the  cost  of 
improvements,  additions  and  betterments,  the  cost  of  which  is  not  deducted 
as  an  expense  in  the  taxpayer’s  return,  and  from  it  should  be  deducted  from 
time  to  time  the  amount  of  any  definite  loss  or  damage  sustained  by  the 
property  through  casualty,  as  distinguished  from  the  gradual  exhaustion  of 
its  utility  which  is  the  basis  of  the  depreciation  allowance.  In  the  case  of  the 
acquisition  after  March  1,  1913,  of  a combination  of  depreciable  and  non- 
depreciable property  for  a lump  price,  as,  for  example,  land  and  buildings,  the 
capital  sum  to  be  replaced  is  limited  to  that  part  of  the  lump  price  which 
represents  the  value  of  the  depreciable  property  at  the  time  of  such  acquisi- 
tion. Where  the  lessee  of  real  property  erects  buildings,  or  makes  permanent 
improvements  which  become  part  of  the  realty  and  income  or  loss  has  been  returned 
by  the  lessor  as  a result  thereof,  as  provided  in  Article  48  [K  2899],  the  capital 
sum  to  be  replaced  by  depreciation  allowances  is  held  to  be  the  same  as  though 
no  such  buildings  had  been  erected,  or  such  improvements  made.  (T.  D.  3062, 
signed  by  Commissioner  Wm.  M.  Williams,  and  dated  Sept.  1,  1920.) 


INC. 


550  TAX 


9-23-20. 


(T.  D.  3064.) 

[Matter  in  itaHcs  is  new;  that  in  hold  face  brackets  [ ] is  old  matter  cut  out.] 

2902  Computation  of  allowance  for  depletion  of  gas  wells. — Article  211, 
1417  Regulations  45,  is  hereby  amended  to  read  as  follows: 

Art.  211.  Computation  of  allowance  for  depletion  of  gas  wells. — 

On  account  of  the  peculiar  conditions  surrounding  the  production  of  natural 
gas  it  will  be  necessary  to  compute  the  depletion  allowance [s]  for  gas  prop- 
erties by  methods  suitable  to  the  particular  cases  in  question  and  acceptable 
to  the  Commissioner.  Usually,  the  depletion  of  natural  gas  properties  should 
be  computed  on  the  basis  of  decline  in  closed  or  rock  pressure,  taking  into 
account  the  effects  of  water  encroachment  and  any  other  modifying  factors. 
The  gas  producer  will  be  expected  to  compute  the  depletion  as  accurately  as 
possible  and  submit  with  his  return  a description  of  the  method  by  which  the 
computation  was  made.  sThe  following  formula,  in  which  the  units  of  gas 
are  pounds  per  square  inch  of  closed  pressure,  [may  be  used  and]  is  recom- 
mended: the  quotient  of  the  capital  account  recoverable  through  depletion 
allowances  to  the  end  of  the  taxable  year,  divided  by  the  sum  of  the  pressures 
at  the  beginning  of  the  year  plus  the  sum  of  initial  pressures  of  new  wells  and 
less  the  sum  of  the  pressures  at  the  time  of  expected  abandonment  (which 
quotient  is  the  unit  cost)  multiplied  by  the  sum  of  the  pressures  at  the  begin- 
ning of  the  taxable  year  plus  the  sum  of  the  initial  pressures  of  new  wells  and 
less  the  sum  of  the  pressures  at  the  end  of  the  tax  year,  equals  the  depletion 
allowance.  (T.  D.  3064,  signed  by  Acting  Commissioner  Paul  F.  Myers, 
and  dated  September  4,  1920.) 


(T.  D.  3071.) 

2903  Husband  and  Wife — Community  Property — Opinion  of  Attorney 
1770  General.  (1)  The  earnings  of  husband  and  wife  domiciled  in  Texas 

are  community  income,  and  such  husband  and  wife  in  rendering 
separate  income  tax  returns  may  each  report  as  gross  income  one-half  the 
total  earnings  of  the  husband  and  wife. 

2904  (2)  The  income  from  separate  property,  except  the  increase,  rents 
and  revenues  from  lands,  is  community  income,  and  therefore  hus- 
band and  wife  domiciled  in  Texas,  in  rendering  separate  income  tax  returns, 
may  each  report  as  gross  income  one-half  the  total  income  from  separate 
property,  except  the  increase,  rents  and  revenues  from  land  held  separately. 

2905  (3)  The  income  from  community  property  as  defined  in  Article 
4622,  Vernon’s  Sayles’  Statutes,  is  community  income,  and  therefore 

husband  and  wife  domiciled  in  Texas,  in  rendering  separate  income  tax  re- 
turns, may  each  report  as  gross  income  one-half  the  total  income  from  such 
community  property. 


2906  There  is  given  below  [beginning  at  ^[2907]  in  full  for  your  information 
and  guidance  an  opinion  rendered  by  the  Attorney  General  under 
date  of  August  24,  1920,  dealing  with  the  right  of  husband  and  wife  domiciled 
in  certain  States  having  so-called  “Community  Property”  laws  to  divide 
certain  of  their  income  for  the  purpose  of  the  income  tax.  (T.  D.  3071, 
signed  by  Commissioner  Wm.  M.  Williams,  and  dated  September  18,  1920.) 


INC.  551 


TAX 


(Attorney-Generar s Opinion  referred  to  above,  in  Tf2906.) 

Department  of  Justice, 

Washington,  August  24,  1920.  . 

Hon.  David  F.  Houston, 

Secretary  of  the  Treasury, 

Washington,  D.  C.  . . / 

Dear  Mr.  Secretary: 

2907  Further  acknowledging  receipt  of  your  favor  of  August  12th,  request- 
ing my  opinion  on  the  three  questions  of  law  set  forth  below,  to  wit: 

(1)  Are  the  earnings  of  husband  and  wife  domiciled  in  Texas 
community  income,  and  may  they  therefore  in  rehdering  separate 
income  tax  returns,  each  report  as  gross  income  one-half  of  the  total 
earnings  of  the  husband  and  wife? 

(2)  Is  the  income  from  separate  property,  as*  defined  in  Article 

■ 4621,  Vernon’s  Sayles’  Statutes,  1918  Edition,  community  income 

and  may  therefore  husband  and  wife  domiciled  in  Texas,  in  render- 
ing separate  income  tax  returns,  each  report  as  gross  income  one-half 
of  the  total  income  from  all  separate  property  owned  by  them?_ 

(3)  Is  the  income  from  community  property  as  defined  in  Article 
4622,  Vernon’s  Sayles’  Statutes,  1914  Edition,  community  income, 
and  may  therefore  husband  and  wife  domiciled  in  Texas,  in  render- 
ing separate  income  tax  returns,  each  report  as  gross  income  one-half 
of  the  total  income  from  community  property? 

I have  the  honor  to  advise  you  as  follows: 

2908  The  Revenue  Act  of  1918  levies  a tax  on  the  net  income  of  every  in- 
dividual (Secs.  210  and  211).  Net  income  is  defined  as  gross  income 

less  deductions  allowed  (Sec.  212).  Gross  income  is  defined  as  follows  (Sec. 
213):  _ , 

That  for  the  purposes  of  this  title  (except  as  otherwise  provided 
in  Section  233)  the  term  “gross  inconie” — 

(a)  Includes  gains,  profits,  and  income  derived  from  salaries, 
wages,  or  compensation  for  personal  service  (including  in  the  case  of 
the  President  of  the  United  States,  the  judges  of  the  Supreme  and  ^ 
inferior  courts  of  the  United  States,  and  all  other  officers  and  em- 
ployees, whether  elected  or  apj>ointed,  of  the  United  States,  Ala^a, 
Hawaii,  or  any  political  subdivision  thereof,  or  the  District  of  Col- 
umbia, the  compensation  received  as  such),  of  whatever  kind  and 
in  whatever  form  paid,  or  from  professions,  vocations,  trades,  busi- 
nesses, commerce,  or  sales,  or  dealings  in  property,  whether  real  or 
personal,  growing  out  of  the  ownership  or  use  of  or  interest  in  such 
property;  also  from  interest,  rent,  dividends,  securities,  or  the 
transaction  of  any  business  carried  on  for  gain  or  profit,  or  gains 
or  profits  and  income  derived  from  any  source  whatever.  The 
amount  of  all  such  items  shall  be  included  in  the  gross  income  for 
the  taxable  year  in  which  received  by  the  taxpayer,  unless,^  under 
methods  of  accounting,  permitted  under  subdivision  (b)  of  Section  212, 

^ any  such  amounts  are  to  be  properly  accounted  for  as  of  a different 
period. 

2909  The  State  Constitution  of  Texas  provides: 

Art.  VII,  Sec.  19,  Constitution  1845:  All  property,  both  real 
and  personal,  of  the  wife,  owned  or  claimed  by  her  before  marriage. 


552 


TAX 


INC. 


9-23-20. 

-and  that  acquired  afterward [s]  by  gift,  devise  or  descent,  shall  be 
xher  separate  property;  and  laws  shall  be  passed  more  clearly  de- 
fining the  rights  of  the  wife,  in  relation  as  well  [as]  to  her  separate 
property  as  that  held  in  common  with  her  husband.  Laws  shall 
also  be  passed  providing  for  the  registration  of  the  wife’s  separate 
property.  [Art.  XVI,  Sec.  15,  Constitution  1876.] 

2910  The  Statutes  of  the  State  of  Texas  determining  property  rights  of 
husband  and  wife  are  as  follows.  Article  4622,  Vernon’s  Sayles’ 

Statutes,  1914  Edition: 

All  property  acquired  by  either  the  husband  or  wife  during  mar- 
riage, except  that  which  is  the  separate  property  of  either  one  or 
the  other,  shall  be  deemed  the  common  property  of  the  husband 
and  wife,  and  during  coverture  may  be  disposed  of  by  the  husband 
only,  provided,  however,  the  personal  earnings  of  the  wife,  the 
rents  from  the  wife’s  real  estate,  the  interest  on  bonds  and  notes 
belonging  to  her,  and  dividends  on  stocks  owned  by  her  shall  be 
under  the  control,  management  and  disposition  of  the  wife  alone, 
subject  to  the  provisions  of  Article  4621,  as  hereinabove  written; 
and  further  provided  that  any  funds  on  deposit  in  any  bank  or 
banking  institution,  whether  in  the  name  of  the  husband  or  the 
wife,  shall  be  presumed  to  be  the  separate  property  of  the  party 
in  whose  name  they  stand,  regardless  of  who  made  the  deposit,  and 
unless  said  bank  or  banking  institution  is  notified  to  the  contrary, 
it  shall  be  governed  accordingly  in  honoring  checks  and  orders 
against  such  account. 

2911  Article  4621,  Vernon’s  Sayles’  Statutes,  1918  Edition. 

All  property,  both  real  and  personal,  of  the  husband  owned  or 
claimed  by  him  before  marriage,  and  that  acquired  afterwards  by 
gift,  devise  or  descent,  as  also  the  increase  of  all  lands  thus  acquired, 
and  the  rents  and  revenues  derived  therefrom,  shall  be  his  separate 
property.  The  separate  property  of  the  husband  shall  not  be  sub- 
ject to  the  debts  contracted  by  the  wife,  either  before  or  after  mar- 
riage, except  for  necessaries  furnished  herself  and  children,  after 
her  marriage  with  him.  All  property  of  the  wife,  both  real  and 
personal,  owned  or  claimed  by  her  before  marriage,  and  that 
acquired  afterwards  by  gift,  devise  or  descent,  as  also  the  increase 
of  all  lands  thus  acquired,  and  the  rents  and  revenues  derived  there- 
from, shall  be  the  separate  property  of  the  wife.  During  marriage 
the  husband  shall  have  the  sole  management,  control  and  disposi- 
tion of  his  separate  property,  both  real  and  personal,  and  the  wife 
shall  have  the  sole  management,  control  and  disposition  of  her 
separate  property,  both  real  and  personal;  provided,  however,  the 
joinder  of  the  husband  in  the  manner  now  provided  by  law  for  con- 
• veyance  of  the  separate  real  estate  of  the  wife  shall  be  necessary  to 
an  encumbrance  or  conveyance  by  the  wife  of  her  lands,  and  the 
joint  signature  of  the  husband  and  wife  shall  be  necessary  to  a 
transfer  of  stocks  and  bonds  belonging  to  her,  or  of  which  she  may 
be  given  control  by  this  Act;  provided,  also,  that  if  the  husband 
shall  have  permanently  abandoned  his  wife,  be  insane,  or  shall  re- 
fuse to  join  in  such  encumbrance,  conveyance  or  transfer  of  such 
property,  the  wife  may  apply  to  the  District  Court  of  the  county  of 
her  residence,  and  it  shall  be  the  duty  of  the  court,  in  term  time  or 
vacation,  upon  satisfactory  proof  that  such  encumbrance,  con- 
veyance or  transfer  would  be  advantageous  to  the  interest  of  the 


INC. 


553  TAX 


wife,  to  make  an  order  granting  permission  to  make  such  encum- 
brance, conveyance  or  transfer  without  the  joinder  of  her  husband, 
in  which  event  she  may  encumber,  convey  or  transfer  said  property 
without  such  joinder.  Neither  the  separate  property  of  the  wife, 
nor  the  rents  from  the  wife’s  separate  real  estate,  nor  the  interest 
on  bonds  and  notes  belonging  to  her,  nor  dividends  on  stocks  owned 
by  her,  nor  her  personal  earnings,  shall  be  subject  to  the  payment 
of  debts  contracted  by  the  husband.  The  homestead,  whether  the 
separate  property  of  the  husband  or  wife,  or  the  community  prop- 
erty of  both,  shall  not  be  disposed  of  except  by  the  joint  convey- 
ance of  both  the  husband  and  the  wife,  except  where  the  husband 
has  permanently  abandoned  the  wife,  or  is  insane,  in  which  instance 
the  wife  may  sell  and  make  title  to  any  such  homestead,  if  her 
separate  property,  in  the  manner  herein  provided  for  conveying  or 
making  title  to  her  other  separate  estate. 

The  community  property  of  the  husband  and  wife  shall  not  be 
liable  for  debts  or  damages  resulting  from  contracts  of  the  wife, 
except  for  necessaries  furnished  herself  and  children,  unless  the 
husband  joins  in  the  execution  of  the  contract.  Provided  that  her 
rights  with  reference  to  the  community  property  on  permanent 
abandonment  by  the  husband  shall  not  be  affected  by  the  preceding 
sentence. 

2912  Article  2469,  Vernon’s  Sayles’  Statutes. 

Upon  the  dissolution  of  the  marriage  relation  by  death  all  prop- 
erty belonging  to  the  community  estate  of  the  husband  and  wife 
shall  go  to  the  survivor,  if  there  be  no  child  or  children  of  the  de- 
ceased or  their  descendants;  but  if  there  be  a child  or  children  of 
the  deceased,  or  descendant  of  such  child  or  children,  then  the  sur- 
vivor shall  be  entitled  to  one-half  of  said  property,  and  the  other 
half  shall  pass  to  such  child  or  children,  or  their  descendants.  But 
such  descendants  shall  inherit  only  such  portion  of  said  property  as 
the  parent  through  whom  they  inherit  would  be  entitled  to  if  alive. 

2913  The  community  property  system  prevails  in  Texas,  Arizona,  Cali- 
fornia, Washington,  Louisiana  and  New  Mexico.  It  seems  to  have 

had  its  origin  in  France  and  Spain  and  to  have  been  brought  thence  into  our 
judicial  system. 

2914  Community  property  laws  provide  generally  that  all  property  acquired 
during  marriage,  by  the  industry  and  labor  of  either  husband  or  wife 

or  both,  together  with  the  produce  and  increase  thereof,  belongs  to  both  in 
equal  shares,  during  the  continuance  of  the  marital  relation.  It  has^  its 
foundation  in  the  fact  of  the  legal  presumption  that  all  property  acquired 
during  marriage,  otherwise  than  by  gift,  devise  or  descent,  is  acquired  by  the 
joint  efforts  of  husband  and  wife  (Nickerson  v.  Nickerson,  65  Tex.  281,  284). 
Their  relation  partakes  of  the  nature  of  a partnership  in  which  each  partner 
may  have  separate  estates,  or  property,  as  well  as  common  stock  of  acquisi- 
tions and  gains.  The  business  of  the  firm  generally  is  transacted  in  the  name 
of  the  husband  and  he  prosecutes  and  defends  its  suits  with  the  same  effect 
as  if  his  partner  were  named  in  the  case  (Simpson  v.  Brotherton,  62  Tex. 
170);  and  although  community  property  has  not  all  the  incidents  of  part- 
nership property,  it  has  many  of  them,  and  is  commonly  spoken  of  as  part- 
nership property  (De  Blanc  v.  Lynch  & Co.,  23  Tex.  25;  Wilkinson  v.  Wil- 
kinson, 20  Tex.  237).  In  the  conventional  partnerships  the  gains  of ^ the 
partners  are  in  proportion  to  their  respective  shares  of  stock  and  services, 
but  in  the  conjugal  partnerships  the  division  is  equal,  though  one  may  Fave 
brought  in  the  greater  part,  if  not  all  of  the  property  from  which  the  profits 

554  TAX 


INC. 


9-23-20. 

are  derived,  or  may  have  contributed  all  his  skill  and  services  unaided  by 
the  other  (Wheat  v.  Owens,  15  Tex.  241;  Routh  v.  Routh,  57  Tex.  589,  595). 
The  fact  that  one  or  the  other  of  the  spouses  may  do  all  the  work  does  not 
change  the  character  of  community  property  (Yates  v.  Houston,  3 Tex. 
452,  454).  And  though  the  management  and  disposal  of  community  prop- 
erty during  marriage  are  usually  given  to  the  husband  this  is  said  to  be  for 
reasons  of  public  policy  and  social  economy  and  not  on  the  grounds  that 
the  husband  has  any  greater  interest  in  it  than  the  wife.  Section  4622, 
Vernon’s  Sayles’  Statutes,  as  amended  in  1913,  and  as  set  forth  above,  pro- 
vides that  the  personal  earnings  of  the  wife,  the  rents  from  her  estate,  the 
interest  on  bonds  and  notes  belonging  to  her,  and  dividends  owned  on  stocks 
owned  by  her,  shall  be  under  the  control,  management  and  disposition  of 
the  wife  alone;  but  the  Supreme  Court  of  Texas  held  in  Tannehill  v.  Tanne- 
hill,  171  S.  W.  1050,  that  such  amendment  did  not  change  the  character  of 
rents  from  the  wife’s  separate  property  so  as  to  make  them  her  separate 
property,  but  that  they  continued  to  belong  to  the  community  estate,  and 
the  husband  was  owner  of  one-half  of  same.  (This  before  the  amendment 
of  Section  4621  in  1917  made  the  rents  from  separate  lands  the  separate 
property  of  the  owner  of  the  land.) 

2915  In  Tucker  v.  Carr,  39  Tex.  98,  102,  the  Court  said:  “It  is  well  settled 
that  all  property  acquired  during  the  marriage  whether  by  the  labor 

of  the  husband  or  the  wife,  or  the  joint  labor  of  both,  whether  the  title  be 
made  to  the  husband  or  to  the  wife  or  to  both  jointly,  is  community  property.” 

2916  Also  see  Cooke  v.  Bremond,  27  Tex.  457, 

2917  In  Holyoke  v.  Jackson,  3 Pac.  841,  the  Supreme  Court  of  Washington, 
in  defining  community  property  rights  in  that  State  held  that  the 

community  “is  like  a partnership,  in  that  some  property  coming  from  or 
through  one  or  other  or  both  of  the  individuals,  forms  for  both  a common 
stock  which  bears  the  losses  and  receives  the  profits  of  its  management,  and 
which  is  liable  for  individual  debts;  but  it  is  unlike  in  that  there  is  no  regard 
paid  to  proportionate  contribution,  service,  or  business  fidelity;  that  each 
individual  once  in  it  is  incapable  of  disposing  of  his  or  her^  interest,  and  that 
both  are  powerless  to  escape  from  the  relationship,  to  vary  its  terms  or  to 
distribute  its  assets  or  its  profits  . . . In  it  the  proprietary  interest 

of  husband  and  wife  are  equal,  and  those  interests  do  not  seem  to  be  united 
merely,  but  unified.” 

2918  There  are  numerous  decisions  holding  that  the  proportional  interests 
of  husband  and  wife  in  community  property  are  equal  regardless 

of  their  individual  contributions. 

2919  In  Merrill  v.  Moore,  104  S.  W.  514,  the  Court  said:  “This  community 
of  interest  is  not  made  to  depend  upon  the  acquisition  of  the  property 

during  the  time  the  parties  actually  live  together,  nor  upon  the  fact  that  there 
was  an  equal  amount  of  labor  or  capital  contributed  by  the  husband  and 
wife  in  its  accumulation.  It  is  the  property  acquired  during  the  marriage 
(with  exceptions  stated)that  shall  be  deemed  the  common  property  of  husband 
and  wife,  and  the  right  to  an  equality  of  enjoyment  and  division  thereof, 
regardless  of  whether  the  one  or  the  other  has  contributed  little  or  nothing 
to  its  acquisition  is  well  recognized.” 

2920  Also  see:  Edwards  v.  Brown,  68  Tex.  329;  Saunders  v.  Isbell, 
24  S.  W.  307;  Barr  v,  Simpson,  117  S.  W.  1041;  Wright  v.  Hays’ 

Admr.,  10  Tex,  130;  Zimpelman  v.  Robb,  53  Tex.  274. 

That  one-half  of  the  common  estate  belongs  to  each  spouse  is  recognised 
in  Treasury  Decision  2450,  which  determines  the  method  of  assessing  estate 
tax  upon  the  estate  of  a decedent  spouse. 


INC. 


555  TAX 


2921  The  decisions  in  the  various  States  seem  to  be  unanimous  on  the 
proposition  that  the  earnings  of  both  husband  and  wife  during  the 

marriage  belong  to  the  community.  i u i j 

2922  In  Fennell  v.  Drinkhouse,  131  Cal.  447,  it  was  held  that  money  earned 
by  the  wife  while  living  with  her  husband  was  community  prop- 
erty the  Court,  saying:  “The  possession  of  community  property  by  the  wife 
is  the  possession  of  the  husband.”  And  in  Martin  v.  Southern  Pacific  Com- 
pany, 130  Cal.  285,  holding  that  moneys  received  as  damages  for  injury  to 
the  wife  are  community  property,  it  was  said: 

The  services  of  the  wife  are  a part  of  the  earning  power  of  the 
community,  and  the  earnings  received  for  her  services  constitute 
community  property  as  much  as  do  the  earnings  received  for  the 
services  of  the  husband.  If  the  injury  had  been  received  by  the 
husband,  it  would  not  be  contended  that  he  .could  not  recover  for 
the  damage  sustained  by  the  loss  of  his  earning  capacity.  In  either 
case  the  earnings  would  be  community  property,  and  any  act  by 
which  either  husband  or  wife  is  deprived  of  the  capacity  to  render 
services  diminishes  the  capacity  to  accumulate  community  property. 

If  the  services  voluntarily  rendered  by  the  wife  obviate  th^e  necessity 
of  employing  other  assistance  the  amount  of  the  community  property 
is  thereby  enhanced  in  the  amount  that  would  be  required  for  such 
assistance.  . . . 

2923  See  also  Washburn  v.  Washburn,  9 Cal.  475. 

2924  Under  the  Louisiana  Statutes  the  profits  of  the  industry  of  both 
spouses  and  the  fruits  of  their  separate  estates  fall  into  the  com- 
munity. 

Succession  of  Webre,  49  La.  1491;  22  So.  390. 

Knight  V.  Kaufman,  105  La.  35;  29  So.  711. 

Manning  v.  Burke,  107  La.  456;  31  So.  862. 

The  decisions  of  the  Supreme  Court  of  the  State  of  Washington  are  to  the 
same  effect. 

Abbott  V.  Weatherby,  6 Wash.  507;  33  Pac.  1070. 

Yake  v.  Pugh,  13  Wash.  78;  42  Pac.  528. 

Sherlock  v.  Denny,  28  Wash.  170;  68  Pac.  452.  i i i- 

There  are  numerous  decisions  by  the  Supreme  Court  of  Texas  holding 
that  in  Texas  the  earnings  of  the  husband  and  wife  are  community  property. 
Cline  V.  Hackbarth,  27  Tex.  Civ.  App.  391;  65  S.  W.  1086. 

Johnson  v.  Burford,  39  Tex.  242. 

Pearce  v.  Jackson,  61  Tex.  642. 

Cooke  V.  Bremond,  27  Tex.^  457. 

In  the  latter  case  the  Court  said: 

Our  whole  system  of  marital  rights  is  based  upon  the  fact  that 
acquisitions  either  of  the  joint  or  separate  labor  or  industry  of  the 
husband  or  wife,  become  common  property;  and  as  a general  rule 
deductible  from  this  principal,  all  property  acquired  by  purchase 
or  apparent  onerous  title,  whether  the  conveyance  be^  in  the  naine 
of  the  husband  or  of  the  wife,  or  in  the  names  of  both,  is  prima  facie 
presumed  to  belong  to  the  community. 

Under  the  laws  of  the  various  States  wherein  the  community  property 
system  obtains,  the  earnings  of  separate  property  of  the  spouses  with  such 
exceptions  as  are  specifically  provided  for  by  Statute,  are  community  property. 
See  Barr  v.  Simpson,  117  o.  W.  1040  (Tex.)  and  Hayden  v.  McMillan, 
23  S.  W.  430  (Tex.) 


(% 


% 


% 


% 


A 


INC. 


556  TAX 


10-8-20. 

2926  The  latter  case  was  decided  when  Article  2851  Revised  Statutes  of 
Texas  provided  that  all  the  property  owned  by  the  wife  before 
marriage  or  acquired  afterwards  by  gift,  devise  or  descent,  and  the  “increase 
of  all  lands  thus  acquired”  should  be  the  separate  property  of  the  wife. 
And  the  Court  held  that  rents  accruing  on  the  separate  lands  of  the  wife 
were  community  property  and  subject  to  garnishment  for  community  debts. 
This  case  also  establishes  the  proposition  that  such  community  interest 
attaches  the  moment  the  property  comes  into  existence,,  the  Court  saying: 
“The  moment  the  rents  become  due  they  are  disconnected  from  the  land 
and  become  personal  property,  and  being  acquired  by  the  joint  labors  of 
the  married  couple  put  forth  during  the  marital  relation  they  must  neces- 
sarily be  community.” 

2926  From  the  above  authorities  I am  convinced  that  under  the  law  of 
Texas  the  earnings  of  the  husband  and  wife  belong  to  them  jointly 

in  equal  shares;  that  the  community  interest  attaches  as  soon  as  the  right 
to  the  wages  comes  into  existence;  and  that  the  increase  and  revenues  from 
the  separate  property  of  each  spouse  except  the  increase,  rents  and  revenues 
from  lands,  is  also  community  property  in  which  the  interests  of  husband 
and  wife  are  equal. 

2927  These  propositions  being  established  it  follows  that  the  earnings  of 
husband  and  wife  and  the  revenues  from  their  separate  personal 

property  are  community  “income,”  under  the  provisions  of  the-Act  of  Febru- 
ary 24,  1919.  Gross  income  under  the  terms  of  the  Act  includes  “gains, 
profits  and  income  derived  from  salaries,  wages,  or  compensation  for  personal 
services  of  whatever  kind  and  in  whatever  form  paid,  or  from  professions, 
vocations,  trades,  businesses,  commerce,  or  sales,  or  dealings  in  property, 
whether  real  cr  personal,  growing  out  of  the  ownership  or  use  of  or  interest 
in  such  property.” 

2928  The  law  of  Texas  presumes  that  the  earnings  of  the  husband  and 
wife  are  the  product  of  their  joint  labor  and  rests  the  ownership 

of  same  in  the  community;  they  are  therefore  community  “income”  to 
wit,  “gains,  profits  and  income”  of  the  community,  “derived  from  salaries, 
wages,  or  compensation  for  personal  services,  . . . professions,  vocations,” 

as  the  case  may  be. 

2929  Under  the  Statutes  of  Texas  heretofore  set  forth,  the  separate  property 
of  the  spouses  is  defined  as  that  “owned  or  claimed  by  him  (or  her) 

before  marriage,  and  that  acquired  afterwards  by  gift,  devise  or  descent,” 
and  also  “the  increase  of  all  lands  thus  acquired,  and  the  rents  and  revenues 
derived  therefrom.”  It  is  to  be  noted  that  the  increase  of  separate  personal 
property  and  the  revenues  derived  therefrom,  are  not  the  separate  property 
of  the  owner  of  the  personalty,  but  are  community  property  (Carr  v.  Tucker, 
42  Tex.  330;  Epperson  v.  Jones,  65  Tex.  425;  Barr  v.  Simpson,  117  S.  W. 
1041).  They  are  therefore  “income”  to  the  community,  to  wit,  “gains,  profits 
and  income  . . . from  businesses,  commerce,  or  sales  or  dealings  in 
property  . . . growing  out  of  the  ownership  or  use  of  or  interest  in  such 
property.” 

2930  Since  one-half  of  all  community  property  vests  in  each  spouse  it 
follows  that  one-half  of  the  increase  and  revenues  from  separate 

property  of  the  spouses  except  increase  and  rents  and  revenues  from  lands, 
is  income  to  each  of  said  spouses. 

2931  Community  property  under  the  laws  of  Texas,  belongs  jointly  to 
husband  and  wife;  it  follows  that  the  Income  therefrom  accrues  to 

husband  and  wife  in  equal  shares.  I therefore  conclude: 


INC. 


557  TAX 


2832  1.  That  the  earnings  of  husband  and  wife  domiciled  in  Texas  arc 

community  income,  and  such  husband  and  wife  in  rendering  separate 
income  tax  returns  may  each  report  as  gross  income  one-half  the  total  earniilgs, 
of  the  husband  and  wife. 

2933  2.  That  the  income  from  separate  property,  except  the  increase,:, 

rents  and  revenues  from  lands,  is  community^  income,  and  that 
therefore  husband  and  wife  domiciled  in  Texas,  in  rendering  separate  income 
tax  returns,  may  each  report  as  gross  income  one-half  the  total  income 
from  separate  property,  except  the  increase,  rents  and  revenues  from  land 

held  separately.  ^ j • a * i 

2834  3.  That  the  income  from  community  property  as  defined  in  Article 

4622,  Vernon’s  Sayles’  Statutes,  quoted  above,  is  community  income, 
and  that  therefore  husband  and  wife  domiciled  in  Texas,  in  rendering  separate 
income  tax  returns,  may  each  report  as  gross  income  one-half  the  total 
income  from  such  commiunity  property. 

Respectfully, 

(Signed)  A.  MITCHELL  PALMER, 
Attorney  General. 

(Attorney-General’s  Opinion  embodied  in  T.  D.  3071,  ^2903.) 


{Decision.) 

Liability  to  Tax  of  Estates  and  Trusts  as  Entities  under  the  Act  of  1913. 
United  States  Circuit  Court  of  Appeals 
For  the  Seventh  Circuit. 

(October  Term  and  Session,  1920.) 


FIRST  TRUST  AND  SAVINGS  BANK,  ^ 
Trustee  Under  the  Last  Will  and  Testa- 
ment of  Otto  Young,  Deceased, 

PloAntiff  in  Err  or  ^ 
vs. 

JULIUS  F.  SMIETANKA,  as  Collector  of 
Internal  Revenue  of  the  United  States  of 
America,  for  the  First  District  of  Illinois. 

Defendant  in  Error. 


Error  to  the  District  Court  of 
the  United  States  for  the' 
Northern  District  of  111- 
nois,  Eastern  Division. 


Before  Baker,  Alschuler  and  Evans,  Circuit  Judges. 


Baker,  Circuit  fud^.e,  delivered  the  opinion  of  the  court; 

2835  Plaintiff  in  error,  as  trustee  under  the  will  of  Otto  1:  oung,  filed  a 

639  declaration  to  recover  income  taxes  assessed  against  the  estate  under 

640  the  Internal  Revenue  Act  of  October^ 3,  1913,  and  paid  under  pro- 
test. A general  demurrer  was  sustained,  and  judgmient  for  costs 

followed.  .... 

2836  Otto  Young’s  will,  after  disposing  of  portions  of  the  income  during 
the  lives  of  his  widow  and  four  daughters  and  until  his  youngest  sur- 
viving grandchild  should  attain  the  age  of  twenty-one,  provided; 

“6.  When  the  last  survivor  of  m.y  daughters  shall  have  de- 
ceased and  the  youngest  surviving  child  of  my  daughters  shall  have 


% 


INC. 


558  tax 


10-8-20. 


attained  the  age  of  twenty-one  years,  all  of  said  trust  estate  then 
remaining  in  the  hands  of  said  trustee  shall  be  divided  in  equal  shares 
between  my  grandchildren,  the  surviving  issue  of  any  deceased 
grandchild  to  receive  the  share  which  such  deceased  grandchild 
would  have  been  entitled  to  receive  if  then  living.  * * * The  excess, 
if  any,  of  the  income  of  said  trust  estate,  over  and  above  the  pay- 
ments hereinbefore  provided  to  be  made  therefrom,  shall  be  accumu- 
lated in  the  hands  of  said  trustee  and  form  a part  of  said  trust  estate, 
subject  to  the  like  control  and  power  of  disposition  on  the  part  of  said 
trustee  as  the  principal  of  said  trust  estate.” 

2937  If  a decedent’s  estate  produces  an  increment  which  is  only  payable 

at  timies  and  to  persons  not  now  detenninable,  is  such  increment  dur- 
ing a tax  year  an  incomic  of  that  tax  year  which  is  assessable  und.er  the  In- 
ternal Revenue  Act  of  October  3,  1913.^ 

2938  Provisions  essential  to  the  answer  are  as  follows: 

“Par.  A,  subd.  1.  There  shall  be  levied  and  collected  an- 
nually (a  tax)  upon  the  entire  net  income  accruing  from  all  sources 
in  the  preceding  calendar  year 

(1)  to  every  citizen  of  the  United  States,  whether  residing  at 
home  or  abroad,  and 

(2)  to  every  person  residing  in  the  United  States,  though  not  a 
citizen  thereof,  and 

(3)  a like  tax  * * * upon  the  entire  net  income  from  all  property 
owned  and  of  every  business,  trade  or  profession  carried  on  in  the 
United  States’  by  persons  residing  elsewhere.” 

“Par.  A,  subd.  2.  In  addition  to  the  income  tax  provided  under 
this  section  (herein  referred  to  as  the  normal  income  tax)  there  shall 
be  levied  and  collected  upon  the  net  income  of  every  individual  an 
additional  income  tax  of  * * 

“Par.  B.  Subject  only  to  such  exemptions  and  deductions  as 
are  hereinafter  allowed,  the  net  income  of  a taxable  person  shall 
include  * * * income  * * * growing  out  of  interest  in  real  or  per- 
sonal property  and  income  derived  from  any  source  whatever.” 

“Par.  D.  Guardians,  trustees,  * * * and  all  persons,  corpora- 
tions or  associations  acting  in  any  fiduciary  capacity,  shall  make 
and  render  a return  of  the  net  income  of  the  person  for  whom  they 
act,  subject  to  this  tax,  coming  into  their  custody  or  control  and 
management,  and  be  subject  to  all  the  provisions  of  this  section 
which  apply  to  individuals.” 

“Par.  E.  (After  providing  for  withholding  the  normal  tax  at 
the  source,  and  making  various  requirem.ents  concerning  returns 
and  assessments,  this  paragraph  continues:)  The  tax  herein  im- 
posed upon  annual  gains,  profits,  and  incom^e  not  falling  under ^the 
foregoing  and  not  returned  and  paid  by  virtue  of  the  foregoing, 
shall  be  assessed  by  personal  return,  under  rules  and  regulations  to 
be  prescribed  by  the  Com.m.issioner  of  Internal  Revenue  and  ap- 
proved by  the  Secretary  of  the  Treasury.” 

“Par.  G fa).  The  normal  tax  hereinbefore  imposed  upon  indi- 
viduals likewise  shall  be  levied  * * * upon  the  entire  net  income 
accruing  from  all  sources  during  the  preceding  calendar  year  to 
every  corporation,  joint  stock  company  or  association,  and  every 
insurance  companv,  organi'zed  in  the  United  States,  no  matter  how 
created  or  organized,  not  including  partnerships.” 

2939  Inasmuch  as  all  persons  and  property  within  the  jurisdiction  of  a 

sovereignty  are  subject  to  taxation,  and  since  the  property  cannot 

559  TAX 


INC. 


speak  and  the  persons  have  no  direct  voice  in  wording  the  tax  laws,  it  is  a 
fundamental  duty  of  the  law-givers  to  make  the  scope  of  a tax  law  definite 
and  its  meaning  clear;  and  therefore  all  doubts  respecting  scope  and  mean- 
ing are  to  be  resolved  in  favor  of  the  taxpayer.  Treat  v.  White,  181  U.  S.  264; 
Gould  Y.  Gould,  245  U.  S.  151  [1[2306l. 

2940  By  citing  this  rule  we  do  not  imply  that  there  is  in  the  act  of  1913 
an  ambiguity  which  must  be  construed  against  the  government.  ^In 
our  judgment  nothing  could  be  clearer  than  the  absence  of  any  legislative 
intent  to  tax  a property  increment  which  during  the  tax  year  had  no  owner 
in  being  who  received  or  was  entitled  to  receive  any  of  such  increment. 
Paragraph  A lays  a tax  each  year  upon  the  net  income  accruing  in  the  pre- 
ceding calendar  year.  Paragraph  B defines  net  income  as  that  which  comes 
in  from  any  interest  in  real  or  personal  property  and  from  any  other  source 
whatever.  Subdivision  1 of  Paragraph  A and  Paragraph  G (a)  condition 
the  levy  upon  the  fact  that  the  income,  either  actually  or  potentially,  and 
with  full  right  of  immediate  disposition,  comes  into  the  hands  of  either  a 
citizen  wherever  resident,  or  a person  who  is  a resident  but  not  a citizen, 
or  a person  who  is  neither  a citizen  nor  a resident  but  who  owns  property 
or  carried  on  business  here,  or  a corporation,  joint  stock  company  or  asso- 
ciation, or  insurance  company,  organized  in  this  country.  Otto  Young’s 
estate  consists,  say,  of  a great  commercial  building  in  a great  commercial 
city;  the  net  rentals,  after  payment  of  insurance,  local  taxes,  maintenance 
and  operation,  exceed  the  amount  required  by  the  trustee  to  pay  the  an- 
nuities to  the  widow  and  children;  at  some  remote  period  the  estate  as  it 
may  then  exist  is  to  be  turned  over  to  persons  now  unknown,  possibly  not 
now  in  existence;  and  in  the  meantime  the  estate  is  growing  in  value  by 
reason  of  the  rise  in  real  estate  and  also  by  the  accumulation  of  rentals. 
But  neither  the  real  estate  as  valued  at  Young’s  death,  nor  the  increase  in 
value,  nor  the  accumulation  of  rentals,  is  a citizen  or  person  or  corporation, 
joint  stock  company  or  association,  or  insurance  company,  mutual  or  stock. 
In  no  calendar  year  preceding  a levy  was  there  any  sort  of  being  to  whom 
the  trustee  could  pay  or  account  for  the  accumulations  of  rentals.  Paragraph 
D of  course  did  not  lay  upon  the  trustee  the  duty  of  returning  these  accumu- 
lations as  part  of  its  own  income.  That  paragraph  required  the  trustee  to 
report  what  it  received  for  another  who,  if  acting  in  his  own  behali,  would 
be  called  upon  to  show  what  he  had  received  or  was  entitled  to  receive,  with 
full  power  of  immediate  disposition,  during  the  preceding  calendar  year. 
Paragraph  E,  the  only  other  part  of  the  act  referred  to  by  government  coun- 
sel, plainly  adds  nothing  to  the  ‘Tax  imposed,”  but  is  concerned  only  with 
methods  of  administration. 

2941  Our  reading  of  the  aet  accords  with  the  many  and  uniform  rulings 
of  the  Treasury  Department  from  the  passage  of  the  act  down  to 
July  26,  1915.  Treas.  Dec.  No.  1906,  issued  November  28,  1913;  Income 
Tax  Regulations  No.  33,  Articles  70,  71,  74  and  75,  issued  January  5,^1914; 
Treas.  Dec.  No.  1943,  issued  February  4,  1914;  Treas.  Dee.  No.  2090,  issued 
Decemiber  14,  1914;  Rulings  on  January  15  and  30,  and  February  9 and  27, 
1915,  in  Incom.e  Tax  Service  1915  on  pages  379,  396,  426,  438;  and  the 
opinion  of  the  Attorney  General  rendered  to  the  Treasury  Department  on 
February  12,  1914,  in  Ineome  Tax  Service  1914  at  page  260. 

3942  In  Treas.  Dec.  No.  2231,  issued  July  26,  1915,  the  Department 
declared  that  “Any  part  of  the  annual  income  of  trust  estates  not 
distributed  becomes  an  entity  and  as  such  is  liable  for  the  normal  and  addi- 
tional tax,  which  must  be  paid  by  the  fiduciary.  When  the  beneficiary^  is 
not  hi  esse  and  the  income  of  the  estate  is  retained  by  the  fiduciary,  such  in- 
come will  be  taxable  to  the  estate  as  for  an  Individual  and  the  fiduciary  will 
pay  the  tax  both  normal  and  additional.”  This  ruling  was  the  cause  of  the 

560  TAX 


INC. 


10-8-20. 


present  and  other  similar  suits.  It  illustrates  the  not  unnatural  tendency  of 
tax  officers  to  increase  the  revenues  by  implications  and  strained  construc- 
tions. The  Department’s  first  rulings  were  in  harmony  with  the  natural 
import  of  the  language  used  by  Congress;  its  later  ruling  does  more  than 
violate  the  canon  that  doubts  and  ambiguities  are  to  go  against  the  gov^n- 
ment,  for  it  is  based,  not  upon  any  uncertainty  in  the  terms  of  the  act,  but 
upon  a metamorphosis  of  a body  of  property  into  a person,  and  upon  exac- 
tions contrary  to  the  exemptions  in  the  Act  of  1913.  If  the  unascertained 
residuary  legatees  were  now  at  hand  to  receive  from  the  trustee  the  accumu- 
lations of  the  preceding  calendar  year,  they  might  be  such  in  number  as 
that  nothing  but  the  normal  tax  on  the  share  of  each  in  excess  of ^ his  personal 
exemption  could  be  assessed;  but  the  Department,  by  converting  an  estate 
into  a personal  entity,  cuts  off  all  personal  exemptions  and  by  adding  me 
shares  together  subjects  each  share  to  the  rates  of  surtaxes  that  are  calculable 
on  the  sum  total.  If  the  residuary  legatee  were  a charitable  or  educational 
institution,  the  Department’s  method  would  add  to  the  detriment  due  to  the 
testator’s  postponement  of  the  benefit  the  taxes  and  surtaxes  throughout 
the  period  of  postponement.  Congress  recognized  that  such  alterations 
and  amendments  were  legislative  and  passed  the  Amendatory  Act  of  Sep- 
tember 8,  1916,  levying  a tax  upon  undistributed  income  added  to  the  prin- 
cipal of  trust  estates. 

2943  The  judgment  is  reversed  and  the  cause  remanded  for  further  pro- 
ceedings in  consonance  with  this  opinion. 


(T.  D.  3076.) 

2944  Depletion  of  timber. — Articles  228,  229,  230,  231,  233,  234  and  235 

1438  of  Regulations  45  are  hereby  amended,  and  Articles  236  and  237 
are  promulgated,  as  follows: 

2945  Art.  228.  Capital  recoverable  through  depletion  allowance  in  the 

1439  case  of  timber. — In  general,  the  capital  remaining  in  any  year 
recoverable  through  depletion  allowances  may  be  determined  as 

indicated  in  Articles  202  [^1408]  and  203  [^1409].  In  the  case  of  leases  the 
apportionment  of  deductions  between  the  lessor  and  lessee  will  be  made  as 
specified  in  Article  204.  The  cost  of  timber  properties^  shall  be  deter- 
mined in  accordanec  with  the  principles  indicated  in  Article  205  [^[1411]. 
For  method  of  determining  fair  market  value  and  quantity  of  timber,  see 
Articles  234,  235  and  236  [below].  For  depletion  purposes  the  cost  of  the 
timber  shall  not  include  any  part  of  the  cost  of  the  land. 

2946  Art.  229.  Computation  of  allowance  for  depletion  of  timber  for  given 
14t0  year. — The  allowance  for  depletion  of  timber  in  any  taxable  year  shall 

be  based  upon  the  number  of  units  of  timber  felled  during  the  year 
and  the  unit  value  of  the  timber  in  the  timber  account  or  accounts,  pertain- 
ing to  the  timber  cut.  The  unit  value  of  the  timber  for  a given  timber  account 
in  a given  year  shall  be  the  quotient  obtained  by  dividing  (a)  the  total  number 
of  units  of  timber  on  hand  in  the  given  account  at  the  beginning  of  the  year 
plus  the  number  of  units  acquired  during  the  year  plus  (or  minus)  the  number 
of  units  required  to  be  added  (or  deducted)  by  way  of  correcting  the  estimate 
of  the  number  of  units  remaining  available  in  the  account  into  (b)  the  total 
fair  market  value  as  of  March  1,  1913,  (and/or  cost)  of  the  timber  on  hand  at 
the  beginning  of  the  year,  plus  the  cost  of  the  number  of  units  acquired 
during  the  year,  plus  proper  additions  to  capital  (See  Art.  231).  ’The  amount 
of  the  deduction  for  depletion  in  any  taxable  year  with  respect  to  a given 

INC.  561  TAX 


timber  account  shall.  be  the  product  of  (a)  .the  number  of  units  of  timber 
cut  from  the  given  account  during  the  year  multiplied  by  (b)  the  unit  value 
of  the  timber  for  the  given  account  for  the  year.  Those  taxpayers,  who  keep 
their  accounts  on  a monthly  basis,  ^may,  at  their  option,  keep  their  depletion 
accounts  on  a monthly  basis,  in  which  case  the  amount  deductible  on  account 
of  depletion  for  a given  month  will  be  determined  in  the  manner  outlined 
above  for  a given  year.  The  total  amount  of  the  deduction  for  depletion  in 
any  taxable  year  shall  be  the  sum  of  the  amounts  deductible  for  the  several 
timber  accounts.  For  description  of  timber  accounts,  see  Articles  235  and 

236  [below].  . • r n j 

2947  The  depletion  of  timber  takes  place  at  the  time  the  timber  is  felled. 
Since,  however,  it  is  not  ordinarily  practicable  to  determine  the 

quantity  of  timber  immediately  after  felling,  depletion  for  purposes  of  ac- 
counting, will  be  treated  as  taking  place  at  the  time,  when,  in  the  process  of 
exploitation,  the  quantity  of  timber  is  first  definitely  determined. 

2948  Art.  230.  Revaluation  of  timber  not  allowed.— In  the  case  of  timber 

1441  acquired  prior  to  March  1,  1913,  the  fair  market  value  as  of  that  date 
shall,  when  determined  and  approved  by  the  commissioner,  be  the 

basis  for  determining  the  depletion  deduction  for  each  year  during  the  con- 
tinuance of  the  ownership  under  which  the  fair  market  value  of  the  timber 
was  fixed,  and  during  such  ownership  there  shall  be  no  redetermination  of 
the  fair  market  value  of  the  timber  for  such  purpose.  However,  the  unit 
market  (or  cost)  value  of  the  timber  will  subsequently  be  changed  if  from 
any  cause  such  unit  market  (or  cost)  value,  if  continued  as  a basis  of  deple- 
tion, shall  upon  evidence  satisfactory  to  the  Commissioner  be  found  inade- 
quate or  excessive  for  the  extinguishment  of  the  cost,  or  fair  market  value 
as  of  March  1,  1913,  of  the  timber. 

2949  Art.  231.  Charges  to  capital  and  to  expenses  in  the  case  of  timber. 

1442  In  the  case  of  a timber  property  held  for  future  operation  by  an  owner 
having  no  substantial  income  from  the  property  or  from  other  sources, 

all  expenditures  for  administration,  protection  and  other  carrying  charges 
prior  to  production  on  a normal  basis  shall  be  charged  to  capital  account, 
after  such  a property  is  on  a normal  production  basis  such  expenditures 
shall  be  treated  as  current  operating  expenses.  In  case  a taxpayer,  who  has 
a substantial  income  from  other  sources,  owns  a timber  property  which  is 
not  yet  on  a normal  production  basis,  he  may,  at  his  option,  charge  such 
expenditure  with  respect  to  such  timber  property  to  capital,  or  treat  them 
as  current  operating  expenses,  but  whichever  system  is  adopted  must  be 
followed  until  permission  to  change  to  the  other  system  is  secured  from  the 
Commissioner.  In  the  case  of  timber  operations  all  expenditures  prior  to 
production  for  plants,  improvements,  and  equipment,^ and  thereafter  all  major 
items  of  plant  and  equipment,  shall  be  charged  to  capital  account  for  purposes 
of  depreciation.  After  a timber  operation  has  been  developed  and  equipped 
and  has  reached  its  normal  output  capacity,  the  cost  of  additional  minor 
items  of  equipment  and  the  cost  of  replacement  of  minor  items  of  worn-out 
and  discarded  plant  and  equipment  may  be  charged  to  current  operating 
expenses,  unless  the  taxpayer  elects  to  write  off  such  expenditures  through 
charges  for  depreciation;  however,  the  method  adopted  must  be  followed 
consistently  from  year  to  year. 

2950  Art.  232.  Not  changed. 

1413 


(% 


!% 


INC. 


562  TAX 


10-8-20. 


2951  Art.  233.  Information  to  be  furnished  by  taxpayer  claiming  depie- 

1444  tion  of  timber. — To  the  income  tax  return  of  the  taxpayer  claiming 
a deduction  for  depletion  or  depreciation  or  both  there  shall  be 

attached  a map  and  statement  (Form  T (Timber))  for  the  taxable  year 
covered  by  the  income  tax  return.  Form  T (Timber)  requires  the  following: 
(a)  map  showing  timber  and  land  acquired,  timber  cut,  and  timber  and  land 
sold;  (b)  description  of,  cost  of,  and  terms  of  purchase  or  lease  of,  timber  and 
land  acquired;  (c)  proof  of  profit  or  loss  from  sale  of  capital  assets;  (d) 
description  of  timber  with  respect  to  which  claim  for  loss,  if  any,  is  made; 
(e)  record  of  timber  cut;  (f)  changes  in  each  timber  account  as  the  result 
of  purchase,  sale,  cutting,  re-estimate,  or  loss;  (g)  changes  in  physical 
property  accounts  as  the  result  of  additions  to  or  deductions  from  capital 
and  depreciation;  (h)  operation  data  with  respect  to  raw  and  finished 
materials  handled  and  inventories;  (i)  unit  production  costs;  and  (j)  any 
other  data  which  will  be  helpful  in  determining  the  reasonableness  of  the 
depletion  and/or  depreciation  deductions  claimed  in  the  return.  Similar 
information  is  required  for  certain  years  prior  to  the  1919  taxable  year  from 
those  taxpayers  who  have  not  already  furnished  it.  The  specific  nature 
of  the  information  required  for  the  earlier  years  is  given  in  detail  in  “Form 
T — General  Forest  Industries  Questionnaire  for  the  years  prior  to  1919.” 

2952  Art.  234.  Determination  of  fair  market  value  of  timber. — VlTere  the 

1445  fair  market  value  of  the  property  at  a specified  date,  in  lieu  of  the 
cost  thereof,  is  the  basis  for  depletion  and  depreciation  deductions, 

such  value  shall  be  determined,  subject  to  approval  or  revision  by  the  Commis- 
sioner upon  audit,  by  the  owner  of  the  property  in  the  light  of  the  most 
reliable  and  accurate  information  available  with  reference  to  the  condition 
of  the  property  as  it  existed  at  that  date,  regardless  of  all  subsequent  changes, 
such  as  changes  in  surrounding  circumstances,  in  methods  of  exploitation, 
in  degree  of  utilization,  etc.  The  value  sought  will  be  the  selling  price  assum- 
ing a transfer  between  a willing  seller  and  a willing  buyer  as  of  the  particular 
date.  Such  factors  as  the  following  will  be  given  due  consideration:  (a) 
character  and  quality  of  the  timber  as  determined  by  species,  age,  size, 
condition,  etc.;  (b)  the  quantity  of  timber  per  acre,  the  total  quantity 
under  consideration,  and  the  location  of  the  timber  in  question  with  reference 
to  other  timber;  (c)  accessibility  of  the  timber  (location  with  reference 
to  distance  from  a common  carrier,  the  topography  and  other  features  of 
the  ground  upon  which  the  timber  stands  and  over  which  it  must  be  trans- 
ported in  process  of  exploitation,  the  probable  cost  of  exploitation,  and  the 
climate  and  the  state  of  industrial  development  of  the  locality);  and  (e)  the 
freight  rates  by  common  carrier  to  important  markets.  The  timber  in  ques- 
tion will  be  valued  on  its  own  merits,  and  not  on  the  basis  of  general  averages 
for  regions;  however,  the  value  placed  upon  it,  taking  into  consideration 
such  factors  as  those  mentioned  above,  will  be  consistent  with  that  of  the 
other  timber  in  the  region.  The  Commissioner  will  give  due  weight  and 
consideration  to  any  and  all  facts  and  evidence  having  a bearing  on  the 
market  value,  such  as  cost,  actual  sales  and  transfers  of  similar  properties, 
the  margin  between  the  cost  of  production  and  the  price  realized  for  timber 
products,  market  value  of  stock  or  shares,  royalties  and  rentals,  value  fixed 
by  the  owner  for  the  purpose  of  the  capitaTstock  tax,  valuation  for  local  or 
State  taxation,  partnership  accountings,  records  of  litigation  in  which  the 
value  of  the  property  has  been  involved,  the  amount  at  which  the  property 
may  have  been  inventoried  and/or  appraised  in  probate  or  similar  proceedings, 
disinterested  appraisals  by  approved  methods,  and  other  factors.  For  deplc- 


INC. 


563  TAX 


tion.  purposes  the  fair  market  value  at  a Specified  date  shall  not  include  any 
part  of  the  value  of  the  land. 

2953  Art.  235.  Determination  of  ctnantity  of  timber.— Each  taxpayer  % 

1446  claiming  or  expecting  to  claim  a deduction  for  depletion  is  required 

to  estimate  with  respect  to  each  separate  timber  account  the  total 
units  (feet  board  measure  log  scale,  cords  or  other  units)  of  timber  reasonably 
known  or  on  good  evidence  believed  to  have  existed  on  the  ground  on  March  1, 

1913,  or  on  the  date  of  acquisition  of  the  property,  as  the  case  may  be*  This 
estimate  shall  state  as  nearly  as  possible  the  number  of  units  which  would  have 
been  found  present  by  a careful  estimate  made  on  the  specified  date  with  % 

the  object  of  determining  100  per  cent  of  the  quantity  of  timber  which  the 
area  would  have  produced  on  that  daet  if  all  of  the  miCrchantable^  timber- 
had  been  cut  and  utilized  in  accordance  with  the  standards  of  utilization 
prevailing  in  that  region  at  that  time.  If,  subsequently,  during  the  owner- 
ship of  the  taxpayer  making  the  return,  as  the  net  result  of  the  growth  of 
the  timber,  of  changes  in  standards  of  utilization,  of  losses  not  otherwise 
accounted  for,  of  abandonment  of  timber,  and/or  of  errors  in  the  original  ^ 

estimates,  there  are  found  to  remain  on  the  ground,  available  for  utilization, 
more  or  less  units  of  timber  than  remain  in  the  timber  account  or  accounts, 
a new  estimate  of  the  recoverable  units  of  timber  (but  not  of  the  cost  or  the 
fair  market  value  at  a specified  date)  shall  be  made,  and,  when  made,  shall 
thereafter  constitute  a basis  for  depletion. 

2954  Art.  235.  Aggregating  timber  and  land  for  purposes  of  valuation 

1446  and  accounting. — With  a view  to  logical  and  reasonable  valuation  of 
timber,  the  taxpayer  shall  include  his  timber  in  one  or  more  accounts. 

In  general,  each  such  account  shall  include  all  of  the  taxpayer’s  timber  which 
is  located  in  one  ‘'block, ” a “block”  being  an  operation  unit  which  includes  ^ 

all  of  the  taxpayer’s  timber  v/hich  would  logically  go  to  a single  given  point 
of  manufacture.  In  those  cases  m which  the  point  of  manufacture  is  at  a 
considerable  distance,  or  in  which  the  logs  or  other  products  will  probably 
be  sold  in  a log  or  other  market,  the  “block”  m.ay  be  a logging  unit  which 
includes  all  of  the  taxpayer’s  timber  which  would  logically  be  removed  by 
a single  logging  development.  In  exceptional  cases,  provided  there  are  good 
and  substantial  reasons,  and  subject  to  approval  or  revision  by  the  Com- 
missioner on  audit,  the  taxpayer  may  divide  the  timber  in  a given  “block 
into  two  or  more  accounts,  e.  g.,  tim.ber  owned  on  February  28,  1913,  and 
that  purchased  subsequently,  may  be  kept  in  separate  accounts,  or  timber 
owned  on  February  28,  1913,  and  the  timber  purchased  since  that  date  in  % 

several  distinct  transactions  may  be  kept  in  several  distinct  accounts,  or 
individual  tree  species  or  groups  of  tree  species  may  be  carried  in  distinct 
accounts,  or  special  timber  products  may  be  carried  in  distinct  accounts,  or 
‘Tlocks”  may  be  divided  into  two  or  more  accounts  based  on  the  character 
of  the  timber  and/or  its  accessibility,  or  scattered  tracts  may  be  included  in 
separate  accounts.  When  such  a division  is  made  a proper  portion  of  the 
total  value  or  cost,  as  the  case  may  be,  shall  be  allocated  to  each  account.  .. 

2955  The  timber  accounts  mentioned  in  the  preceding  paragraph  shall  not 
include  any  part  of  the  value  or  cost,  as  the  case  may  be,  of  the  land. 

In  a manner  similar  to  that  prescribed  in  the  foregoing  part  of  this  article 
the  land  in  a given  “block”  may  be  carried  in  a single  land  account  or  may 
be  divided  into  two  or  more  accounts  on  the  basis  of  its  character  and/or 
accessibility.  When  such  a division  is  miade,  a proper  portion  of  the  total 
value  or  cost,  as  the  case  may  be,  will  be  allocated  to  each  account.  t ^ 


INC. 


564 


TAX 


10-2I-20. 


2956  Tlie  total  value  or  total  cost,  as  the  case  may  be,  of  land  and  timber 
shall  be  equitably  allocated  to  the  timber  and  land  accounts  re- 
spectively. 

2957  Each  of  the  several  land  and  timber  accounts  carried  on  the  books 
of  the  taxpayer  shall  be  definitely  described  as  to  their  location  on 

the  ground  either  by  maps  or  by  legal  descriptions. 

2958  For  good  and  substantial  reasons,  to  be  approved  by  the  Commis- 
sioner, or  as  required  by  the  Commissioner,  the  timber  of  the  land 

accounts  may  be  readjusted  by  dividing  individual  accounts,  by  combining 
two  or  more  accounts,  or  by  dividing  and  recombining  accounts. 

2959  Art.  237.  Timber  depletion  and  depreciation  accounts  on  books. — 
1446  Every  taxpayer  claiming  or  expecting  to  claim  a deduction  for  depletion 

and/or  depreciation  of  timber  property  (including  plants,  improve- 
ments and  equipment  used  in  connection  therewith)  shall  keep  accurate 
ledger  accounts  in  which  shall  be  charged  the  fair  market  value  as  of  March 
1,  1913,  or  the  cost,  as  the  case  may  be,  of  (a)  the  property,  and  (b)  the 
plants,  improvements  and  equipment,  together  with  such  amounts  subse- 
quently expended  for  the  administration,  protection  and  other  carrying 
charges,  or  development  of  the  property  or  additions  to  plant  and  equip- 
ment as  are  not  chargeable  to  current  operating  expenses.  (See  Articles  231 
and  236.)  In  such  accounts  there  shall  be  set  up  separately  the  quantity  of 
timber,  the  quantity  of  land,  and  the  quantity  of  other  resources,  if  any,  and 
a proper  part  of  the  total  value  or  cost  shall  be  allocated  to  each.  (See  Article 
236.)  These  accounts  shall  be  credited  with  the  amount  of  the  depreciation 
and  depletion  deductions  claimed  and  allowed  each  year,  or  the  amount  of 
the  depreciation  and  depletion  shall  be  credited  to  depletion  and  deprecia- 
tion reserve  accounts,  to  the  end  that  when  the  sum  of  the  credits  for  deple- 
tion and  depreciation  equals  the  value  or  cost  of  the  property,  plus  the  amount 
added  thereto  for  administration,  protection,  and  other  carrying  charges, 
or  development  or  for  additional  plant  and  equipment,  less  salvage  value  of 
the  physical  property,  no  further  deduction  for  depletion  and  depreciation 
will  be  allowed.  (T.  D.  3076,  signed  by  Commissioner  Wm,  M.  Williams, 
and  dated  October  5,  1920.) 


(T.  D.  3078.) 

2960  A society  organized  to  insure  its  members  against  fire  (and  other 
767  casualty)  is  liable  to  tax  on  its  statutory  net  income  as  a “fire  insur- 
ance company”  imder  the  1909  and  1913  Acts.— The  appended 

decision  [captions  only,  1[2961  to  1[2964],  dated  July  19,  1920,  of  the  United 
States  District  Court  for  the  Southern  District  of  New  York  in  the  cases  of 
Jewelers  Safety  Fund  Society  v.  Lowe,  collector,  and  Jewelers  Safety  Fund 
Society  v.  Anderson,  collector,  is  published  for  the  information  of  internal 
revenue  officers  and  others  concerned.  (T.  D.  3078,  signed  by  Commissioner 
Wm.  M.  Williams,  and  dated  October  13,  1920.) 

[Captions  referred  to  in  ^[2960  above.] 

2961  1.  Gross  Income  of  Insurance  Companies — Premium  Receipts. 

The  premium  receipts  of  “every  insurance  company’’  by 
whatever  name  they  are  called  are,  unless  specifically  exempted  by  the 
terms  of  the  taxing  statutes  in  question,  a part  of  such  company’s  gross 
income. 

2962  2.  Same — Premium  Deposits. 

Premium  deposits  made  in  advance  by  members  of  a mutual 
insurance  company  to  cover  estimated  losses  and  expenses  are,  so  long 

INC.  565  TAX 


as  the  payment  thereof  constitutes  the  consideration  for  contract  of 
insurance,  insurance  premiums  constituting  gross  income  of  the  company. 

2963  3.  Same — Interest  on  Bank  Balances  and  Profits  from  Investment  of 
Premium  Deposits. 

Moneys  received,  by  way  of  interest  upon  bank  balances  and  from 
investment  of  such  portion  of  premium  deposits  as  are  not  currently 
required  for  the  payment  of  losses  and  expenses  are  profits  earned  by 
an  insurance  company  subject  to  tax. 

2964  4.  Mutual  Fire  Insurance  Companies — Corporation  Coming  Within 
Meaning  of. 

A corporation,  organized  to  insure  its  members,  limited  to  jewelers 
and  dealers  in  goods  ordinarily  carried  in  the  jewelry  trade,  against 
loss  or  damage  by  fire,  theft,  barratry,  embezzlement  and  transporta- 
tion, which  requires  each  member  to  deposit  in  advance  a definite  sum 
sufficient  to  cover  estimated  losses  and  expenses  for  the  ensuing  year, 
the  balance  of  such  deposits  being  returned  to  members,  is  a mutual 
fire  insurance  company  and  subject  to  the  taxes  imposed  by  the  Acts 
of  August  5,  1909,  and  October  3,  1913.  (Captions  of  decision  appended 
to  T.  D.  3078  [112960].) 


(T.  D.  3082.) 

[Matter  in  italics  is  new;  that  in  bold  face  brackets  [ ] is  old  matter  cut  out.] 

2965  Gross  income  defined — Inclusions — Article  42,  Regulations  No.  45, 
914  amended. — Article  42  of  Regulations  No.  45  is  hereby  amended  to 

2672  read  as  follows: 

2822  Art.  42.  Sale  of  personal  property  on  installment  plan. — Dealers  in 
personal  property  ordinarily  sell  either  for  cash,  or  on  the  personal 
credit  of  the  buyer,  or  on  the  installment  plan.  Occasionally  a fourth 
type  of  sale  is  met  with,  in  which  the  buyer  makes  an  initial  payment  of  such 
a substantial  nature  (for  example,  a payment  of  more  than  25  per  cent) 
that  the  sale,  though  involving  deferred  payments,  is  not  one  on  the  install- 
ment plan.  In  sales  on  personal  credit,  and  in  the  substantial  payment  type 
just  mentioned,  obligations  of  purchasers  are  to  be  regarded  as  the  equivalent 
of  cash,  but  a different  rule  applies  to  sales  on  the  installment  plan.  Dealers 
in  personal  property  who  sell  on  the  installment  plan  usually  adopt  one  of 
four  ways  of  protecting  themselves  in  case  of  default:  (a)  through  an  agree- 
ment that  title  is  to  remain  in  the  seller  until  the  buyer  has  completely  per- 
formed his  part  of  the  transaction;  (b)  by  a form  of  contract  in  which  title 
is  conveyed  to  the  purchaser  immediately,  but  subject  to  a lien  for  the  unpaid 
portion  of  the  purchase  price;  (c)  by  a present  transfer  of  title  to  the  pur- 
chaser, who  at  the  same  time  executes  a reconveyance  in  the  form  of  a chattel 
mortgage  to  the  seller;  or  (d)  by  conveyance  to  a trustee  pending  performance 
of  the  contract  and  subject  to  its  provisions.  The  general  purpose  and  effect 
being  the  same  in  all  of  these  plans,  it  is  desirable  that  a uniformly  applicable 
rule  be  established.  The  rule  prescribed  is  that  in  the  sale  or  contract  for 
sale  of  personal  property  on  the  installment  plan,  whether  or  not  title  remains 
in  the  vendor  until  the  property  is  fully  paid  for,  the  income  to  be  returned 
by  the  vendor  will  be  that  proportion  of  each  installment  payment  which  the 
gross  profit  to  be  realized  when  the  property  is  paid  for  bears  to  the  gross 
contract  price.  Such  income  may  be  ascertained  by  taking  as  profit  that 
proportion  of  the  total  cash  collections  [payments]  received  in  the  taxable 
year  from  installment  sales,  {such  collections  being  atlocated  to  the  year  against 
the  sales  of  zuhich  they  apply  [always  including  payments  received  in  the 


INC. 


566 


TAX 


^11-30-20. 


has  not  been  '‘received,”  but  remains  in  the  hands  of  the  trustee.  But, 
apart Jrom  the  fact  that  the  corpus  of  the  residuary  estate  has  in  fact  already 
been  ‘‘received”  by  the  hospital  in  the  shape  of  a mortgage,  and  the  hospital 
Itself  is  pro  forma  paying  to  its  own  trustee  the  money  which,  pro  forma, 
constitutes  the  income  here  taxed,  the  construction  thus  urged  and  the 
effect  given  to  the  word  “received”  does  not  commend  itself  to  our  judg- 
ment. The  sections  in  question  in  the  acts  of  1913  and  1916  are  to  be  con- 
sidered and  construed  jointly.  They  concern  the  same  subject-matter, 
and  that  of  1916  was  evidently  meant  to  continue  the  broad  and  absolute 
purpose  and  provisions  of  the  act  of  1913  “that  nothing  in  this  section  shall 
apply  * * * to  any  corporation  * * * operated  exclusively  for 
* * charitable  * * * purposes.”  Such  being  the  case,  the  residu- 
ary estate  which  produced  this  income  being  the  property  solely  of  the 
hospital,  no^  one  but  the  hospital  owning  the  income  thereof,  and  the  tem- 
porary holding  of  the  income  being  by  a trustee,  who  was  the  agent  and  rep- 
resentative solely  of  the  hospital,  it  is  clear  that  when  substance  and  spirit, 
and  not  mere  form  and  words,  are  the  interpreters  of  the  statute,  the  receipt 
of  this  income  by  the  hospital’s  agent  and  representative  was  in  truth  and 
reality  a receiving  by  the  hospital,  for  he  who  acts  by  the  hand  of  another 
himself -acts.  If  this  income  was  received  from  a third  person  by  the  trustee 
and  afterwards  lost,  surely  the  hospital  could  never  have  collected  it  again 
from  such  third  person  on  the  theory  the  hospital  had  never  received  it. 
Moreover,  it  will  also  appear  that,  if  the  trustee  had,  without  protest,  used 
the  money  of  the  hospital  to  pay  this  income  tax,  such  trustee  could  not, 
on  settlement  of  his  trusteeship,  have  justified  such  payment  under  section  2 
of  the  act  of  1913,  for  that  section  only  warrants  such  deduction  and  with- 
holding where  the  income  is  the  “income  of  another  person  subject  to  tax,” 
and  elsewhere,  as  we  have  seen,  the  same  section  provided  “that  nothing  in 
this  section  shall  apply  * * * to  any  corporation  * * * operated 
exclusively  for  * * * charitable  * * * purposes.” 

2991  From  the  above,  it  is  clear  to  us,  first,  that  the  United  States,  the 
taxing  power  and  real  defendant  in  this  case,  speaking  by  its  legis- 
lative branch  in  plain  language  enacted  its  purpose  and  will  to  exempt 
from  taxation  the  income  of  “any  corporation  or  association  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or  educational 
purposes,  no  part  of  the  net  income  of  which  enures  to  the  benefit  of  any 
private  stockholder  or  individual;”  second,  that  the  action  of  the  United 
States  by  its  executive  officer,  in  this  case  the  collector  of  internal  revenue, 
in  assessing  and  collecting  this  income  tax  from  the  hospital,  was  not 
warranted  by  the  taxing  statutes;  and,  third,  that  it  is  the  duty  of  the  United 
States,  acting  by  its  third  agency,  the  federal  courts,  to  prevent  its  executive 
branch  from  illegally  defeating  its  expressed  will  in  the  law  enacted  by  its 
legislative  branch. 

2992  It  follows,  therefore,  that  the  judgment  entered  by  the  court  below 
in  favor  of  the  hospital  and  against  the  collector  should  be  and  is 

affirmed.  (266  Fed.  676.) 


INC. 


573  TAX 


2993  National  banks  may  ret  lawfully  doclare  stock  dividends. — 
815  [CoiKmcnt:  In  an  rpirlon  given  to  the  Secretsrv  of  the  Treasury 
849  on  October  26,  1920.  /ciirg  Attorney-General  \Vm.  L.  Frierson 
2575  so  holds. — The  Corporation  Trust  Company.) 


{Attorney-Generar s Opinion.) 

Whether  certain  foreign  corporations  and  partnerships  derive  income  from 
sources  within  the  Urdted  States. 

Department  of  Justice, 

November  3,  1920. 

2994  Sir:  I have  the  honor  to  acknowledge  receipt  of  your  letter  of 
1010  August  12,  1920,  requesting  an  opinion  as  to  v/hether,  under  the 
1018  Revenue  Act  of  February  24,  1919,  in  the  five  following  cases,  the 
1027  foreign  corporation  or  partnership  derives  income  from  sources 
1545  within  the  United  States,  and,  if  so,  what  is  the  measure  for  deter- 
1553  mining  the  amount  of  incomie  derived  from  such  sources. 

2995  (1)  R.  Burleigh  & Sons,  a corporation  organized  under  the  laws  of 
Scotland,  owns  and  operates  two  sawmills  in  the  United  States,  one  at 

Dermiott,  Ark.,  and  the  other  at  Dawson  Springs,  Ky.  The  m.ills  saw  logs 
into  plank  squares  called  “handle  blanks”  and  also  roughly  turn  hammier 
handles.  These  products  are  all  exported  to  Glasgow,  where  they  are  finished 
at  the  homie  mill.  In  addition  the  manager  of  the  Amierican  plant  buys  logs 
in  the  United  States  and  exports  them  as  such  to  Great  Britain.  No  part  of 
the  products  of  the  mills  located  in  this  country  or  of  the  logs  purchased  here 
is  sold  in  the  United  States,  but  the  entire  output  is  sold  in  Great  Britain. 
The  plants  and  operations  of  the  manager  in  the  United  States  are  conducted 
solely  from  funds  sent  to  this  country  from  the  home  office  in  Glasgow, 
Scotland,  and  no  funds  are  sent  to  the  home  office  from  the  Am.erican  plants. 

2996  Section  213  (a)  of  the  Act  of  February  24,  1919  (40  Stat.  1065), 
defines  gross  incomie  as  follows: 

“Sec.  213.  That  for  the  purposes  of  this  title  (except  as  otherwise 
provided  in  sec.  233)  the  term  ‘gross  incom.e’ — 

“(<2)  Includes  gains,  profits,  and  incom^e  derived  from  salaries,  w^ages,  or 
com>pensation  for  personal  service  (including  in  the  case  of  the  President  of  the 
United  States,  the  judges  of  the  Supremie  and  inferior  courts  of  the  United 
States,  and  all  other  officers  and  employees,  whether  elected  or  appointed, 
of  the  United  States,  Alaska,  Hawaii,  or  any  political  subdivision  thereof,  or 
the  District  of  Columbia,  the  compensation  received  as  such),  of  whatever 
kind  and  in  whatever  form  paid,  or  from  professions,  vocations,  trades, 
businesses,  commjerce,  or  sales,  or  dealings  in  property,  whether  real  or 
personal,  growing  out  of  the  ownership  or  use  of  or  interest  in  such  property; 
also  from  interest,  rent,  dividends,  securities,  or  the  transaction  of  any 
business  carried  on  for  gain  or  profit,  or  gains  or  profits  and  Incom.e  derived 
from  any  source  whatever.  The  amiount  of  all  such  items  shall  be  included 
in  the  gross  income  for  the  taxable  year  in  which  received  by  the  taxpayer, 
unless,  under  methods  of  accounting  permitted  under  subdivision  (b)  of 
section  212.  any  such  amounts  are  to  be  properly  accounted  for  as  of  a dif- 
ferent period.  * * 

2997  Fection  233  (b)  (40  Stat.  1077)  provides: 

“In  ihc  case  of  a foreign  corporation,  gross  income  includes  only  the 
gross  income  from  sources  witln'n  the  United  States,  including  the  interest 
on  bonds,  notes,  or  other  interest-bearing  obligations  of  residents,  corporate 
or  otherwise,  dividends  from  resident  corporations,  and  including  all  amounts 

574 


INC. 


TAN 


11^0-20. 


received  (although  paid  under  a contract  for  the  sale  of  goods  or  otherwise) 
representing  profits  on  the  manufacture  and  disposition  of  goods  within  the 

United  States.”  j u r 

2998  No  incom.e  is  derived  from  the  mere  manufacture  of  goods;  before 
there  can  be  income  there  must  be  sale;  and  there  is  no  income  from 

sources  within  the  United  States  from  goods  m.anufactured  here  unless  there 
is,  in  the  language  of  section  233  (b),  both  “m.anufacture  and  disposition  of 
goods  within  the  United  States.”  The  obvious  purpose  of  this  section  is  to 
tax  only  incomie  that  accrues  within  the  United  States.  ^ Congress  does  not 
attempt  to  tax  profits  arising  from  goods  m.anufactured  in  this  country  but 
sold  after  being  shipped  abroad  and  without  being  disposed  of  by  the  owner 
in  this  country.  I conclude,  therefore,  that  when  Burleigh  & Sons  manu- 
facture or  partially  manufacture  articles  in  this  country  but  do  not  sell  or 
dispose  of  them  until  they  are  taken  to  Scotland,  there  is  no  gross  income  from 
sources  within  the  United  States  v/ithin  the  mieaning  of  the  Act. 

2999  As  to  the  purchase  and  exportation  of  logs,  since  profits  that  may  accrue 
from  such  transactions  are  not  specifically  provided  for  in  section 

233  (b),  if  any  gains  or  profits  are  gross  incomie  from  sources  within  the 
United  States,  they  miust  be  so  because  they  represent  compensation  from 
trades,  businesses,  commierce,  etc.,  as  enumerated  in  section  213  (a),  which 
are  carried  on  within  the  United  States. 

3000  In  Sulley  v.  Attorney  General,  5 H.  & N.  711  (2  B.  T.  C.  149),  under 
a statute  taxing  the  income  of  nonresidents  “from  any  property 

whatever  in  the  United  Kingdom,  or  profession,  trade,  employm_ent,  or 
vocation  exercised  within  the  United  Kingdom,”  the  facts  are  simiilar  to  those 
above  stated.  Sulley  was  a partner  in  a firm  of  general  merchants  and 
drapers  carrying  on  business  in  both  the  United  States  and  England.  Sulley 
resided  in  England  and  the  other  petitioners  in  the  United  States.  Sulley 
transacted  the  business  of  the  firm  in  England,  which  consisted  of  purchasing 
goods  in  England  and  shipping  themi  to  the  United  States.  No  money  was 
received  in  England  except  what  was  sent  from  the  LTnited  States,  and  the 
profits  of  the  business  v^ere  miade  by  the  resale  of  goods  at  an  increased  price 
in  the  United  States.  The  court  held  that  the  liability  to  income  tax  attached 
only  to  such  profits  as  came  home  to  England  as  the  share  of  Sulley,  the 
partner  resident  there.  The  Lord  Chief  Justice  said: 

“The  question  is,  whether  there  is  a carrying  on  or  exercise  of  the  trade  in 
this  country.  I think  there  is  not,  looking  at  the  sense-  in  which  the  term  is 
used  and  having  regard  to  the  subject-matter  of  the  statute.  Wherever  a 
merchant  is  established,  in  the  course  of  his  operations  his  dealings  must 
extend  over  various  places;  he  buys  in  one  place  and  sells  in  another.  ^ But  he 
has  one  principal  place  in  which  he  may  be  said  to  trade,  viz.,  where  his  profits 
come  homie  to  him.  That  is  where  he  exercises  his  trade.  It  would  be  very 
inconvenient  if  this  were  otherwise.  If  a man  were  liable  to  income  tax  in 
every  country  in  which  his  agents  are  established,  it  would  lead  to  great 
injustice.  The  argument  for  the  Crown  must  be  carried  to  this  extent,  that 
mierely  buying  goods  in  this  country  is  a trade  exercised  here  so  as  to  subject 
the  purchaser  of  the  goods  to  incom.e  tax.  In  the  present  case  the  defendant 
is  a partner;  but  if  the  argument  is  well  founded,  this  American  firm  might 
be  taxed  in  the  same  way  if  he  had  been  merely  an  agent.  It  would  be  most 
impolitic  thus  to  tax  those  who  come  here  as  customers.  The  subject  of  a 
foreign  State,  not  resident  here,  can  not  be  made  amenable  to  our  laws. 
How  then  are  their  profits  to  be  made  amenable  to  the  fiscal  law.^  Simply  by 
the  provision  that  whosoever  carries  on  the  business  and  receives  the  profits 
here  shall  be  assessed.  But  in  the  present  case  no  profits  are  received  by  the 
firm,  or  exist  in  this  country.  * * * The  profits  of  the  firm  in  America 


INC. 


575  TAX 


do  not  accrue  in  respect  of  any  trade  carried  on  in  this  country,  but  in  respect 
of  the  trade  carried  on  in  New  York,  where  the  main  business  is  conducted. 
3C01  In  State  ex  Tel.  Manitowoc  Gas  Co.  v.  Wisconsin^  Tax  Commission^ 
161  Wis.  Ill,  the  Supreme  Court  of  Wisconsin  said: 

“If  an  income  be  taxed,  the  recipient  thereof  must  have  a domicile  within 
the  State,  or  the  property  or  business  out  of  which  the  income  issues  must  be 
situate  within  the  State  so  that  the  income  may  be  said  to  have  a situs  therein. 

3002  By  a parity  of  reasoning  I conclude  that  income  which  may  accrue 
to  Burleigh  & Sons  in  England  by  sale  of  logs  purchased  in  the 

United  States  is  not  income  from  sources  within  the  United  States. 

3003  (2)  The  Moorbrook  Mills  Co.  is  a corporation  organized  under  the 
laws  of  England,  and  the  Sea  Island  Mills  (Inc.)  is  a corporation 

organized  under  the  laws  of  New  York.  Under  an  agreement  between  them 
the  latter  corporation  is  granted  the  exclusive  right  to  handle  the  merchandise 
of  the  former  in  the  United  States  and  Canada.  Orders  for  the  goods  are 
taken  by  the  New  York  corporation  on  net  term.s,  payment  to  be  made  10 
days  after  delivery.  A minimum  net  price  for  the  sale  of  the  goods  by  the 
New  York  corporation  is  fixed  by  the  English  corporation  at  an  amount  rwt  to 
exceed  the  price  obtained  for  similar  goods  in  England.  The  New  York 
corporation  assumes  credit  risks  and  advances  50  per  cent  of  the  minimum 
net  price  against  the  bills  of  lading  or  packers’  receipts.  The^  amount  so 
advanced  is  deducted  by  it,  together  with  freight  charges,  commissions, 
when  remitting  to  the  English  corporation  the  amounts  collected  frorn  the 
customers.  The  New  York  corporation  receives  a 5 per  cent  commission 
on  the  sale  of  the  goods  and  any  excess  over  the  minimum  net  price,  after 
deducting  such  commission,  and  charges  for  freight,  duties,  insuranc^  etc., 
are  shared  equally  between  the  two  corporations.  No  price  that  is  insufficient 
to  cover  the  minimum  net  price,  plus  freight,^  duty,  and  other  ^arges,  is 
accepted  without  the  approval  of  the  English  corporation.  The 
accepts  all  merchandise  risks.  If  goods  are  refused  or  returned  to  the  New 
York  corporation  by  its  customiers,  it  is  required  to  make  every  effort  to  di^ose 
of  them.  Unless  goods  are  sold  at  a profit  above  all  expenses  the  New 
corporation  receives  no  commission  thereon.  The  goods  are  covered  by 
insurance  for  the  joint  account  of  both  corporations  and  are  invoiced  to  the 
customier  by  the  New  York  corporation.  ^ r i r 

3004  The  case  of  the  Moorbrook  Mills  Co.  is  the  converse  of  that  oi 
Burleigh  & Sons.  They  purchase  goods  in  England  and  sell  them 

within  the  United  States,  and  profits  accruing  from  such  transactions  are 
plainly  profits  derived  from  business  carried  on  vrithin  the  United  States. 

3005  See:  Werle  & Co.  v.  Colquhoun,  2 B.  T.  C.  402;  Turner  v.  Rickman, 
4 B.  T.  C.  25;  MaePherson  & Co.  v.  Moore,  6 B.  T.  C.  107. 

3006  The  gross  income  from  such  business  is  income  from  sources  within 
the  United  States,  and  is  to  be  estimated  in  the  same  way  that  such 

income  is  estimated  where  both  manufacture  and  sale  are  had  within  the 

United  States.  ^ i j 

3007  (3)  Baton,  MacLaran  & Co.  is  a partnership  organized  in  England, 
consisting  of  two  members  who  are  citizens  and  residents  of  that 

country.  The  principal  office  of  the  firm  is  at  Liverpool,  England,  t)ut  it 
maintains  an  office  at  Dallas,  Tex.,  which  is  operated  under  the  name  of  A.  A. 
Baton  & Co.  The  Dallas  office  is  in  charge  of  John  S.  Ownby,  who  receives 
a fixed  salary  and  a stipulated  commission  based  upon  the  net  earnings  of 
the  firm  in  accordance  with  a contract  of  employment  made  by  him  with  the 
members  of  the  firm.  It  is  claimed  by  the  firm  that  A.  A.  Baton  & Co.  is 
merely  a buying  agency  for  the  home  office,  and  that  such  name  has  been  given 
to  the  branch  for  book  record  purposes  and  to  distinguish  the  firm  s trans- 
actions in  Liverpool  from  those  of  its  agency  in  the  United  States.  The 

576  TAX 


INC. 


11-30-20. 


business  of  Paton,  MacLaren  & Co.  is  that  of  cotton  merchants  and  importers. 
A.  A.  Paton  & Co.,  the  branch  office,  is  engaged  in  buying  cotton  in  the 
United  States  in  behalf  of  Paton,  MacLaran  & Co.  and  in  shipping  it  to  the 
parent  office  in  England  for  disposition.  It  is  the  custom  of  the  branch 
office  to  draw  on  the  parent  office  for  amounts  sufficient  to  make  such  pur- 
chases, together  with  a liberal  margin  to  cover  estimated  charges  and  expenses, 
so  that  at  the  end  of  the  season  the  branch  office  may  show  a balance  to  its 
credit.  It  is  claimed  that  this  balance  represents  merely  the  difference  be- 
tween the  total  amount  at  which  the  cotton  shipm^ents  for  the  season  are 
invoiced  to  Liverpool  and  the  total  purchase  price  plus  ordinary  and  necessary 
costs  of  handling  the  cotton  and  the  expenses  of  the  agency.  The  branch 
office,  however,  does  not  make  any  sales. 

3008  (4)  C.  M.  Lampson  & Co.  is  a partnership  organized  in  England 
consisting  of  six  members,  five  of  whom  are  British  subjects  residing 

in  London  and  the  other  a citizen  of  the  United  States  residing  in  New  York 
City.  The  hom.e  office  of  the  hrm  is  in  London,  but  it  maintains  a branch 
office  in  New  York  City  in  charge  of  and  conducted  under  the  name  of  the 
partner  resident  in  that  city.  The  business  of  the  firm  is  that  of  commission 
merchant  in  raw  furs.  The  furs  are  consigned  to  it  from  various  parts  of  the 
world,  including  the  United  States,  the  sales  being  made  almost  entirely  in 
London  at  auction  by  auctioneers  employed  by  the  firm  or  at  private  sale. 
The  firm  does  not  at  any  time  take  title  to  the  goods,  but  title  remains  in  the 
consignor  until  the  sale,  when  it  passes  to  the  purchaser.  The  principal  func- 
tion of  the  New  York  office  is  to  solicit  consignments  of  raw  furs  to  the  firm  at 
London,  which  requires  the  resident  partner  to  travel  to  various  points  in 
the  United  States  and  Canada.  The  majority  of  goods  consigned  from 
Canada  are  sent  to  New  York  for  shipment  to  London.  The  New  York 
office  also  acts  as  disbursing  agent  for  the  firm  in  paying  to  consignors  in  the 
United  States  and  Canada  the  proceeds  of  sales  of  their  goods  in  London, 
attends  to  the  shipment  of  the  goods  to  London  and  their  storage  and  insur- 
ance in  New  York  while  w^aiting  for  steamers,  and  further  makes  advances  to 
consignors  on  the  security  of  bills  of  lading  or  express  receipts.  The  money 
required  to  maintain  the  New  York  office  is  obtained  by  selling  drafts  on 
London,  and  a balance  of  about  $20,000  is  usually  carried  by  it  with  a New 
York  bank.  The  income  of  the  partnership  is  derived  from  a commission  of 
about  6 per  cent  on  the  proceeds  from  sales  of  furs  consigned  to  it.  It  collects 
the  proceeds  of  the  sales  and  deducts  its  commission,  the  expenses,  if  any, 
incurred  by  it  for  freight,  insurance,  or  storage,  and  also  the  amount  of  any 
advances  made  to  the  consignors.  The  balance  of  the  proceeds  is  remitted 
to  the  consignors.  No  profit  is  made  on  the  freight  or  other  charges. 

3009  These  cases  are  disposed  of  by  the  reasoning  of  the  first  case,  from 
which  it  is  concluded  that  in  the  former  case  the  partnership  of 

Paton,  MacLaran  & Co.  is  not  deriving  income  from  sources  within  the 
United  States,  and  that  in  the  latter  case  only  the  income  of  the  partner 
resident  within  the  United  States  is  taxable. 

3010  (5)  The  Manchester  Liners  (Ltd.)  is  a corporation  organized  under 
the  laws  of  Great  Britain,  with  its  home  ofhce  at  Manchester,  England, 

operating  a line  of  freight  steamships  between  Philadelphia,  Pa.,  and  foreign 
ports.  The  corporation  has  no  office  in  the  United  States,  but  consigns  its 
steamships  to  hurness.  Withy  & Co.  (Ltd.),  at  Philadelphia,  who  handles 
them  as  agents  and  brokers,  together  with  steamships  consigned  to  them  by 
other  owners.  The  agents  see  to  the  entry  and  clearance  of  each  steamer 
and  the  discharge  and  loading  of  the  cargo  and  supplies,  collect  such  part  of 
the  freight  as  is  prepayable  in  this  country  for  the  ocean  carriage,  deduct  the 
amount  of  the  agents’  disbursements  and  charges  for  their  services,  and  remit 

577  TAX 


INC. 


the  balance  to  the  steamship  corporation  at  Manchester  upon  the  departure 
of  the  vessel.  Frequently  a large  part  of  the  freight  is  not  prepayable,  but 
is  payable  upon  delivery  of  the  goods  at  Manchester. 

3011  In  an  opinion  rendered  March  9,  1910,  28  Op.  211,  Atty.-Gen.  Wicker- 
sham  decided  that  foreign  steamship  companies  engaged  in  the 

business  of  transporting  passengers,  goods,  and  merchandise  between  ports 
in  the  United  States  and  foreign  ports,  and  maintaining  passenger  and  freight 
agencies  in  this  country,  are  subject  to  the  special  excise  tax  provided  in 
section  38  of  the  Act  of  August  5,  1909,  saying: 

* * Their  business  consists  entirely  in  transporting  passengers  and 
goods  and  merchandise  between  ports  in  this  country  and  those  of  foreign 
countries,  and  receiving  and  discharging  the  same.  Through  agents  located 
here  all  contracts  and  arrangements  incident  to  such  a business  at  this  end  of 
their  lines  are  made,  and  all  exports  are  delivered  to  their  warehouses  and 
loaded  upon  their  vessels,  and  the  passengers  embark,  while  they  are  within 
the  limits  of  the  United  States;  and  likewise  while  here  their  imports  are 
unloaded  and  passengers  from  foreign  ports  disembark.  If  these  companies 
do  not  transact  business  in  the  United  States  they  transact  no  business  in  any 
foreign  port,  and  their  entire  business  is  carried  on  upon  the  high  seas.  To 
such  a conclusion  I am  unable  to  give  assent.” 

3012  A similar  conclusion  was  arrived  at  in  Erichsen  v.  Last,  8 Q.  B.  D. 
414  (4  B.  T.  C.  422),  which  held  that  a cable  corporation  established 

at  Copenhagen,  with  an  agent  and  an  office  in  London,  with  cables  extending 
between  England  and  Denmark,  was  carrying  on  trade  in  England  from  which 
profit  arose  on  account  of  contracts  entered  into  with  persons  in  England  to 
send  messages  from  England  to  other  countries.  Brett,  L.  J.,  said: 

* * That  which  earns  the  profit,  as  I said  at  first,  or  that  out  of 
which  they  get  the  profit  is  the  better  phrase,  is  the  money  to  be  paid  to  them 
out  of  the  contract,  which  contract  is  made  in  England,  and  such  contracts 
being  habitually  made  by  them  in  England,  it  seems  to  me,  they  carry  on  in 
England  the  trade  or  business  of  making  such  contracts.  Therefore,  it  seems 
to  me,  that  these  people  are  properly  said  to  be  persons  from  whom  this 
duty  must  be  collected.” 

3013  I am  of  the  opinion  that  the  Manchester  Liners  (Ltd.)  derives  income 
from  sources  within  the  United  States  to  the  extent  that  it  derives 

income  from  freight  and  passenger  traffic  originating  within  the  United  States. 

Respectfully, 

WM.  L.  FRIERSON, 

Acting  Attorney  General. 

To  the  Secretary  of  the  Treasury. 


(% 


(% 


INC. 


578  TAX 


11-30-20. 


{Decision.) 

Claim  for  refund  essential  to  suit  for  recovery  of  taxes  even  though  claim  for 
abatement  has  been  filed  and  adversely  acted  on. 

SUPREME  COURT  OF  THE  UNITED  STATES. 

No.  82. — October  Term,  1920. 

Rock  Island,  Arkansas  and  Louisiana  Railroad  ] 

Company,  Appellant,  I Appeal  from  the  Court  of 

vs.  Claims. 

The  United  States. 

[November  22,  1920.] 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

3014  This  is  a claim  for  a sum  paid  as  an  internal  revenue  tax  under  the 

2177  Act  of  August  5,  1909,  c.  6,  §38,  36  Stat.  11,  112.  It  is  alleged 

2189  that  the  claimant  was  not  engaged  in  or  doing  business  in  the  year 

2982  for  which  the  tax  was  collected  and  that  therefore  it  was  not  due. 

The  Court  of  Claims  dismissed  the  petition  on  the  ground  that  the 
claimant  had  not  complied  with  the  conditions  imposed  by  statute  and  the 
claimant  appealed  to  this  Court. 

3015  The  facts  are  sim.ple.  After  the  tax  was  assessed  a claim  for  an  abate- 
m.ent  was  sent  to  the  Commissioner  of  Internal  Revenue  in  July,  1913. 

On  Decem-ber  18  of  the  same  year  the  Commissioner  rejected  the  application, 
whereupon  on  December  26  the  claimant  paid  the  tax  with  interest  and  a 
penalty.  So  far  as  appears  there  was  no  protest  at  the  time  of  paymient  and 
is  is  found  that  after  it  nothing  was  done  to  secure  repayment  of  the  tax. 
By  Rev.  Sts.  §3226,  amended  by  Act  of  February  27,  1877,  c.  69,  §1,  19  Stat. 
248,  no  suit  shall  be  maintained  in  any  Court  for  the  recovery  of  any  tax 
alleged  to  have  been  illegally  assessed  “until  appeal  shall  have  been  duly  made 
to  the  Commissioner  of  Internal  Revenue  according  to  the  provisions  of  law 
in  that  regard,  and  the  regulations  of  the  Secretary  of  the  Treasury  established 
in  pursuance  thereof,  and  a decision  of  the  Commissioner  has  been  had 
thereon,  provided,”  etc.  Regulations  of  the  Secretary  established  a pro- 
cedure and  a form  to  be  used  in  applications  for  abatement  and  distinct 
ones  for  claims  for  refunding  them.  The  claimant  took  the  first  step  but  not 
the  last. 

3016  By  Rev.  Sts.  §3220  the  Commissioner  of  Internal  Revenue  is  author- 
ized ‘on  appeal  to  him  made,  to  remit,  refund,  and  pay  back’  taxes 

illegally  assessed.  It  is  urged  that  the  ‘appeal’  to  him  to  remit  made  a second 
appeal  to  him  to  refund  an  idle  act  and  satisfied  the  requirement  of  §3226. 
Decisions  to  that  effect  in  suits  against  a collector  are  cited,  the  latest  being 
Loomis  V.  Wattles.,  266  Fed.  Rep.  876. — But  the  words  ‘on  appeal  to  him  made’ 
mean,  of  course,  on  appeal  in  respect  of  the  relief  sought  on  appeal — to  refund 
if  refunding  is  what  he  is  asked  to  do.  The  words  of  §3226  also  must  be 
taken  to  mean  an  appeal  after  payment,  especially  in  view  of  §3228  requiring 
claims  of  this  sort  to  be  presented  to  the  Commissioner  within  two  years  after 
the  cause  of  action  accrued.  So  that  the  question  is  of  reading  an  implied 
exception  into  the  rule  as  expressed,  when  substantially  the  same  objection 
to  the  assessment  has  been  urged  at  an  earlier  stage. 

3017  Men  must  turn  square  corners  when  they  deal  with  the  Govern- 
ment. If  it  attaches  even  purely  formal  conditions  to  its  consent  to 

be  sued  those  conditions  must  be  complied  with.  Lex  non  praecipit  inutilia 


INC. 


579  TAX 


(Co.  Lit.  127^)  expresses  rather  an  ideal  than  an  accomplished  fac^  But  in 
this  case  we  cannot  pronounce  the  second  appeal  a mere  form.  On  appea 
a iudee  sometimes  concurs  in  a reversal  of  his  decision  below.  It  is  possible 
as  suggested  by  the  Court  of  Claims  that  the  second  appeal  may  be  heard  by  a 
different  person.  At  all  events  the  words  are  there  in  the  statute  and  the 
regulations,  and  the  Court  is  of  opinion  that  they  mark  the  conditions  ot  the 
claimant’s  right.  See  Kings  County  Savings  Inshtution  Blair,  lib 
U.  S.  200.  It  is  unnecessary  to  consider  other  objections  that  the  claiman 
would  have  to  meet  before  it  could  recover  upon  this  claim. 


(% 


-INC.  580 


TAX 


12-18-20.  « 

(THE  CORPORATION  TRUST  COMPANY’S  INCOME  TAX  SERVICE. > 


INSERT  T^S  PAGE  TO  FACE  PAGE  580*. 


THE  INDEX  on  the  blue  sheets  at  the  back  of  the  book  indexes 
the  Law  and  all  regulations,  etc.,  relating  thereto,  to  and  * 
including  page  580  opposite.  Page  581  and  the  pages 
following  that  page,  are  unindexed. 

THE  RUNNING  TABLE  OF  CONTENTS,  on  Supplementary 
Page  115,  at  the  back  of  the  book,  should  be  consulted  for 
matter  unindexed.  This  table  consists  of  a list 
of  all  current  Treasury  Decisions,  etc.,  printed 
in  the  Service,  showing  in  a general  way, 
the  subject  covered  by  each  regulation, 
ruling  or  other  matter. 


Remove  the  pink  sheet  facing  page  520. 


(THE  CORPORATION  TRUST  COMPANY’S  INCOME  TAX  SERVICE^)' 


THE  INDEX  on  the  blue  sheets  at  the  back  of  the  book  indexes 
the  Law  and  all  regulations,  etc.,  relating  thereto,  to  and 
including  page  580.  Page  581,  opposite,  and  the  pages 
, . ; , . following,  are  unindexed. 

THE  RUNNING  TABLE!  OF  CONTENTS  on  Supplementary 
Page  115,  at  the  back  of  the  book,  should  be  consulted  for 
matter  unindexed.  This  table  consists  of  a Ust  of 
all  current  Treasury  Decisions,  etc.,  printed  in 
the  Service,  showing  the  general  subject 
covered  by  each  regulation,  ruling  or 
" other  matter. 


12^-20. 


3018  Collection  by  distraint,  of  tax  assessed  by  collector  ex  parte  against 
2071  a long  since  dissolved  corporation,  the  business  being  continued  by 
2164)  the  former  stockholders  as  a partnership  (Pennsylvania),  and  the 
property  against  which  the  collector  is  proceeding  being  that  of  the 
partnership,  may  not  be  enjoined  by  the^  members  of  the  partnership,  they 
being  taxable  persons  and  the  property  itself  being  such  as  to  be  liable  to 
distraint  for  any  tax  assessed  against  them.  (Substance  of  decision  of  U.  S. 
District  Court,  M.  D.  Pennsylvania,  September  27,  1920,  in  Markle  et  al. 
vs.  Kirkendall,  Collector  (267  Fed.  498).) 


(T.  D.  3101.) 

3019  Traveling  expenses.— Article  292  of  Regulations  45  (revised)  is 
[1187  hereby  amended  to  read  as  follows,  effective  on  and  after  January 
1,  1921:  ^ 

“Art.  292.  Traveling  expenses. — Traveling  expenses,  as  ordinarily 
understood,  include  railroad  fares  and  meals  and  lodging.  If  the  trip  is 
undertaken  for  other  than  business  purposes,  such  railroad  fares  are  personal 
expenses  and  such  meals  and  lodging  are  living  expenses.  If  the  trip  is  on 
business,  the  reasonable  and  necessary  traveling  expenses,  including  rail- 
road fares,  and  meals  and  lodging  in  an  amount  in  excess  of  any  expenditures 
ordinarily  required  for  such  purposes  when  at  home,  become  business  instead 
of  personal  expenses,  (a)  If,  then,  an  individual  whose  business  requires 
him  to  travel  receives  a salary  as  full  compensation  for  his  services,  without 
reimbursement  for  traveling  expenses,  or  is  employed  on  a commission  basis 
with  no  expense  allowance,  his  expenses  for  railroad  fares,  and  expenses  for 
meals  and  lodging  in  an  amount  in  excess  of  any  expenditures  ordinarily 
required  for  such  purposes  when  at  home,  are  deductible  from  gross  income, 
(b)  If  an  individual  receives  a salary  and  is  also  repaid  his  actual  traveling 
expenses,  he  shall  include  in  gross  income  an  amount  thereof  equal  to  the 
ordinary  expenditures  required  for  meals  and  lodging  when  at  home,  as  such 
amount  is  held  to  be  additional  compenaation  to  the  taxpayer,  (c)  If  an 
individual  receives  a salary  and  also  an  allowance  for  meals  and  lodging,  as, 
for  example,  a per  diem  allowance  in  lieu  of  subsistence,  any  excess  of  the 
cost  of  such  meals  and  lodging  over  the  allowance  plus  the  ordinary  expendi- 
tures required  for  such  purposes  when  at  home,  is  deductible,  but  any  excess 
of  the  aljowance  over  such  expenses  plus  such  ordinary  expenditures  is  tax- 
able income.  Congressmen  and  others  who  receive  a mileage  allowance  for 
railroad  fares  should  return  as  income  any  excess  of  such  allowance  over  their 
actual  expenses  for  such  fares.  A payment  for  the  use  of  a sample  room  at 
a hotel  for  the  display  of  goods  is  a business  expense.  This  contemplates 
that  only  such  expenses  as  are  reasonable  and  necessary  in  the  conduct  of 
the  business  and  directly  attributable  to  it  may  be  deducted.  A taxpayer 
claiming  the  benefit  of  the  deductions  referred  to  herein  must  attach  to  his 
return  a statement  showing  (1)  the  nature  of  the  business  in  which  engaged; 
(2)  number  of  days  away  from  home  during  the  calendar  year  on  account 
of  business;  (3)  number  of  members  in  taxpayer’s  family  dependent  upon 
him  for  support;  (4)  average  monthly  expense  incident  to  meals  and  lodg- 
ing for  entire  family,  including  taxpayer  himself  when  at  home;  (5)  average 
monthly  expense  incident  to  meals  and  lodging  when  at  home  if  taxpayer 
has  no  family;  (6)  total  amount  of  expenses  incident  to  meals  and  lodging 
while  absent  from  home  on  business  during  taxable  year;  (7)  total  amount 
of  excess  expenditures  incident  to  meals  and  lodging  while  traveling  on  busi- 
ness and  claimed  as  a deduction;  (8)  total  amount  of  other  expenses  incident 
to  travel  and  claimed  as  a deduction. 

581 


INC. 


TAX 


3020  Claim  for  the  deductions  referred  to  herein  must  be  substantiated 
when  required  by  the  Commissioner,  bj,records  showing  in  detail 
the  amount  and  nature  of  the  expenses  incurred.  (T.  D.  3101,  signed  by 
Commissioner  Wm.  M.  Williams,  and  dated  December  16,  1920.) 

{Decision) 

Revenue  Act  of  1916 

Increase  in  value  of  capital  assets  when  realized  by  sale  or  di^ 

position,  by  one  not  a trader  or  dealer  therein,  is  not  income,  and  hence  is 
not  taxable  as  such. 

DISTRICT  COURT  OF  THE  UNITED  STATES 
District  of  Connecticut 


Frederick  F.  Brewster 
vs. 

James  J.  Walsh 
Collector  of  Internal  Revenue, 


No.  2133 
'At  Law 


804 

1055 

1310 

1916. 


Henry  F.  Parmelee,  Esq.,  New  Haven,  Conn. 

Georee  D.  Watrous,  Esq.,  New  Haven,  Conn. 

for  Plaintiff. 

Edward  L.  Smith,  Esq.,  United  States  Attorney 
Allan  K.  Smith,  Esq.,  Ass’t  United  States  Attorney. 

for  Defendant. 

THOMAS,  DISTRICT  JUDGE;  ™ 

3021  This  action  arises  under  the  Income  Tax  Law  of  1916.  Plaintitt 
seeks  to  recover  of  the  defendant,  who  is  Collector  of  Internal 
Revenue  for  the  District  of  Connecticut,  $17,689.13,  which  amount 
the  plaintiff  paid  to  the  Government  under  protest,  as  an  additional 
income  tax  assessed  against  him  for  the  year  ending  December  , 

lyio.  The  plaintiff  further  claims  that  there  is  also  due  him  the  additional 
sum  of  $67.66  which  the  Government  concedes  was  an  overpayment  ot 
normal  tax  and  is  rightly  due  the  plaintiff,  so  that  the  total  amount  chimed 
by  the  plaintiff  is  $17,756.79.  Trial  by  jury  was  waived  and  the  case  was 
tried  to  the  Court.  , i • ‘o:  * ‘ 

3022  The  facts  were  stipulated.  It  appears  that  plaintiff  is  not  now 

nor  was  he  during  the  times  mentioned  herein,  a member  ot  any 
stock  exchange,  or  of  any  similar  organization  or  association  engaged  in 
the  business  of  trading  in,  buying  or  selling  securities.  Neither  ^as  he  in 
any  way  engaged  in  the  business  of  buying  or  selling  stocks  and  bonds 
otherwise  than  occasionally  making  purchases  of  stocks  and  bonds  tor  m- 
vestment  purposes,  and  occasionally  making  sales  of  such  stocks  and  bonds 
for  the  purpose  of  changing  the  character  of  his  investments.  It  fn^ej 
appears  that  there  are  three  transactions  involved  in  the  mam  points  raised 

3023^  The  first  transaction  concerns  the  bonds  of  the  International 
Navigation  Company.  In  1899  the  P'a>ntiff  acquired  certa  n 
interest-bearing  bonds  of  that  Company  of  the  face  value  of  $191,000  in 
exchange  for  other  securities  of  the  same  corpmation,  and  during  the 
year  1916  he  sold  the  same  bonds  for  .$191^00.  On  March  1,  I^I^’ 

bonds  were  quoted  in  the  market  at  7934%  r v so  mht  to 

that  day  the  market  value  of  the  bonds  was  $151,845.  The  tax  soiightto 


582 


TAX 


INC. 


12£20>20. 


be  collected  by  the  Government  on  this  transaction  is  based  Upon  the 
difference  between  the  sale  price  and  the  market  price  of  the  bonds  on 
March  1,  1913,  to  wit:  $39,155,  which  amount  the  Commissioner  taxed 
as  income  for  the  year  1916,  and  is  part  of  the  tax  paid  under  protest  which 
plaintiff  seeks  to  recover  in  this  suit. 

3024  The  second  transaction  concerns  certain  bonds  of  the  International 
Mercantile  Marine  Company.  In  1903,  plaintiff,  as  a member  of 

an  underwriting  syndicate,  was  granted  an  allotment  of  mortgage  bonds 
of  the  face  value  of  $257,000,  in  return  for  which  he  paid  the  Company 
at  that  time  $231,300  in  cash,  but  the  bonds  thus  allotted  were  not  de- 
livered to  the  plaintiff  until  April,  1906  when  he  received  them  with  nothing 
by  way  of  interest  on  the  amount  of  cash  he  had  turned  over  to  the  Com- 
pany in  1903.  The  plaintiff  claims  that  interest  at  6%  for  three  years  on 
$231,300  is  properly  an  element  of  cost  and  attributable  thereto. 

3025  It  becomes  necessary  at  this  point  to  digress  from  a statement  of 
the  facts  and  first  dispose  of  plaintiff’s  claim  for  interest  on  this 

transaction,  in  order  to  determine  what  the  bonds  actually  cost  the  plaintiff, 
as  the  actual  cost  must  be  determined  before  consideration  can  be  given 
to  the  plaintiff’s  claims  respecting  the  tax  the  Commissioner  assessed  and 
which  plaintiff  paid  under  protest,  pursuant  to  such  assessment.  Plaintiff’s 
claim  that  interest  computed  from  date  of  payment  in  1903  to  date  of 
receipt  of  bonds  in  1906,  and  added  to  the  cash  paid  for  the  bonds  repre- 
sents the  real  cost  of  the  bonds  to  the  plaintiff  is  untenable. 

3026  In  Hays  v.  Gauley  Mountain  Coal  Co.,  247  U.  S.  189,  one  of 
the  questions  there  presented  was  whether  the  respondent  should 

be  allowed  to  add  interest  to  the  amount  of  cash  it  had  paid  in  1902  for 
certain  shares  of  the  capital  stock  of  another  mining  company  which  shares 
it  sold  in  1911,  but  the  Supreme  Court  held  that  there  was  “no  merit  in 
the  contention  that  interest  should  be  added  to  the  purchase  price  in  order 
to  ascertain  its  cost,”  so  that  I find  that  the  actual  cost  of  these  bonds  to 
the  plaintiff  was  $231,300. 

3027  From  the  stipulation  it  further  appears  that  the  plaintiff  sold  the 
bonds  in  1916  for  $276,150,  part  of  them  having  been  sold  at  107^ 

and  part  at  1073^.  But  on  March  1,  1913,  the  market  quotation  and 
market  value  of  these  bonds  was  64  bid  and  643/^  asked  and  at  such  quo- 
tation had  an  actual  market  value  of  $164,480.  On  this  transaction  the 
plaintiff  failed  to  make  an  income  tax  return  as  to  any  profit  or  gain  by 
him  obtained  on  the  sale  of  these  bonds  and  was  later  assessed  an  additional 
tax  of  $111,670  on  the  ground  that  this  was  the  representative  gain  shown 
by  the  difference  between  $164,480,  the  value  of  said  bonds  as  indicated 
by  the  market  quotation  of  March  1,  1913,  and  $276,150,  the  price  which 
plaintiff  received  from  the  sale  of  the  bonds  in  1916.  The  tax  which  was 
assessed  on  this  transaction  by  the  Commissioner,  and  paid  under  protest, 
and  which  is  part  of  the  tax  here  sought  to  be  recovered  was  levied  upon 
the  sum  of  $111,670,  which  amount  the  Government  claims  represents  the 
income  received  from  the  sale  of  these  bonds  and  which  amount,  as  stated 
above,  was  the  difference  between  the  market  value  of  the  bonds  on  March 
1,  1913,  and  the  sum  received  for  them  when  sold  in  1916. 

3028  The  third  transaction  relates  to  a stock  dividend  declared  by  the 
Standard  Oil  Company  of  California,  in  which  Company  the  plaintiff 

owned  1330  shares  of  its  capital  stock.  In  1916  the  plaintiff  received  665 
shares  of  stock  of  said  Company  as  a stock  dividend  declared  against  a 
surplus, — 18.0754%  of  which  had  been  earned  after  March  1,  1913.  The 
Government  claims  that  the  plaintiff  derived  $12,019.41  taxable  income 
therefrom,  but  this  claim  has  been  decided  adversely  to  the  Government 


INC. 


583  TAX 


in  Eisner  v.  Macomher,  252  U.  S.  189  [^  2575],  where  the  identical  stock 
dividend  was  under  consideration,  so  that  the  plaintlfF,  upon  that  authority, 
is  entitled  to  recover  for  the  tax  assessed  and  collected  in  connection  with 
this  transaction. 

3029  The  discussion  is  therefore  narrowed  to  two  transactions,  those 
pertaining  to 

(a)  The  International  Navigation  Company  bonds, 

(b)  The  International  Mercantile  Marine  Company  bonds,  both  of 

which  the  plaintiff  owned  on  and  before  March  1,  1913,  and  which  he  sold 
in  1916,  in  accordance  with  the  conditions  above  set  forth.  So  that  the 
sole  inquiry  here  is — whether  the  difference  in  the  amounts  between  the 
value  of  investment  securities  on  March  1,  1913,  and  the  amounts  received 
for  such  securities  when  sold  in  1916  is  taxable  income  within  the  Income 
Tax  Law  of  1916?  (39  Stat.  c.  463,  pp.  756,  757.) 

3030  The  discussion  of  this  proposition  revolves  around  the  Sixteenth 
Amendment  of  the  Constitution  and  the  legislation  passed  by 

the  Congress  after  the  ratification  of  the  Amendment. 

3031  The  Sixteenth  Amendment  to  the  Constitution  provides: 

“The  Congress  shall  have  power  to  lay  and  collect  taxes  on 

incomes,  from  whatever  source  derived,  without  apportionment 
among  the  several  States,  and  without  regard  to  any  census  or 
enumeration.’’ 

3032  The  pertinent  sections  of  the  statute  passed  by  the  Congress  to 
carry  the  Amendment  into  effect  provide: 

“Sec.  1.  (a)  That  there  shall  be  levied,  assessed,  collected,  and 
paid  annually  upon  the  entire  net  income  received  in  the  preceding 
calendar  year  from  all  sources  by  every  individual,  a citizen  or 
resident  of  the  United  States,  a tax  of  two  per  centum  upon  such 
income.” 

“Sec.  2.  (b)  That,  subject  only  to  such  exemptions  and  de- 

ductions as  are  hereinafter  allowed,  the  net  income  of  a taxable 
person  shall  include  gains,  profits,  and  income  derived  from  salaries, 
wages,  or  compensation  for  personal  service  of  whatever  kind  and 
in  whatever  form  paid,  or  from  professions,  vocations,  businesses, 
trade,  commerce,  or  sales,  or  dealings  in  property,  whether  real  or 
personal,  growing  out  of  the  ownership  or  use  of  or  interest  in  real 
or  personal  property,  also  from  interest,  rent,  dividends,  securities, 
or  the  transactions  of  any  business  carried  on  for  gain  or  profit,  or 
gains  or  profits  and  income  derived  from  any  source  whatever: 
Provided,  that  the  term  ‘dividends’  as  used  in  this  title  shall  be 
held  to  mean  any  distribution  made  or  ordered  to^  be  made  by  a 
corporation,  joint-stock  company,  association,  or  insurance  com- 
pany, out  of  its  earnings  or  profits  accrued  since  March  first, 
nineteen  hundred  and  thirteen,  and  payable  to  its  shareholders, 
whether  in  cash  or  in  stock  of  the  corporation,  joint-stock  com- 
pany, association,  or  insurance  company,  which  stock  dividend 
shall  be  considered  income,  to  the  amount  of  its  cash  value.” 

3033  It  is  thus  apparent  that  the  statute  specifically  imposes^  a tax 
upon  net  income  which  “shall  include  gains,  profits,  and  income 

derived  from  . . . sales  or  dealings  in  property,”^  and  then  provides: 

“(c)  For  the  purpose  of  ascertaining  the  gain  derived  frorn  the 
sale  or  other  disposition  of  property,  real,  personal,  or  mixed, 
acquired  before  March  first,  nineteen  hundred  and  thirteen,  the 
fair  market  price  or  value  of  such  property,  as  of  March  first 
nineteen  hundred  and  thirteen,  shall  be  the  basis  for  detemrining 
the  amount  of  such  gain  derived.” 

584  TAX 


INC. 


12.20-20. 


3034  It  is  the  contention  of  the  plaintiff  that  the  statute  is  unconsti- 
tutional in  so  far  as  it  taxes  as  income  the  increased  value  of  invest- 
ments when  realized  by  pie,  and  that  such  a tax  is  a direct  tax  upon  capital 
or  property  not  authorized  by  the  Sixteenth  Amendment  and  not  a tax 
upon^  income.  In  other  words,  that  such  gains  do  not  come  within  the 
definition  of  income  as  the  word  is  used  in  the  Sixteenth  Amendment. 

3035  On  the  other  hand,  it  is  the  contention  of  the  Government  that 
such  gains  do  constitute  income  properly  taxable  under  the  Income 

Tax  Law  of  1916. 

3036  We  are  therefore  brought  to  a consideration  of  the  scope  of  the 
Sixteenth  Amendment,  because  there  is  no  question  but  that  prior 

to  the  adoption  of  this  Amendment  the  Congress  had  no  power  whatever 
to  tax  as  income  gains  arising  from  the  sale  of  property  where  the  owner 
thereof  was  not  a dealer  or  trader  in  such  property  so  as  to  justify  an 
excise  tax  upon  his  business. 

3037  In  support  of  this,  reference  is  made  to  the  decision  of  the  Supreme 
Court  in  Pollock  v.  Farmer  s Loan  ^ Trust  Co.y  158  U.  S.  601. 

The  conclusion  stated  by  Chief  Justice  Fuller,  on  page  637,  is  as  follows: 
“Taxes  on  personal  property,  or  on  the  income  of  personal 
property,  are  likewise  direct  taxes,’’  and  that  “The  tax  imposed  by 
Sections  twenty-seven  to  thirty-seven,  inclusive,  of  the  Act  of 
1894,  so  far  as  it  falls  on  the  income  of  real  estate  and  of  personal 
property,  being  a direct  tax  within  the  meaning  of  the  Constitu- 
tion, and,  therefore,  unconstitutional  and  void  because  not  appor- 
tioned according  to  representation,  all  those  sections  . . . are 

necessarily  invalid.” 

3038  In  Eisner  v.  Macomber,  supra — Mr.  Justice  Pitney,  speaking  of 
the  Pollock  case,  said  on  page  205: 

“It  was  held  that  taxes  upon  rents  and  profits  of  real  estate 
and  upon  returns  from  investments  of  personal  property  were  in 
effect  direct  taxes  upon  the  property  from  which  such  income  arose, 
imposed  by  reason  of  ownership;  and  that  Congress  could  not 
impose  such  taxes  without  apportioning  them  among  the  States 
according  to  population,  as  required  by  Article  I,  section  2,  clause 
3,  and  section  9,  clause  4,  of  the  original  Constitution.” 

3039  The  Sixteenth  Amendment  does  not  extend  the  taxing  power  to 
new  subjects.  InEvans  v.Gore,  253  U.  S.  245,  at  page  261  [1[2738], 

Mr.  Justice  Van  Devanter  in  delivering  the  opinion  of  the  Supreme  Court 
said: — 

Thus  the  genesis  and  wordsofthe  Amendment  unite  in  showing 
that  it  does  not  extend  the  taxing  power  to  new  or  excepted  sub- 
jects, but  merely  removes  all  occasion  otherwise  existing  for  an 
apportionment  among  the  States  of  taxes  laid  on  income,  whether 
derived  from  one  source  or  another.” 

3040  And  again  in  Eisner  v.  Macomber,  supra,  at  page  206,  Mr.  Justice 
Pitney,  in  discussing  the  scope  of  the  Amendment,  said: 

As  repeatedly  held,  this  did  not  extend  the  taxing  power  to 
new  subjects,  but  merely  removed  the  necessity  which  otherwise 
might  exist  for  an  apportionment  among  the  States  of  taxes  laid 
on  income.  Brushaber  v.  Union  Pacific  R.  R.  Co.,  240  U.  S.  1, 
17-19;  Stanton  v.  Baltic  Mining  Co.,  240  U.  S.  103,  112  et  seq.; 

Peck  y Co.  V.  Lowe,  247  _U.  S.  165,  172-173. 

A proper  regard  for  its  genesis,  as  well  as  its  very  clear 
language,  requires  also  that  this  amendment  shall  not  be  extended 
by  loose  construction,  so  as  to  repeal  or  modify,  except  as  applied 


INC. 


585  TAX 


to  income,  those  provisions  of  the  Constitution  that  require  an 
apportionment  according  to  population  for  direct  taxes  upon 
property,  real  and  personal.^  This  lirnitation  still  has  an  appro- 
priate, and  important  function,  and  is  not  to  be  overridden  by 
Congress  or  disregarded  by  the  courts.  a • i t r 

In  order,  therefore,  that  the  clauses  cited  from  Article  1 ot 
the  Constitution  may  have  proper  force  and  effect,  save  only  as 
modified  by  the  amendment,  and  that  the  latter  also  may  have 
proper  effect,  it  becomes  essential  to  distinguish  between  what  is 
and  what  is  not  ‘income,’  as  the  term  is  there  used;  and  ro  apply 
the  distinction,  as  cases  arise,  according  to  truth  and  substance, 
without  regard  to  form.  Congress  can  not  by  any  definition  it 
may  adopt  conclude  the  matter,  since  it  cannot  by  legislation  alter 
the  Constitution,  from  which  alone  it  derives  its  power  to  legislate, 
and  within  whose  limitations  alone  that  power  can  be  lawfully 


Gxcrcis0(l  • • 

3041  In  the  case  at  bar  it  therefore  “becomes  essential  to  ditinguish 
between  what  is  and  what  is  not  ‘income  as  the  term  is  used  in  t e 

Sixteenth  Amendment  . . . and  to  apply  the  distinction  according  to 
truth  and  substance  without  regard  to  form,”  in  order  that  Article  l o 
the  original  Constitution,  section  2,  clause  3,  and  section  9,  clause  4,  may 
have  proper  force  and  effect  save  only  as  modifiea  by  the  bixteent 

Amendment.  . , , . t • • i r 

3042  The  question  therefore  is  simply  this.  Is  a gam  in  value  realiz 

from  the  sale  of  property  income? 

3043  Insisting  with  great  earnestness,  with  persuasive  argument  and  tne 
citation  of  cases  alleged  to  be  in  support  of  its  a^ument,  the 

Government  contends  that  the  answer  is— Yes.  The  plaintiff,  with  equal 
forcefulness,  contends  that  the  answer  is  No. 

3044  But  the  cases  relied  upon  by  the  Government  arose  under  the 
Corporation  Tax  Act  of  1909  and  not  under  an  Income  l ax  Law. 

The  Corporation  Tax  Act  of  1909,  as  held  by  the  Supreme  Court  in  Stratton  s 
Indepenhnce  v.  Howbert,  231  U.  S.  399,  414,  416,  was  not  an  income  tax 
law,  and  since  gains  bv  sales  were  specifically  included  as  taxable, jhe  cases 
decided  under  that  act  do  not  determine  the  definition  of  the  word  income 
within  the  Sixteenth  Amendment  and  so  are  not  apposite  to  the  instant 

3^045  Mr.  Justice  Pitney,  in  the  Strattons  Independence  case,  supra, 

page  414,  said: — , , , t a 4- 

“As  has  been  repeatedly  remarked,  the  Corporation  lax  Act 
of  1909  was  not  intended  to  be  and  is  not  in  any  proper  sense  an 
income  tax  law.  This  court  had  decided  in  the  Pollock  case  that 
the  income  tax  law  of  1894  amounted  in  effect  to  a direct  tax 
upon  property,  and  was  invalid  because  not  apportion^  according 
to  population  as  prescribed  by  the  Consitution.  1 he  Act  oi 
1909  avoided  this  difficulty  by  imposing  not  an  income  tax,  but  an 
excise  tax  upon  the  conduct  of  business  in  a corporate  capacity, 
measuring,  however,  the  amount  of  tax  by  the  income  ot  the 
corporation,  with  certain  qualifications  prescribed  by  the  Act  it^  t. 
Flint  V.  Stone-Tracy  Co.,  220  U.  S.  107;  McCoachv.  MinMl  Co., 

228  U.  S.  295;  United  States  v.  Whitridge  (decided  at  this  term, 
ante,  p.  144).” 

And  again  on  page  416  he  said:  , • i • i ^ 

“As  to  what  should  be  deemed  ‘income’  within  the  meaning 
of  Sec.  38,  it  of  course  need  not  be  such  an  income  as  would  have 
been  taxable  as  such,  for  at  that  time  (the  Sixteenth  Amendment 


on 


586  TAX 


INC. 


12-20-20. 


not  having  been  as  yet  ratified),  income  was  not  taxable  as  such 
by  Congress  without  apportionment  according  to  population,  and 
this  tax  was  not  so  apportioned.  Evidently  Congress  adopted  the 
income  as  the  measure  of  the  tax  to  be  imposed  with  respect  to  the 
doing  of  business  in  corporate  form  because  it  desired  that  the 
excise  should  be  imposed,  approximately  at  least,  with  regard  to 
the  amount  of  benefit  presumably  derived  by  such  corporation 
from  the  current  operations  of  the  Government.  In  Flint  y. 
Stone-Tracy  Co.,^  220  U.  S.  107,  165,  it  was  held  that  Congress  in 
exercising  the  right  to  tax  a legitimate  subject  of  taxation  as  a 
franchise  or  privilege,  was  not  debarred  by  the  Constitution  from 
measuring  the  taxation  by  the  total  income,  although  derived  in 
part  from  property,  which,  considered  by  itself,  was  not  taxable. 

It  was  reasonable  that  Congress  should  fix  upon  gross  income, 
without  distinction  as  to  source,  as  a convenient  and  sufficiently 
accurate  index  of  the  importance  of  the  business  transacted.” 

See  also  Anderson  v.  Forty-Two  Broadway^  239  U.  S.  69,  72;  Stanton  v. 
Baltic  Mining  Co.,  240  U.  S.  103,  114;  Von  Baumhach  v.  Sargent  Land  Co., 
242  U.  S.  503,  522;  Doyle  v.  Mitchell  Bros . Co.,  247  U.  S.  179,  183. 

3046  The  question  before  us  was  passed  upon  by  the  Supreme  Court  under 
the  Income  Tax  Law  of  1867  inGray  v.  Darlington,  15  Wallace  63, 

and  this  precise  question  has  not  been  before  the  Supreme  Court  since 
that  decision.  There  it  was  decided  that  under  the  Law  of  1867  a gradual 
increase  in  value  extending  over  a period  of  years  could  not  be  taxed  as 
income  for  the  year  in  which  it  was  realized  by  sale.  Speaking  for  the 
Court,  Mr.  Justice  Field  on  page  65  said: — 

“The  question  presented  is  whether  the  advance  in  the  value 
of  the  bonds,  during  this  period  of  four  years,  over  their  cost,  re- 
alized by  their  sale,  \vas  subject  to  taxation  as  gains,  profits,  or 
income  of  the  plaintiff  for  the  year  in  which  the  bonds  were  sold. 

The  answer  which  should  be  given  to  this  question  does  not,  in 
our  judgment,  admit  of  any  doubt.  The  advance  in  the  value 
of  property  during  a series  of  years  can,  in  no  just  sense,  be 
considered  the  gains,  profits,  or  income  of  any  one  particular 
year  of  the  series,  although  the  entire  amount  oif  the  advance  be 
at  one  time  turned  into  money  by  a sale  of  the  property.  The 
statute  looks,  with  some  exceptions,  for  subjects  of  taxation  only 
to  annual  gains,  profits,  and  income.” 

And  further  on  page  66: 

“The  mere  fact  that  property  has  advanced  in  value  between 
the  date  of  its  acquisition  and  sale  does  not  authorize  the  imposi- 
tion of  the  tax  on  the  amount  of  the  advance.  Mere  advance  in 
value  in  no  sense  constitutes  the  gains,  profits,  or  income  specified 
by  the  statute.  It  constitutes  and  can  be  treated  merely  as  increase 
of  capital.” 

3047  Respecting  this  decision,  the  Supreme  Court  inLynch  v.  Turrish, 

247  U.  S.  221  [1f2351],  speaking  by  Mr.  Justice  McKenna,  said 

on  page  230,  after  discussing  v.  Darlington'. 

“This  case  has  not  been  since  questioned  or  modified,”  and  meets  the 
Government’s  attempt  to  distinguish  Gray  v.  Darlington,  on  page  230,  in 
the  following  manner: — 

“The  Government,  however,  makes  it  view  depend  upon  dis- 
putable differences  between  certain  words  of  the  two  acts.  It  urges 
that  the  Act  of  1913  makes  the  income  taxed  one  ‘arising  or  accru- 
ing’ in  the  preceding  calendar  year,  while  the  Act  of  1867  makes 


INC. 


587  TAX 


the  income  one  ^derived.*  Granting  that  there  is  a ^ade  of 
difference  between  the  words,  it  cannot  be  granted  that  Congress 
made  that  shade  a criterion  of  intention  and  committed  the  con- 
struction of  its  legislation  to  the  disputes  of  purists.^  Besides,  the 
contention  of  the  Government  does  not  reach  the  principle  oi  Gray 
V.  Darlington^  which  is  that  the  gradual  advance  in  the  value  of 
property  during  a series  of  years  in  no  just  sense  can  be^ ascribed 
to  a particular  year,  not  therefore  as  ‘arising  or  accruing,  to  meet 
the  challenge  of  the  words,  in  the  last  one  of  the  years,  as  the  Gov- 
ernment contends,  and  taxable  as  income  for  that  year  or  when 
turned  into  cash.  Indeed,  the  case  decides  that  such  advance  in 
value  is  not  income  at  all,  but  merely  increase  of  capital  and  not 

subject  to  a tax  as  income.”  i a j 

3048  The  meaning  of  the  word  “incomes”  in  the  Sixteenth  Amendment 
is  no  broader  than  its  meaning  in  the  Act  of  1867.  It  was  adopted 

in  its  present  form,  using  only  the  words  “incomes  from  whatever  source 
derived”  with  the  presumptive  knowledge  on  the  part  of  Congress  and  the 
several  State  legislatures,  of  the  meaning  attributed  thereto  by  the  deci- 
sions of  the  various  courts,  both  State  and  Federal.  ^ u i 

3049  It  has  been  held  repeatedly  that  gains  realized  from  the  sale 
of  capital  assets  held  in  trust  are  not  income,  but  are  principal, 

exactly  as  the  securities  were  before  they  were  sold,  and  that  where  a tenant 
for  life  is  entitled  to  the  entire  net  income  of  a fund,  and  the  trustee  realizes 
an  advance  in  value  by  the  sale  of  an  investment,  the  life  tenant  is  not  en- 
titled to  the  gain  which  is  uniformly  treated  by  the  Courts  as  an  increment 

to  principal  and  a part  of  the  corpus  of  the  trust.  ^ ^ , j 

3050  The  following  are  a few  of  the  leading  cases  sustaining  the  doctrine 
that  the  growth  or  increase  of  value  when  realized  on  the  sale  ot 

an  investment  is  accretion  to  capital  and  not  income  as  between  life  tenant 
and  remainderman.  Boardman  v.  Mansfield^  79  Conn.  634;  Carpenter  v. 
Perkins,  83  Conn.  11,  20;  Parker  v.  Johnson,  37  N.  J.  Eq.  366,  368;  Out- 
cault  V.  Appleby,  36  N.  J.  Eq.  74,  78;  Matter  of  Gerry,  103  N.  Y.  445; 

Thayer  v.Burr,  201  N.  Y.  155,  157,  158;  Graham  s Estate,  198  Pa.  St.  216, 

Neel’s  Estate  (No.  2)  207  Pa.  St.  446;  Lauman  v.  Foster,  157  Iowa  275; 
Slocum  V.  Ames,  19  R.  I.  401;  Jordan  v.  Jordan,  192  Mass.  337;  Mercer  v. 

Buchanan,  132  Fed.  501,  508.  ^ , t • r i c*  u 

3051  These  decisions  had  at  the  time  of  the  adoption  or  the  bpteentn 
Amendment,  established  a definite  meaning  of  the  word  ^ i^JF^me 

for  the  purpose  of  statutory  and  Constitutional  construction.  It  is  dimcult 
to  see  how  the  word  “income”  can  have  any  different  meaning  when  applied 
to  the  proceeds  of  an  investment  when  held  by  a trustee,  than  when  held  by 
an  individual,  as  the  Income  Tax  Law  specifically  refers  to  funds  held  in 

trust.  (Sec.  2 (b).)  ^ i i i • -ii 

3052  In  order  to  show  the  conclusions  reached  by  the^  Courts  it  will 
suffice  to  quote  from  only  one  of  the  cases  to  which  reference  is 

made  supra.  In  Parker  v.  fohmson,  37  N.  J.  Eq.  366,  the  Court  said: 
“The  profit  is  not  income.  It  was  made  by  the  trustee  in  the 
process  of  converting  the  investment,  and,  like  a premium  realized 
on  the  sale  of  Governm.ent  bonds  in  which  the  funds  might  be  in- 
vested, it  belongs  to  the  fund.  The  trustee  in  this  case  is  to  keep 
the  fund  invested,  and  the  tenant  for  life  is  entitled  to  the  interest. 

It  is  clearly  the  duty  of  the  trustee  to  apply  the  profits  on  one  in- 
vestment to  making  up  the  losses  on  others.  ^ ^ 

3053  So  it  seems  that  income  from  investments  consists,  in  ^e  case 
of  bonds,  of  interest;  in  the  case  of  stocks,  of  dividends.  There  is 

no  income  from  the  sale  of  investments. 


588 


TAX 


INC. 


12-20-20. 


3054  The  conclusion  seems  imperative  that  the  word  ‘‘income”  has  a 
well-defined  meaning,  not  only  in  common  speech  but  also  under 

judicial  construction  and  this  meaning  does  not  include  the  increase  m 
value  of  capital  assets  when  realized  upon  a sale. 

3055  The  following  extract  from  the  opinion  of  Mr.  Justice  Pitney  in 
the  Macomber  case,  supra,  at  page  206,  is  instructive:  ^ 

“For  the  present  purpose  we  require  only  a clear  definition  of 
the  term  ‘income’  as  used  in  common  speech,  in  order  to  determine 
its  meaning  in  the  amendment.” 

3056  It  seems  to  me  apparent  that  the  Supreme  Court,  in  Tozvne  v. 
Eisner^  245  U.  S.  418,  426,  [1f2313],  and  in  Eisner  v.  Macombety 

supra,  followed  the  doctrine  enunciated  in  Gibbons  v.  Mahon,  136  U.  S. 
549,  where  it  was  held  that  a stock  dividend  is  an  accretion  to  capital  and 
not  income  as  between  a life  tenant  and  the  remainderman  and  therefore 
held  in  the  Towne  case  that  a stock  dividend  was  not  income  within  the 
meaning  of  the  Income  Tax  Law  of  1913  and  in  the  Macomber  case  that 
a stock  dividend  was  not  income  within  the  meaning  of  the  Sixteenth 
Amendment.  As  already  stated,  it  is  difficult  to  see  why  any  different 
rule  should  be  applied  to  the  proceeds  of  an  investment — purely  a capital 
investment — when  held  by  a trustee  than  when  held  by  an  individual. 

3057  Two  pertinent  points  have  been  definitely  established  by  the  Su- 
preme Court  in  Eisner  v.  Macomber,  supra,  page  214:  ^ 

First: — “Enrichment  through  increase  in  value  of  capital  in- 
vestment is  not  income  in  any  proper  meaning  of  the  term. 

and 

Second: — If  it  requires  conversion  of  capital  in  order  to  pay  the 
tax,  it  must  follow  that  the  tax  is  on  capital  increase  and  not  on 
income,  for  on  page  213,  the  Court  said: — 

“Yet  without  selling,  the  shareholder,  unless  possessed  of  other 
resources,  has  not  the  wherewithal  to  pay  an  income  tax  upon  the 
dividend  stock.  Nothing  could  more  clearly  show  that  to  tax  a 
stock  dividend  is  to  tax  a capital  increase,  and  not  income,  than  this 
demonstration  that  in  the  nature  of  things  it  requires  conversion 
of  capital  in  order  to  pay  the  tax.” 

3058  Had  the  plaintiff  possessed  no  resources  other  than  the  bonds 
which  he  sold, — prior  to  the  sale  his  capital  would  have  been  their 

then  entire  value.  The  increase  since  March  1,  1913,  was  capital  increase. 
To  collect  the  tax  on  this  increase  in  value  because  the  capital  was  converted 
into  cash  must  of  necessity  diminish  his  capital  to  that  extent.  Before  the 
sale  all  the  plaintiff  possessed  was  capital  without  any  part  of  it  constituting 
income.  The  sale  of  capital  results  only  in  changing  its  form  and  like  the 
mere  issue  of  a stock  dividend,  makes  the  recipient  no  richer  than  before. 
Gibbons  v.  Mahon,  supra;  Towne  v.  Eisner,  s\\pv2i', Eisner  v.  Macomber , supra. 

3059  The  exact  question  presented  in  this  case  has  not  been  before  the 
Supreme  Court  since  its  decision  in  Gray  v.  Darlington,  supra,  nor 

did  it  arise  in  Eisner  v.  Macomber,  supra.  Notwithstanding  certain  passages 
in  the  opinion  of  the  Court  in  the  Macomber  case  stating  that  when  dividend 
stock  is  sold  at  a profit,  the  profit  is  taxable  like  other  income, — which  I 
consider,  in  view  of  all  that  has  been  written  by  the  Supreme  Court  in  a 
long  line  of  income  tax  decisions,  must  mean  that  the  profit  derived  from 
such  transactions,  if  it  is  income,  applies  in  the  case  of  a trader  and  not  in 
the  case  of  an  individual  who  merely  changes  his  investments. 

3060  Therefore,  under  the  authoruty  of  Gray  v.  Darlington,  which  is 
approved  in  Lynch  v.  Turrish,  supra,  I feel  constrained  to  hold 

that  the  appreciation  in  value  of  the  plaintiff’s  bonds,  even  though  realized 


INC. 


589  TAX 


by  sale,  is  not  income  taxable  as  such,  and  in  reaching  this  conclusion  I 
find  support  for  it  in  the  Macomber  case  where  Mr.  Justice  Pitney  says: 
“Enrichment  through  increase  in  value  of  capital  investment 
is  not  income  in  any  proper  meaning  of  the  terrn.’’ 

3061  It  follows  that  the  Income  Tax  Law  of  1916,  in  so  far  as  it  attempts 
to  tax  such  increase,  is  in  conflict  with  the  apportionment  require- 
ments of  the  First  Article  of  the  Constitution,  being  a direct  tax  and  not 
apportioned  among  the  several  States  according  to  population. 

3062  Counsel  for  plaintiff  contended  that  the  Act  should  be  so  construed 
as  to  limit  the  tax  to  the  actual  increase  from  the  dates  of  acquisi- 
tion, although  the  value  of  such  bonds  was  less  on  March  1,  1913,  than  when 
acquired  prior  thereto,  in  the  event  that  the  gain  in  value  of  the  bonds  v hen 
sold  was  taxable  at  all.  In  view  of  the  decision  that  such  increases  are 
not  income  it  becomes  unnecessary  to  discuss  the  point. 

3063  The  conclusion  herein  expressed  has  been  reached  only  after  a very 
r careful  consideration  of  all  the  respective  claims  presented  by  able 

counsel  in  exhaustive  and  persuasive  briefs  and  with  full  appreciatiori  of  the 
admonition  given  by  the  Supreme  Court  in  Nicol  v.  Ames^  173  U.  S.  509, 
at  page  514.  This  Court  fully  appreciates  that 

“It  is  always  an  exceedingly  grave  and  delicate  duty  to  decide 
upon  the  constitutionality  of  an  act  of  the  Congress  of  the  United 
States,’’ 

and  that  ...  , 

“the  duty  imposed  demands  in  its  discharge  the  utmost  delibera- 
tion and  care  and  invokes  the  deepest  sense  of  responsibility  ^ 
as  was  said  by  Chief  Justice  Fuller  in  the  opening  paragraph  of  the  opinion 
in  Pollock  V.  Farmers^  Loan  lA  Trust  Co.,  158  U.  S.  601,  at  page^617.  In 
the  discharge  of  that  duty,  as  I see  it,  it  follows  that  the  word  “incomes 
in  the  Sixteenth  Amendment  should  not  and  cannot  be  so  construed  as  to 
include  property  other  than  income  even  if  such  property  is  described  as 
income  by  an  Act  of  Congress,  as  such  a construction  permits  the  Congress 
to  nullify  the  provisions  of  the  second  Section  of  Article  I of  the  Constitu- 
tion, that  direct  taxes  shall  be  apportioned.^ 

3064  Let  judgment  be  entered  for  the  plaintiff  to  recover  of  the  defendant 
$17,756.79,  together  with  interest  on  the  same  from  July  19,  1918, 

together  with  costs  of  suit. 

Ordered  Accordingly. 

(Signed)  THOMAS,  D.J. 

December  16,  1920. 


f 


INC.  590 


TAX 


12-81-20; 

(T.  D.  3101. — Corrected.) 

3065  Art.  292.  Traveling  expenses. — [Comment:  T.  D.  3101  [^3019], 
3019  as  issued  by  the  Bureau  in  mimeograph  form,  was  incorrect  in  that 
the  word  “plus,’’  the  sixth  word  from  the  end  of  the  sentence  beginning 
“(c)  If  an  individual  receives  a salary  and  also  an  allowance  for  meals  and 
lodging,”  should  be  “minus.”  As  corrected  by  the  Government  the  clause 
at  the  end  of  the  sentence  should  read  “but  any  excess  of  the  allowance  over 
such  expenses  minus  such  ordinary  expenditures  is  taxable  income.” — The 
' Corporation  Trust  Company.! 


(T.  D.  3102.) 

3066  Liability  to  tax  of  U.  S,  citizens  resident  in  Philippines. — The  ap- 
f48hJ  pended  decision  [summary  only,  1(3067]  of  the  District  Court  of  the 

[United  States  for  the  Northern  District  of  California,  Southern 
Division,  in  the  case  of  W.  H.  Lawrence  v.  Julius  S.  Wardell,  collector, 
rendered  November  16,  1920,  is  published  for  the  information  of  internal 
revenue  officers  and  others  concerned. 

3067  Summary  of  decision  referred  to  in  1(3066. — A citizen  of  the  United 
States  who  resided  in  the  Philippine  Islands  during  the  entire  year 

1918  is  subject  to  the  tax  imposed  by  the  Revenue  Act  of  1918.  (T.  D.  3102, 
signed  by  Paul  F.  Myers,  Acting  Commissioner  of  Internal  Revenue,  and 
dated  December  24,  1920.) 


(T.  D.  3104) 

3068  Inventories  of  livestock  raisers  and  other  farmers. — Regulations  45 
2692  are  hereby  amended  by  inserting  after  Article  1585  a new  Article 
to  be  known  as  Article  1585(a)  which  shall  supersede  Treasury 
Decision  3011  [K2692]  and  shall  read  as  follows: 

Article  1585(a).  Inventories  of  livestock  raisers  and  other  farmers. — 
(1)  Farmers  may  change  the  basis  of  their  returns  from  that  of  receipts  and 
disbursements  to  that  of  an  inventory  basis,  which  necessitates  the  use  of 
opening  and  closing  inventories  for  the  year  in  which  the  change  is  made. 
There  should  be  included  in  the  opening  inventory  all  farm  products  (including 
livestock)  purchased  or  raised  which  were  on  hand  at  the  date  of  the  inven- 
tory, and  there  must  be  submitted  with  the  return  for  the  current  taxable  year 
an  adjustment  sheet  for  1917  and  each  year  thereafter  (prior  to  the  year  in 
which  the  change  is  made)  based  on  the  inventory  method;  upon  the 
amount  of  which  adjustments  the  tax  shall  be  assessed  and  paid  (if  any  be 
due)  at  the  rate  of  tax  in  effect  for  each  respective  year.  Where  it  is  impos- 
sible to  render  complete  inventories  from,  the  beginning  of  the  taxable  year 
1917,  the  Department  will  accept  estimates  which  in  its  opinion  substantially 
reflect  the  income,  on  the  inventory  basis,  for  the  year  1917  and  thereafter; 
but  inventories  must  not  include  real  estate,  buildings,  permanent  improve- 
ments or  any  other  assets  subject  to  depreciation. 

(2)  Because  of  the  difficulty  of  ascertaining  actual  cost  of  livestock  and 
other  farm  products,  farmers  who  render  their  returns  upon  an  inventory 
basis  may  at  their  option  value  their  inventories  for  the  current  taxable  year 
according  to  the  “farm  price  method”  of  determining  costs,  which  provides 
for  a valuation  of  inventories  a1  market  price  less  cost  of  marketing.  If  the 
use  of  the  “farm  price  method”  of  valuing  inventories  for  any  taxable  year 

INC.  591 


TAX 


involves  a change  in  method  of  pricing  inventories  from 

prior  years,  the  opening  inventory  for  the  taxable  year  in 

is  made  should  be  brought  in  at  the  same  value  as  the  closing  for 

the  preceding  taxable  year  (this  being  the  same  in  effect  as 

ing  inventory  on  the  new  basis  and  crediting  iricorne  wi  r +t,  + -caKle 

don  brought  in).  If  such  valuation  of  the  opening  inventory  for  the  taxable 

year  in  which  the  change  is  made,  results  in  an  abnormally 

that  year,  there  may  be  submitted  with  tne  return  for  such  taxable  year 

fn  adjustment  shee/for  1917  and  each  year  thereafter  (pn-  to  the  year  m 

which  the  change  is  made),  based  on  the  farm  price  method  of  valuing 

inventories;  upon  the  amount  of  which  adjustments  the  tax  shall  be  assessed 

and  paid  as  provided  in  paragraph  (1)  hereof.  has 

(3)  Where  returns  have  been  made  in  which  the  taxable  net  income  ha 
been  computed  upon  incompUte  inventories,  the  abnorma  ity  must  be  c - 
rected  by  submitting  with  the  return  for  pe  current  taxable  year  “ adjust- 
ment sheet  for  1917  and  each  year  thereafter  (prior  to  the  year  in  which  the 
change  is  made),  upon  which  such  adjustments  shall  be  made  as  are  neces 
sary  to  bring  the  closing  inventory  for  the  preceding  year 
with  the  opening  complete  inventory  for  the  current  taxable  Y ■>  P , 
Tmlnt  of  which  adjustments  the  tax  shall  be  assessed  paid  as  provided 
in  paragraph  (1)  hereof.  (T.  D.  3104,  signed  by  Paul  F Myers,  Acting 
Commissioner  of  Internal  Revenue,  and  dated  December  27,  19  .) 

(T.  D.  3105.) 

3060  Contributions  by  corporations  to  Red  Cross  and 
1181  war  organizations  deducted  m returns  lor  the  year  1918.  °™er 
1460  to  obviate  the  necessity  of  filing  amended  returns  for  bhejear  1 
by  corporations  which  filed  their  completed  returns 
publicatiL  of^the  opinion  of  the  Attorney  General  and  claimed  deductions 
^r“t  of  contributions  to  the  Red  Cross  and  o^her  recoded  wa 
organizations,  corporations  which  filed  their 

deductions  nrior  to  the  issuance  of  Treasury  Decision  2847  nl4601,  sfioulQ 
file  immediately  with  the  Collector  of  Internal  Revenue  a 

the  amount  of  such  deductions  claimed,  the  amount  of  net  income  as 
reported  and  as  corrected,  and  the  amount  of  additional  tax  due  by  «a^  ot 
the  erroneous  claiming  of  the  deductiom  The  total  j 

tax  shown  to  be  due  by  such  statement  should  be  paid  at  once,  together  witn 
interest  on  each  installment  from  the  original  due  date. 

3070  In  cases  where  this  procedure  is  followed  amen  _ office 

required  and  the  statements  referred  to  when  received  by  this  office 
through  the  collector’s  office,  will  be  filed  with  the  original  returns  in  lieu  of 

amended  returnSo  statement  and  make  payment  of  the  additional  tax 

by  a corporation  will  subject  it  to  the  5%  penalty  with  mterest  for 

when  it,  T t*g 

tributions  is  disallowed.  (1.  U.  signea  oy  ^ . 

Commissioner  of  Internal  Revenue,  and  dated  December  27,  19  .} 


INC. 


592  TAX 


12-31-20. 


(T.  D.  3108.)  v.  - 

3072  Valuation  of  Inventories. — Article  1582,  Regulations  45,  is  hereby  .; 
1092  amended  to  read  as  follows:  ^ ' 

Art.  1582.  Valuation  of  inventories. — Inventories  must  be  valued  at  (a)  cost  i 
or  (b)  cost  or  market,  as  defined  in  Article  1584  as  amended,  whichever  is  ' 
lower.  (See  Article  1585  for  inventories  by  dealers  in  securities).  Whichever 
basis  is  adopted  must  be  applied  consistently  to  the  entire  inventory.  A tax-  . 
payer  may,  regardless  of  his  past  practice,  adopt  the  basis  of  “cost  or  market 
whichever  is  lower”  for  his  1920  inventory,  provided  a disclosure  of  the  fact 
and  that  it  represents  a change  are  made  in  the  return.  Thereafter  changes 
can  be  made  only  after  permission  is  secured  from  the  Commissioner.  Inven- 
tories should  be  recorded  in  a legible  manner,  properly  computed  and  sum- 
marized, and  should  be  preserved  as  a part  of  the  accounting  records  of  the 
taxpayer.  Goods  taken  in  the  inventory  which  have  been  so  intermingled 
that  they  can  not  be  identified  with  specific  invoices  will  be  deemed  to  be 
the  goods  most  recently  purchased.  (T.  D.  3108,  signed  by  Paul  F.  Myers, 
Acting  Commissioner  of  Internal  Revenue,  and  dated  December  30,  1920.) 


(T.  D.  3109.) 

3073  Inventories  at  market. — Article  1584,  Regulations  45,  as  amended 
1094  by  T.  D.  3047  [1[2834],  is  hereby  amended  to  read  as  follows: 

2834 

Art.  1584.  Inventories  at  market. — Under  ordinary  circumstances, 
“market”  means  the  current  bid  price  prevailing  at  the  date  of  the  inventory 
for  the  particular  merchandise  in  the  volume  in  which  ordinarily  purchased 
by  the  taxpayer.  This  method  of  valuation  is  applicable  in  the  cases  (a)  of 
goods  purchased  and  on  hand,  (b)  of  basic  elements  of  cost  (materials,  labor 
and  burden)  in  goods  in  process  of  manufacture,  and  (c)  of  finished  goods 
on  hand;  exclusive,  however,  of  goods  on  hand  or  in  process  of  manufacture 
for  delivery  upon  firm  sales  contracts  at  fixed  prices  entered  into  before  the 
date  of  the  inventory,  which  goods  must  be  inventoried  at  cost.  Where  no 
open  market  quotations  are  available,  the  taxpayer  must  use  such  evidence 
of  a fair  market  price  at  the  date  or  dates  nearest  the  inventory  as  rnay  be 
available,  such  as  specific  transactions  in  reasonable  volume  entered  into  in 
good  faith,  or  compensation  paid  for  cancellation  of  contracts  for  purchase 
commitments.  Where,  owing  to  abnormal  conditions,  the  taxpayer  has 
regularly  sold  such  merchandise  at  prices  lower  than  the  current  bid  price 
as  above  defined,  the  inventory  may  be  valued  at  such  prices,  and  the  cor- 
rectness of  such  prices  will  be  determined  by  reference  to  the  actual  sales 
of  the  taxpayer  for  a reasonable  period  before  and  after  the  date  of  the 
inventory.  Prices  which  vary  materially  from  the  actual  prices  so  ascertained 
will  not  be  accepted  as  reflecting  the  market  and  the  penalties  prescribed 
for  filing  false  and  fraudulent  returns  may  be  asserted.  Goods  in  process 
of  manufacture  may  be  valued  for  purposes  of  the  inventory  on  the  lowest 
of  the  following  bases:  (1)  the  replacement  or  reproduction  cost  prevailing 
at  the  date  of  the  inventory;  or  (2)  the  proper  proportionate  part  of  the 
actual  finished  cost;  or,  under  abnormal  conditions,  (3)  the  proper  propor- 
tionate part  of  the  sales  price  of  the  finished  product,  account  being  taken 
in  all  cases  of  the  proportionate  part  of  the  total  cost  of  basic  elements 
(materials,  labor  and  burden)  represented  in  such  goods  in  process  of  manu- 
facture at  the  stages  at  which  they  are  found  on  the  date  of  the  inventory. 
The  inventories  of  taxpayers  on  whatever  basis  taken  will  be  subject  to  in- 


INC. 


593 


TAX 


vestigation  by  the  Commissioner  and  the  taxpayer 

missioner  of  the  correctness  of  P . article  included  in  the 

to  show  both  the  cost  and  of  1918,  by  reason  among 

Xf?hfngs  ofgX^nmLtal  control 

Snr::  tt::ubllr^  f^enjln 

established  during  the  succeeding  y ’ r gpotion  214  (a)  12  or  Section 
sustained  in  accordance  with  the  pro\  losses  in  1918  inventories 

23,(.)  ,4  of  .he  ““  “Sty  S ? Ac.i.g  Com- 

and  from  rebates].  (1.  19.  j r.L-pmber  80  1920.) 

missioner  of  Internal  Revenue,  and  dated  December  PU,  ly  ; 


END  OF  1920  SERVICE. 


'f 


f 


f 


INC. 


594 


TAX 


MEMORANDA 


3aOIVH3«  ZAT  Y^TATOOp  TSUZT  ’/[OITAHO^LSOO  SHT 


MEMORANDA 


THE  CORPORATION  TRUST  COMPANY  TAX  SERVICES 


1 


i 


4-27-20. 

TABLE  OF  FOBMS. 

. . Reproduced 

« Ckj..  for  

47  Claim  for  abatement 

47 A Claim  for  credit— Taxes  paid  in  excess.'.  .*.*.'. 

1000  Ownership  Certificate— Tax  to  be  paid  at  source.*.* ! " * 

1001  Ownership  Certificate— Tax  not  to  be  paid  at  source— 

Domestic  securities jq 

lOOlA  Ownership  Certifipte— Tax  not  to  be  paid  at  source^ 

Foreign  securities U 

lOOlB  Statement  of  income  received  by  nonresident  alien* from 
sources  within  the  United  States— Personal  ex- 
emption claimed 12 

1012  Monthly  return  of  tax  withheld  at  source— Bond  interest*.  68 

1013  Annual  return  of  tax  withheld  at  source— Bond  interest  13 

1040  Individual  income  tax  return— Net  income  exceeding 

$5,000. 

1040A  Individual  income  tax  return  for  net  income  of  not  more 

than  $5 ,000 49 

1040F  Schedule  of  farm  income  and  expenses !.*.*.*.*.*  75 

1041  Annual  return  of  income  by  fiduciaries * 59 

1042  Annual  return  of  tax  withheld  at  source— Salaries*  rent 

etc ’ ; 

1058  Substitute  certificate — Tax  not  to  be  paid  at  source  15 

1059  Substitute  certificate— Tax  to  be  paid  at  source.  ....'.** 16 

1065  Annual  return  of  partnerships  and  personal  service  cor- 
porations  

1078  Certificate  of  alien  claiming  residence  in  the  United 

States 21 

inni  Ownership  certificate  Disclosing  actual  owner  of  stock  22 

1096  Annual  information  return  summary— Salaries,  wages 

interest,  rent,  etc ’ 23 

1096A  Monthly  information  return— Bond  interest  and  foreieii 

dividends 25 

1096B  Annual  information  return— Bond  interest  and  foreien 

dividends 26 

1098  Annual  information  return — miscellaneous  income  pay- 

ments (and  tax  withheld)  to  nonresident  aliens'^and 
foreign  corporations 43 

1099  Annual  information  return— Salaries,  wages*  interest* 

rent,  etc ’ 27 

1114  Application  for  permission  to  establish  repiacement 

fund.  (See  1[942.) 

1115  Claim  by_  nonresident  alien  for  benefit  of  personal  ex- 

emption 28 

111^  credit  for  foreign  taxes  paid — Individuals. ...  30 

1117  Bond — In  connection  with  claim  on  Form  1116 34 

11  in  credit  for  foreign  taxes  paid — Corporations.. . 35 

1119  Bond — In  connection  with  claim  on  Form  1118 79 

Corporation  income  and  profits  tax  return 51 

1120A  Corporation  income  and  excess  profits  tax  return  for 

fiscal  years  ended  1919 39 

Concluded  on  Supplementary  Page  2, 

Income  Tax 
Supplementary  Paj?e  1. 


tC  VO  On 


Form 

No. 

1122 

1124 

1125 

1126 


TABLE  OF  FORMS— -Concluded. 

(See  Supplementary  Page  1.) 

Reproduced 

Designation  ^ P^g® 

Information  return  of  subsidiary  or  affiliated  corpora- 

tion  in  connection  with  consolidated  return 67 

Bond— In  connection  with  claim  for  abatement  on  ac- 
count of  inventory  losses  or  rebate  payments 47 

Schedule  of  taxable  interest  on  Liberty  Bonds oU 

Certificate  of  inventory ^ 


To  be  added  to  as  fast  as  the  revised  forms,  or  new  forms,  are  issued. 


See  ‘‘Forms  and  Their  Uses”  Index  Page  16. 


Income  Tax 
Supplementary  Page  2. 


3-1-20. 


TREASORV  DEPARTMENT, 
BuBEfi.n  Internal  Revenue. 
Form  46— Revised  Jan., 

Ed.  200,000. 


State  of. 

County  of 


CLAIM  FOR  REFUND. 

TAXES  ERRONEOUSLY  OR  ILLEGALLY  COLLECTED. 

ALSO  AMOUNTS  PAID  FOR  STAMPS  USED  IN  ERROR  OR  EXCESS. 


IMPORTANT. 

This  claim  should  be  forwarded  to  the  Cidiector  of 
Internal  Revenue  to  wlMxn  the  Tax  was  paid  and  nuist 
be  accompanied  b;  Collector’s  Receipt  therefor. 


Date  of  filing  to  be 


plainly  stamped  here 


. (Name  of  claimant.) 

(Address  of  claimant;  give  street  and  number  as  well  as  city  or  town,  and  State.) 


This  deponent  being  duly  'sworn  according  to  law  denoses  and  says  that  this  claim  is  made  on  behalf  of  the 
imant  named  above,  and  tnat  the  facts  stated  below  ^vitn  reference  to  the  claim  are  true  and  complete: 


claimant 

1.  Business  engaged  in  by  claimant 

2.  Character  of  assessment  or  tax  ... 


(State  for  or  upon  what  tho  tax  was  assessed  or  the  stamps  afdxed.) 

3.  Amount  of  assessment  or  stamps.. - 3— . 


4.  Amount  now  asked  to  be  refunded  (or  such  greater  amoimt  as  is  legally  refundable) 3 

5.  Date  of  payment  of  assessment  or  purchase  of  stamps 

Deponent  verily  believes  that  the  amount  stated  in  Item  4 should  be  refunded  and  claimant  now  asks  and 
demanfW  refund  of  said  amount  for  the  following  reasons: 


And  this  deponent  further  alleges  that  the  said  claimant  is  not  indebted  to  the  United  States  in  any  amount 
whatever,  and  that  no  claim  has  heretofore  been  presented,  except  as  stated  herein,  for  the  rofimding  of  the  whole 
or  any  part  of  the  amount  stated  in  Item  3. 


Svxtm  to  and  fhibaanJbed  hrfore  me  this 

day  of , 19 


Signed: 


WritaNuiM 

• it  UD  b* 

•iDy  r«*d. 


(N»m*.)  (Title.) 

(Thia  affidavit  may  be  Hwom  to  before  a Deputy  Collector  of  Internal  Revenue  without  charge.) 


Income  Tax 
Supplementary  Page  3. 


CERTiFiCATES. 


CoXUaor 


Schedule  Number 

Allowed  or  Rejected  Number. 

Clfumant 


District 


(Nature  ot  tai.) 


Address 


Claim  examined  bj— 


Claim  approved  by— 

CUtf  of  DIriilon. 


Examined  and  submitted  for  action-.— 


19.... 

COMMITTEE  ON  CLAIMS. 


Amount  claimed — $ 

Amoimt  allowed — $ 

Amount  rejected' — $.. — — r — ' 

[Page  2 of  Form  45.] 


Income  Tax 
Supplementary  Page  4. 


tBBASOIlT  MPARTUtKT, 
O.  8.  iMnlKAL  Reventx. 
Ponn  i«l& 


CLAIM  FOR  ABATEMENT 

TAXES  ERRONEOUSLY  OR  ILLEGALLY  ASSESSED 


DAtE  OF  FOING  TO  Bf 


State  (f 

County  of. 


' IMPORTANT 

Thu  claim  ahould  be  forwarded  to  the  Coneetor 
of  Internal  Rerenue  from  whom  notice  of  aMe<»» 
ment  wee  roeelved* 


PUIKIY  STAMPED  HERE 


CNdino  ^ clfthoaote) 


<A4drass  of  clalmaot;  gfvo  street  and  immber  as  weO  as  city  or  town,  and  StatBe) 

This  deponent  being  duly  sworn  according  to  law^  deposes  and  says  that  this  claifia  is  mado  on  behalf  of  the 
dftimant  named  above,  and  thAt  the  facts  stated  below  with  reference  to  said  claim  are  true  and  complete: 


2.  Charactep  of  assessment  op  tax . 

S Amnnnf  of  iLoceacmonf.  _ 

_ _ 5 

4.  Amount  now  asked  to  be  abated  ..  . . . 

Deponent  verily  believes  that  the  amoimt  stated  in  item  4 should 

bo . abated,  and  claimant  now  asks  and 

demands  abatement  of  said  amount  for  the  following  roosons: 


Sworn  to  and  subscribed  before  me  this 
- . day  of  ^ 10. 


(TItta.) 

CrUs  affidavit  may  tw  atroni  to  before  a Deputy  CbUectorbi  Internal  Revenue  without  shftrge.)  »-«h 


. Income  Tax 
Supplementary  Page  5, 


CERTIFICATE  OF  ASSESSMENT 

I «c,tify  that  an  examination  of  the  records  of  the  Commissioner’s  Office  shows  the  following  facta  as  to  the 


assessment  and  payment  of  the  tax: 

. 

NAME  AND  ADDRESS. 

ClIABACTEn  or 
Assessment  oh 
Aeticle  Taxeb. 

Period 
Covered  nr 
Assessment. 

Lbt. 

Year. 

Month.- 

PAGE; 

Lofit 

Amount. 









Assetgment  CUrt,  InUmal  Rnmue  Bvreou. 


Form  47 


Abatement  Order  Xo, 


District 


Address  . 


Examined  and  submitted  for  action 


CUhn  utmlncd  by** 

Amount  claimed,  $. 

Amount  allowed,  $ — 

CUlm  appravid  by-~ 

Amount  rejected,  $ 

coMMirr^oN  dJUMSi 


'Income  Tax 
Supplementary  Page  6. 


CLAIM  FOR  CREDIT 

TAXES  PAID  IN  EXCESS 


TREASURY  DEPARTMENT, 
U.  8.  INTEHNAL  RKVEKTE. 
Form  47  A.— March,  1919. 


State  of 

County  of 


ss: 


IMPORTANT 

Thl*  cl«lm  should  bo  forwarded  to  the  Collector 
of  InUmal  Revenue  from  whom  notice  of  assess* 
ment  was  received* 


DATE  OF  FILING 


TO  sT] 


..... 


FUiNlY  STAMP £!>  Ht«E 


Write  Nerae 
SO  it  csn  be 
cosily  rood. 


(Name  of  claimant.) 


(Address  of  claimant;  give  street  and  number  as  well  as  city  or  town,  and  State.) . - 

This  deponent  being  duly  sworn  according  to  law,  deposes  and  says  that  this  claim  is  made  on  behalf  of  the 
claimant  named  above,  and  that  the  facts  stated  below  with  reference  to  said  claim  are  true  and  complete. 

1.  Business  engaged  in  by  claimant - 

2;  Character  of  assessment  or  tax 


3.  Amount  of  tax  paid. $ Taxable  year. 

4.  Portion  of  No.  3 claimed  as  a credit S 

5.  Unpaid  assessment  against  which  credit  is  asked $...i Taxable  year 

Deponent  verily  believes  that  the  amoimt  stated  in  item  4 should  be  credited,  and  claimant  now  asks  and 

demands  credit  of  said  amount  for  the  following  reasons: 

(State  facts  regarding  alleged  overpayment.) 


Sworn  to  and  subscribed  before  me  this 
day  of  — , 19. 


(fltte.) 

(This  affidavit  may  be  sworn  to  before  a Deputy  Collector  of  Internal  Revenue  without  charge.)  t-nn 


Income  Tax 
Supplementary  Page  7, 


CERTIFICATES 

* I certify  that  an  examination  of  the  records  of  tho  Commissioner’s  Office  shows  the  following  facts  as  to  iJlO  ' 
assessment  and  payment  of  the  tax: 

ASSESSMENT  OVERPAID 


NAME  OE  TAXPAYER. 

Chabacter  of 
Assessment  and 
Peeiod  Covebed. 

List. 

Year. 

Month. 

Pag,e. 

Line. 

Amount. 

Datb  Paid. 

Aueument  Clerk,  Internal  Revenue  Bureau. 


Collector  of  Internai Revenue. 


o 

( # 


ASSESSMENT  TO  BE  CREDITED 


NAME  AND  ADDRESS. 

Character  of 
Assessment  or 

Article  Taxed. 

Period 
Covered  by 
Assessment. 

L.sr. 

Year. 

Month. 

Page. 

Line. 

Amodot. 

Aitetsmenl  CUA,  internalRevenue  Bureau. 


Collector  of  Internal  Revenue. 


Form  47  A 


District 


eibatem€nt;Order  M'o. 

(Nature  of  tax.) 


Clairrumt 
Address  . 


CUim  approTcd  bj— 


Examined  and  submitted  for  action 


19... 


COMMITTEE  ON  CLAIMS: 


.Amount  claimed,  $. 
Amouni  allowed,  S. 
Amount  rejected,  f. 


f^m 


' 4 


i t 


Income  Tax 
Supplementary  Page  8. 


j 


Income  Tax 
Supplementary  Page  9, 


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Supplementary  Page  10. 


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Income  Tax 

Sui/pleincDt«ry  Page  11. 


This  form  will  not  be  accepted  unless  all  information  called  for  is  furnished. 


TREASURY  DEPARTMEKT 
U.  8.  iNTtRNAi  Revenue 
Form  1001 B— December,  1919 

STATElilENT  OF  INCOME  RECEIVED  BY  NONRESIDENT  AUEN  FROM  SOURCES  WITHIN  UNITED  STATES 

PERSONAL  EXEMPTION  CLAIMED. 


To  ha  with  withholdlne  aeent  by  nonresident  alien  individual  owning  bonds  of  a domestic  coporatlon  which  contain  a tax-free  covenant  cUuse.  The  execu- 

tloa  of  oertiflcate  does  not  relieve  the  bond  owner  from  filing  ownership  certificates  required  by  the  regulations. 

NAMES  MUST  BE  PRINTED  OR  WRITTEN  PLAINLY. 


DEBTOR  ORGANIZ.A.TION. 

OWNER  OF  BONDS. 

Street — 

Str66t  - 

City — State 

City otatc 

Subject  of — 

This  is  to  certify  that  the  owner  of  the  above-described  bonds 
is  a nonresident  alien  as  to  the  United  States  and  is  asubject  of  the 
country  as  stated  above,  and  is  entitled  to  personal  exemption 
and  credit  for  dependents  in  accordance  with  paragraphs  (c)  and 
Section  216  of  the  Revenue  Act  of  1918,  and  Article  307, 
Regulations  45. 

SlOSATUBS  or  OwNXB 

OB  AQBNT. 

Bond  interest  received  during  calendar  year  with 
respect  to  tax-free  covenant  bonds  issued  by 
above-named  corporation — $ 

All  other  income  from  sources  in  United  States...  $ 

Total § 

Personal  exemption — $ 

Address  I 

olAfect.  1 

[ 

Credit  for  denendents $ - 

Total S 

Citliens  or  subjects  of  tho  countries  enumerated  in  Class  (a)  of  Article  307,  Regulations  G,  as  amended,  will  bo  allowed  for  the  purpose  of  the  normal  tax  the  foUowIng 

' In  the  case  of  a sinele  nerson.  a rersona!  exemption  of  $1,000,  or  in  the  case  of  the  head  of  a family  or  a married  pemon  living  with  husband  or  wife,  a persjml 
exemption  of  $2  000  A husbanif  and  wife  living  together  shall  receive  but  one  personal  exemption  of  $2,000  agamst  their  aggregate  net  Income,  and  in  case  they 
make  separate  rkums,  the  personal  exemption  of  $2,000  may  be  taken  by  either  or  divided  between  them; 

S200  for  each  person  (other  than  husband  or  wife)  dependent  upon  and  receiving  his  chief  support  from  the  ta.xpayer,  if  such  dependent  person  Is  under  eighteen 

yearn  of  age  oris  incapable  of  self-support  because  mentally  or  physicaUy  defective. 

Cttizdis  or  subjects  of  the  countries  enumerated  in  Class  (b)  of  Article  307  will  be  allowed  the  benefit  of  the  personal  exemption  but  no  cremt  for  dependents.  ClUtms 
or  subjwtTof  the  countries  enumerate  in  Class  (c)  of  Article  307  will  not  bo  permitted  to  claim  the  benefit  of  personal  exemption  or  credit  for  dependents  and  should 
thmforo  not  use  this  form. 


TO  BE  FILLED  IN  BY  WITHHOLDING  AGENT. 

District  in  which  return  Form  1013  is  Sled — 

Amount  of  tax  required  to  be  withheld  at  source  as  shotyn  by  Form  1013,  for  1910,  $ 

To  be  reduced  on  account  of  personal  exemption  claimed  as  indicated  by  this  certificate,  the  items  appearing  on  the  followr..ig 
monthly  returns.  Form  1012: 

Month . Page Amount  of  tax.  $ — 

^ Month. Page Amount  of  tax. — 

Month—. Page Amount  of  tax — 

Month - Page...... Amount  of  tax 

Name  of  withholding  ^gent - — 


Income  Tax 
Supplementary  Page  12. 


THIS  RETURN  MUST  BE  MADE 
IN  DUPUCATE  TO  THE  COUEC- 
TOR  OF  INTERNAL  REVENUE 
FOR  THE  DISTRICT  IN  WHICH 
THE  WITHHOLDING  AGENT  IS 
LOCATED,  ON  OR  BEFORE 
MARCH  I,  1920,  AND  THE  TAX 
MUST  BE  PAID  ON  OR  BEFORE 
HINE  IS,  1920. 


Form  1013— Revised  January,  1920. 

UNITED  STATES  INTERNAL  REVElJUE  SERVICE 

ANNUAL  RETURN  OF  NORMAL  INCOME  lAXJO  BE  PAID  AT  SOURCE 

INTEREST  ON  BONDS  AND  OTHER  SIMILAR  OBLIGATIONS  OF 
DOMESTIC  AND  RESIDENT  CORPORATIONS  AND  FOREIGN  COR- 
PORATIONS HAVING  A, PAYING  AGENT  IN  THE  UNITED  STATES' 

For  the  Calendar  Year  1919 


(Name  of  debtor  organization)’ 
(Address  in  lull)  ’ 
(Name  oi  withholding  agent) 
(^Address  in  iull) 


Do  not  write  in  thia  apatw 


PAYMENT 


(Cashier**  Stamp) 


CASH  CHECK  M.O. 


Enmioed  bj. 


INSTRUCTIONS 


If  debtor  organization  makes  its  own  return,  no  entries  need  be  made  on  lines  provided  for  name  and' address  of  withholding  agent.' 

This  return  must  be  made  by  debtor  organizations,  or  their  duly  authorized  withholding  agents,  and'must  show,  by  months  in  which  the 
mcome  was  paid  and  reported  on  Form  1012,  the  total  amount  of  tax  to  be  paid  at  source  on  each  of  the  following  classes  ot payments: 


withheld  and  paid  at  source  in  such  cases.  ‘ " ^ 

2.  Interest  on  bonds  without  tax-free-covenant  clauses: 

(а)  If  paid  to  a nonresident  alien  individual,  a normal  tax  of  8 per  centum  is  required  to  be  withheld  and  paid  at  source 

(б)  If  P^d  to  a foreign  corporation  having  no  office  or  place  of  business  in  the  United  States,  a normal  tax  of  10  per- centum  is  required 

to  be  withheld  and  paid  at  source.  f ^ 


MONTH 

CLASS  1 

CLASS  2(a) 

CLASS  2(b)  < 

TOTA4 

JANUARY 

$ 

1 

%. 

J 

FEBRUARY 

' 

$ 

MARCH  __ 



—— 

— 

APRIL  ^ 

MAY  . 

JUNE... . 

JULY 

AUGUST  .r .. 

SEPTEMBER 

OCTOBER-..  

NOVEMBER 

DECEMBER 

1 

1 

1 

TOTALS 

1 

........i 

' 

, L.. 

LJ 

$-1......:.. 

Less  adjustments  on  account  of  Forms  lOOlB,  attached  he 

Amount  of  tax  to  be  assessed.. 

iSmSSL 

■ , -r 

that  the  above  return  is  a full  and  complete  summarij  of  the  amounts  of  normal  tax  {h^etofore 
p e on  monthly  returns  on  Form  1012,  which  are  hereby  mode  a part  of  this  return)  required  to  be  withheld  from, 
payments  made  by  the  above  or^nization  during  the  year  1919. 


Sworn  to  and  subscribed  before  me  this 
- 1920. 


(Slgnator*) 


(Slgoaturt) 


(Capacity  in  which  acting) 


(Address  in  lull)' 


Income  Tax 
Supplementary  Page  13. 


Form  r<H2— RevlRed  January,  1920 

UNITED  STATES  INTERNAL  REVENUE  SERVICE 

ANNUM  RETURN  OF  NORMAL  INCOME  TAX  TO  BE  PAID  AT  SOURCE 

Do  not  write  in  thia  space 

CsBMfor  will  »I»BP  h***  1^ 
dmi.  .(  6Iaif  il  the  rmlorn  it  ml 
tcuKBHoM  by  nmiHuic.. 

PAYMENT 

$ 

SALARIES,  WAGES,  RENT,  ETC.,  PAID  TO  NONRESIDENT  ALIEN 
INDIVIDUALS  AND  FOREIGN  CORPORATIONS  (NOT  ENGAGED 

IN  TRADE  OR  BUSINESS  WITHIN  THE  UNITED  STATES  AND 
not  HAVING  ANY  OFFICE  OR  PLACE  OF  BUSINESS  THEREIN) 

For  the  Calendar  Year  1919 

(Caslii*!^*  StAmp) 

THIS  SETPiN  MOST  BE  MADE 
m DOPUCATE  TO  THE  COLIEC- 
TOl  OF  INTERNAL  REVENUE 
FOR  THE  DISTRICT  IN  WHICH 
THE  WITHaOLDiNG  AGENT  IS 
lOCATEO.  ON  OR  BEFORE 
MARCH  1,  UM,  AJIO 

MUST  BE  PAID  ON  08  BEFORE 
JUNE  IS.  isa 

CASH  CHECK  M.O. 

Examined  by 

This  -etxira  ia  required  to  he  made  by  receipt^  custody  disposaror 

of  real  or  persona!  property,  fiduciaries,  e^P^oy?"^' •”  remuneration,  emolumente,  or  other  fixed  or  deternunahle  annual  m 

and  not  ha^ng  any  office  or  place  or  buBurees  wittoa  j salaries  wat^ps  rent,  etc.,  to  individuals  and  10  per  centom  of  the 

The  laiv  requires  that  a tp  equal  to  3 ^ a^w  tox  required  to’ be  “deducted  and  withheld  is  paid  by  the  recipient  of  the 

amount  paid  to  corporations  shall  be  deducted  miQ  w .ffi  eld  “inSme  derived  from  dividends  on  the  capital  stock  or  from  the  net  earnings  of  a 
^o^r^^r^tiillrslcl  ^o^mt^y^iH™S?Sy:S  -der  the  Re^venue  Act  of  1918  is  exempt  from  wrth- 

by  a report  on  Form  1098  of  income  paid  for  every  item  entered  hereon.  „ _ 

I swear  (or  affirm)  that  iho  folio wtog  is  a tme  ^d  oL  plyS'fonncomr^’above  d^cribed.^lTn^^^^^ 

endar  year  1919  by  the  withhold  i^a|^C^  evddcLed\y  reports  which  are  listed  below  a^  inclosed  herewith  showing  the 

il°K»re  J^dffenfof  of  incom'e  piid,  and  the  amount  of  tax  withheld. 

I further  declare  that  the  amount  of  tax  withheld  is  $ 


Sworn  to  and  subscribed  before  me  this day  of ’(Signature.) 


('signature.) 

NAME  ^ INDIVIDUAL  OR  CORPORATION  TO 
WHOM  PAID 

(’Tiite:) (Capacity 

address  in  full 

in  which  acting.) 

amount  of 

INCOME  PAID  1 

amount  c 

?AX  WITHHl 

IF 

ELD 

P 



• 

. . 

Y , 

i 

1 

L... 

L, 

1 

t 

I-.—  - 



.... 

-- 

1 



'.O 

1. 

...11. 



r 



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1 

lin-- 

Income  Tax 

Supplementary  Page  14. 


lUviSd  SUBSTITUTE  CERTIRCATE— TAX  ^OT  TO  BE  PAID  AJ^SOURCE 

U.  8.  MVaTOB.  Qd  ^ OTHER  SIMOAR  OBUGATIOflS  OF  DOMESTIC  AMD  R^ENT  CORPORATIONS 


Income  Tax 

Supplementary  Page  15. 


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Income  Tax 

Supplementary  Page  16« 


1-26-20. 


IF  RETURN  IS.  FOR 
CALENDAR  YEAR  1919 

NO  TAX  IS  ASSESSAip  ON  THIS  RETtlN  EITT  FORMS  A BA®  OF  ASSESSMENT  ON  THE  MEMBERS’  SHARES  OF  INCOME 
Pago  i of  Return 

(Do  Not  Write  in  tlu<  S^ct) 

FILE  IT  WITH  THE 
COLLECTOR  OF 
INTERNAL  REVENUE 
FOR  YOUR  DISTRICT 
ON  OR  BEFORE 
MARCH  15,  1920 

Form  14)65— UNITED  STATES  INTERNAL  REVENUE  SERTTCE 

RmSIP  AND  PERSONAL  SERIE  CORPOSAW  REfORN  OF  INCOME 

FOR  CALENDAR  YEAR  1919 

Or  for  period  besun  — 19 and  ended , 19 

Audited' b7 

IF  FOR  A PERIOD 

nrUAM  A 

If  the  return  is 

PRINT  PLAINLY  PARTNERSHIP’S  OR  CORPORATION’S  NAME  AND  BUSINESS  ADDRESS 

READ  IN 

wirltiezv  1 rtAIN  A 
CALENDAR  YEAR,  THE 
RETURN  SHOULD  BE 
FILED  ON  OR  BEFORE 
THE  15TH  DAY  OF 
THE  THIRD  MONTH 
FOLLOWING  THE 
CLOSE  OF  SUCH 

madefor  a period 
other  than  a cal* 
Moar  year,  the 

STRUCT!  ONS 
CAREFULLY 
AND  ANSWER 

(Oato:  awEttvad.) 

dales  of  the  be- 
jinoing  aad  ecd* 

1 ing  of  the  period 
covered  must  be 

1 slated  is 

1 the  spare  pro- 
1 vided  above. 

(Name) 

ALL  QUES- 
TIONS  ON 
THIS  FORM 

(Street  and  number  or  niral  route) 

BEFORE 

FILLING 

IN  THE 

PERIOD  1 

(Post  offles  and  State) 

SCHEDULES. 

KIND  OF  BUSINESS STATE  WHETHER  PARTNERSHIP  OR  CORPORATION 


SCHEDULE  A— INCOME  TO  BE  ACCOUNTED  FOR  BY  MEMBERS. 


GROSS  INCOME.  I 

1.  Gross  sales,  less  returns  and  allowances: '$ 

2.  Lese  cost  of  goods  sold,  exclusive  of  expousee,  repairs,  and  other  items  called  for  separately  I 

below  (from  Schedule  A2) ; 


3.  Grose  income  from  serx-ices  or  from  operations  other  than  trading  or  manufacturing,  less  allowances  I'from  Schedule  A3). 

4.  Interest  on  obligations  of  the  United  States  issued  since  September  1,  1917,  and  War  Finance  Corporation  Ebnds  (Ir 


ScheduleA4). 


5.  Interest  from  other  sources  (not  including  interest  referred  to  in  Schedule  D,  Item  6)  (from  Schedule  A5) 

6.  Rentals ! 

7.  Royalties 


8.  Share  of  net  income  earned  during  period  by  personal  service  corporations  (whether  received  or  not) 

9.  Dividends,  cash,  or  stock,  from  earnings  of  corporatrins  taxable  by  the  United  States  upon  any  portion  of  their  net 

incomes  (including  dixidends  on  stock  of  personal  service  corporations  declared  out  of  profits  earned  prior  to  January  1 
1918)  (from  Schedule  A91. ’ 

10.  Dixidends  on  stock  of  foreign  corporations  not  taxable  by  the  United  States  upon  any  portion  of  their  net  incomes 

(from  Schedule  AlO) i y 

11.  Gross  income  from  all  other  eources  (not  including  any  amount  in  respect  to  sales  of  capital  assets  or  miscellaneous  invest- 

ments— see  Item  24,  below)  (from  Schedule  All). 


12. 


Total  of  Items  1 to  11 


DEDUCTIONS. 

13.  Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  including 

cost  or  value  oi  capital  assets  or  miscellaneous  investments  sold  during  accounting  period,  see  Item  23)  (from  Schedule 
A13):  Labor,  $ other  expenses,  $ Total 

14.  Compec^tion  of  members  ( including  shareholders  of  nersonal  service  corporation  who  drewsalaries  therefrom  and  salaries, 

commissions,  and  other  compensation  in  xvhatever  form  paid)  (from  Schedule  -A14) 


15.  Repairs  (including  labor,  supplies,  etc.)  (from  Schedule  A15):  Labor,? (other  expenses,? Total  J 

IG.  Interfflt  (except  on  indebtoduess  incurred  or  continued  to  purchase  or  carry  obligations  or  securities,  other  than  obligations  I 

of  the  United  States  issued  after  September  24,  1917,  the  interest  on  which  is  wholly  exempt  from  taxation) I 

17.  Taxes  (except  Federal  income,  war-profits,  and  excess-profits  taxes,  and  taxes  which  are  a credit  under  Section  222orEection  1 

238,  and  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  assessed) I 

18.  Debts  ascertained  to  be  worthless  and  charged  off  during  accounting  period  (from  Schedule  A18) I 

19.  Exhaurtion,  wear  and  tear  (including  obsolescence)  (from  Schedule  A19) 


Depletion;  if  claimed,  secure  from  the  collector  Form  D (minerals),  Form  E (coal),  Form  F (misceiianeouslio^oVais),  I 
Form  0 (oil  and  gas),  or  Form  T (timber),  fill  in  and  file  xvith  return 

21.  Total  of  Itfits  13  to  20  

22.  Dn-PEnp-xcE  Between-  Items  12  and  21  


23.  Profit  or  !o.se  on  of  capiLRl  and  miscellaRcou?  invostmonla, 'including  liquidating  di\ddenda  ('from  Schedule  A23) 

24.  suataiDfvi  during  accounting  period  which  arc  deductible  under  Sec-tion  234  {a)  (4)  of  the  Act  of  1918  (Irom 

Schedule  A24) 


25.  Am'“rti2a»»on  of  W.r  Fecilities  firom  Schedule  Ali5\ 

26.  Net  Income  for  Accouktino  Period  to  be  Accouj 

22  AND  Itevi  25) 


(Extend  in  la.«t  column  net  total  of  Items  23, 24,  and  25  extended).. 

TED  FOR  BT  MEMBERS  (TOTAt.  OF  OR  DIFFERENCE  BETWEEN  ItEJ 


SCHEDULE  B -ALLOCATION  OF  STOCK  DIVIDENDS. 


2.  AccmnrLATED  in— 

2.  1918-19. 

3.  . 1917. 

4.  1916. 

5.  1913-15. 

Stock  dividends  received  during  the  accounting  period  which  were 
declarixi  and  paid  between  January  1 and  .Xovember  1,  1918,  both  date-s 
inclusive,  or  authorized  or  dcclare'I.  and  entered  on  the  hooka  of  the 
corporation  xrilhin  those  dates  and  received  iluring  such  accounting 
period  and  before  .March  27,  1919,  shall  bo  allocated  as  follows: 

(a)  Received  directly 

s... 

$ 

$ 

$ 

(4)  Received  indirectly 

(c)  Totat  s 

$ 

s 

$- 

$ 

SCHEDULE  C— MEMBERS’  SHARES  OF  INCOME,  ETC. 

^ Enter  below  the  share  of  net  income  (whether  distributed  or  not)  of  each  member  of  the  partnership  or  sharefrolder  of  the  personal  serx  ice  corporation,  and  each  member’s  share  of 


Uemfers  ol  pennersbip  or  sharcholdois  ol  pcrsoniiF  service  corporalkm. 

1 3.  Cash  anti  stoek  d'ri- 
dcDOs  (including 

1 column  2,  Schedule  B). 

4.  Brock  dlTldends 
(irom  columns  3,  4, 
and  fi,SchedaleB). 

5.  lntcrc.''t  on  Liberty 
Bon  ds,  ote. . issued  .sJac© 
September  1, 1917,  and 

Other  income,  including  interest  on  tax-free 
bonds. 

8.  Income,  war^rofifs, 
and  exoes.'vpronis  tax- 
es paid  or  BccTucd  to  a 
possession  of  the  D.  S. 
or  toaforelgu  country. 

1.  Xtrofi  and  address  ofeo-h,  as  shoa-n  on  individual  tax 
return.':. 

War  Flnan''e  Colora- 
tion Bonds. 

6.  1919. 

7.  1020. 

(a)- 

1 

1 

(6) * 

1 ■ 

(d)- - 1 

i 

1 

ff)  1 

(/)--  

1 

1 

1 

(J) 1 

1 

1 

! 

i 

...J  1 

1 1 

^ Amount  cf  inmrt  lit  \iy,n  tax-Iiee  cox-enr.nt  bonds  reported  in  column  fi,  upon  which  a normal  tax  has  been  paid  or  will  bo  jwjd  at  source,  $ 

A sex-trally  duly  sworn,  each  for  himself  deposca  and  ea>-8  that  this  return,  iu<  hiding  the  eccompaiiyung  aehedulos  and  sLatemonts,  has  been  examined  by  1 

ana  u to  itie  U«t  of  ius  knowledgo  and  belief  a true  and  complete  return  made  in  good  faith  pursuant  to  the  Itovenuo  Act  ot  I»18  and  the  regulations laaaed  thereunder. 

Sworn  to  and  aubscribcJ  before  mo  this day  of 19 


r sffid.Tlt. 


Pretidml  oj carporatum. 
Uember  of jKtrtnenhip. 


Trtoturrr  6/  corpontim. 


[Page  1 of  Form  1065.) 


IiKoinc  'fax 

Supplementary  Page  17. 


Page  a of  R^um. 

SCHEDULE  D— RECONCILIATION  OF  NET  PROFIT  AS  SHOWN  BY  BOOKS  WITH  NET  INCOME. 


• 1.  Net  profit  fet  year  as  by  boobs,  beiore  any  adjust- 
ments are  m^e  tbereis  

2.  Tjn^owable  dednctiona: 

(a)  Donations,  gratuities,  and  contributions.. 
lb)  Income^  war-profits,  and  excess-profits  taxes  paid  ( 
accrued  to  the  United  States.. 

(c)l 


(d)  Special  improvement  taxes 

(»)  Furniture  and  fixtures,  additions,  or  betterments 
treated  as  expenses  on  the  books 

(/)  Replacements  coveted  by  depreciation 

(a)  Insnnaceiminlamsuidantlielireofaarpartaer 

“ fgr  tke  SeneBt  «f  the  (artaerehlp  or  corperaUv.  ..... 

(M  btereeC  on  indebtedness  inctured  or  continued  to  purchase  or  carry 
ohUn^oni  or  securities  (other  than  oblivions  or  the  United 
States  issued  after  September  £1. 1917)  the  interest 

Is  whoUj  exempt  from  taxation 

(0  Additions  to  reserves  for  bad  debts,  contingencies. 

(to  be  detMled)._ 

U) — 

(1). — 


tablch 


<»»)- 


(ft)  Other  unallowable  deductions  (to  be  detailed)- 
■(o)____ 

(P)- 


S.  Partnership’s  dlstrlbnUte  share  of  net  Income  earned  dnrins  period 
br  personal  serilce  corporatuna  not  receiiedor  accrued  on  beets 


bf  personal 

Total 


9 eairj  belongs  on  line  8).. 


6.  Income  not  to  be  accouaied  icT  by  membera: 

(o)  Interest  on  obligations  of  the  United  States  issued 
beiore  Septemoer  1,  1917,  and  on  obligations  of 


(6)  Interest  on  obligations  of  States,  Territories,  and 
political  subdivisioiis  thereof 


(d)  Dividends  on  stock  of  personal  service  corporations 
from  net  income  earned  during  the  period  between 
January  1,  1918,  and  the  beginning  of  present 
accounting  period  which  were  returnable  by 
members  for  the  previous  accounting  period 

(c)  Other  items  of  nontaxable  income  (to  be  detsiled). 

(/) 


7.  Charges  against  reserves  for  bad  debts,  contingencies,  etc. 

(to  be  detailed) 


8.  Amount  necessary  to  adjust  book  profit  or  loss  with  the 
amounts  reported  in  Items  23  and  24,  Schedule  A (un- 
less entry  belongs  on  line  4) 


9.  Income  to  be  accounted  for  by  members  (Item  26, 
Schedule  A) — 


SCHEDULE  E— BALANCE  SHEETS. 

hereto  balance  sheets  as  of  the  beginning  and  end  of  the  taxable  year  (preferably  in  parallel  columns),  ahowing  as  nearly  as  practicable  the  details  caUed  for  b^ow;  (These 
ets  should  be  prepared  from  the  books  and  should  be  in  agreement  therewith,  or  any  differencea  should  be  reconciled.)  uABn.mEa 


balance  sheets  ^ould  be  prepared  from  the  books 

ASSETS. 

CMh<lDoludiDg  cash  in  bank  and  on  hand,  oaniflcawa  ol  deposit,  etc.), 
T^ad*  account*  (beiore  deducting  reserves  lor  losses). 

Hciea  receivable  from  customers. 

notes  receivable  (to  be  ctoaaifled). 


U.B,  bondinndobUgatloiatMCtilxsnnto  be-.tued  scpamwlyX 
Stcclc  u(  cotparaUan»- 

ttn. 


and  employed 


I agreement  therewith,  or  any  c 

ASSETS  (Continued). 

Deferred  chargej  to  future  operations  (to  be  detailed). 

FUed  assets: 

Land. 

Buildings. 

Machin^.  4 

Tools  ana  minor  equipment. ' 

Delivery  equipment. 

Office  lomlture. 

Other  Jstate  character), 

Less  reserm  for  depreciation  and  depletion  (show  separately  a 
applicable  to  cacc  fixed  asset).* 

Net  Vxldx. 


♦Reserves  for  depreciation 


: (other  than  stock  dividends' 

partnership. 

Created  by  stock  dividend  or  otherwise. 

Onhon^  Surplus  and  undlvldod  I 

Total. 

may  be  deducted  from  the  respective  asset  accounts  or  itemized  on  the  liability  side  of  the  balance  sheet. 


Loans  and  notes  payable: 

To  others  (including  bank  loans). 


Accrued  expenses  1 
able  deductions 


e not  allowable  deductioiu  from 


be  d^slfled)  or  ail  partners'  capfial  and 


schedule  F— analysis  of  surplus  or  partnership  net  worth  ACCOUNTS. 

Attach  hereto  an  analysis  of  the  surplus  or  partnership  net  worth  accounts,  showing  the  details  o£  all  changes  therein  during  the  taxable  year  as  nearly  as  practicable  in  the  following 

Deduct:  5.  Withdrawals  or  dix-idends  (state  d_ate  declared  and  date  and  amount  of 
each  payment;  also  whether  in  cash  or  in  stock,  and  out  of  which  year’s 
earnings  paid). 

6.  Other  debits  (to  be  detailed). 

7.  Surplus  or  partnership  net  worth  at  end  of  year  as  shown  by  books. 


1.  Surplus  or  partnership  net  worth  at  beginning  of  year  as  shown  by  books 
Add;  2.  Total  net  profit  as  shown  by  books  (Item  1,  Schedule  D). 

3.  Other  credits  (to  be  detailed). 

4.  Total  of  Items  1,  2,  and  3. 


QUESTIONS. 


KIND  OF  BUSINESS, 
ilow,  Identify  tfie  corpora: 
and  follow  this  by  a special  descrlpUco  ol  the  business, : 


<A)  Agriculture  and  related  industries,  including  fishing,  logging.  Ice  harvesting,  < 
och  property.  State  the  product  or  products.  (B)  ilintng  and  quanylng,  incl 
lude  the  leasing  of  such  property.  State  the  product  or  products.  (C)  Manulacti 


Include  the  leasing 
and  also  the  mate' 
bridges,  railroads, 
their  manu' — *"■' 
lion.  Rail, 


I,  ships,  etc.,  also  equipping  and  installing  same  with  systems,  devices,  or  machinery,  without 
a.  ^te  nature  ofstructures  built,  materials  used  or  kind  of  installations.  (El)  Transpo^* 
local,  etc.  State  the  kind  and  spocial  product  transported,  if  any.  (E2)  Public  utuitie. 
Tor  water,  dectrio  light  or  power,  hydro  orsteam  generated;  heatine.steam  or  hot  water;  tele- 
T.  (E.3)  Storage  without  trading  or  profit  from  sales.  ElevaK 


, product  stored.  (E4?^.€aslng  transportation  or  utilities.  State  kin^  of  property.  (F) 

'Trading  In  goods  bought  and  not  produced  by  the  trading  concern.  State  manner  of  trade,  whether  whol^ie, 
ret^,  or  commission,  and  the  product  handled.  Sales  withstorage  with  profit  primarily  tromsaies.  (G)  Service, 
domestic,*  ....  X 1*^ 


retail,  or  commission,  and  the; 

sstlc,  including  hotels,  tvovomaomaw.  vw..  w 
a the  service.  (11)  Finance,  including  banking,  real  estate, 
sses  (o)  because  of  combining  several  of  them  witn  no  pr 
2.  (^ncems  whose  business  involves  activity  falling  in 


(G)S 

lai,  (/ciDuumi,  vi'  technical  service. 
(I)  Concerns  not  falling  in  above 
t business,  or  (6)  for  other  reasons, 
ore  of  the  above  generalclasses,  where  the 
d,  should  report  business  as  identified  with  but  one  ol  the  above  generalclasses,  fer 
example,  concerns  in  A or  B whK^  also  transport  and  market  their  own  product  exclusively  or  mainly,  should 
still  be  identified  with  classes  A or  B:  concemsln  C (manufacturing)  which  own  orcontroltheirsourceof  material 
supply  in  A or  B and  which  alsotransport.sell,  or  install  their  own  product  exclusively  or  mainly,  should  be 
identified  with  manufacturing;  concerns  in  D may  control  or  own  source  of  supply  of  materials  used  exclusively 
or  mainly  in  their  constructive  work:  concerns  in  El  or  E2  may  own  or  control  the  source  of  their  material  oc 
power;  concerns  in  F may  transport  or  store  their  own  merchandise,  but  Its  production  would  identity  them 
^thA.BorC, 

3.  Answers: 

fa)  Oeneralclass  (use  key-letter  designation).....^ 

(0>J'-'-'  X-.-X 


, which  should  be^mly  attach^  to  this  return. 

OTHER  CONCERNS  IN  SAME  BUSINESS. 

5.  Attach  hereto  a list  of  the  names  and  addresses  of  five  representative  cocK^ems  in  your  locality  or  section 
of  the  country  engaged  In  the  same  kmd  of  business. 

ORGANIZATION  OR  INCORPORATION. 

6.  DatAafftrgMilgfttlQnftriTifforpQrfttiQa — 


14.  If  the  answer  lo  questions  1 


(Name  of  corporation.) 

(Name  of  corporation.) 

"(Addr^.) 

Shares  held. 

Percentage  of 
stockholdings. 

Shares  held. 

Percentage  of 
stockholdings. 

1 

1 

1 

I 

1 

1 : 

full  voting  privileges  during  the  entire  taxable  oeriod;  (2)  whether  the  voting  privUeges  were  cumalftlive; 
whether  these  voting  pnviieges  were  exercised ’during  the  taxable  period;  (4)  the  conditions  by  which  these 

votlae  privUeges  mhy  be  sacrificed  or  acquired.  , a,  -j  x a a 


(6^^^tat^''ihe*dKdTod°pr1i^^  oUhTr^p^lIve  classes  of  stock:  the  rate  of  t^vidends  i>a;djdur:rig  t 
ibie  period;  the  date  ana  r"-  


) Stale 
lepcrio"  . 

lerred  stock  participates 
(c)  State  if  the  prefei 
(<i)  Sbow  separately 
except  where  impracticable  by  i 

those  holding  stock  in  two 

I Indicate  whether  e 


) distribution  of  assets,  dividends  or  otherwtee. 

:d  bytherespectivesiockhol  ■ 

1 of  the  large  o'lmber  ol  stockholders.  Under  such 

‘ 3 affilia'^  Cx/rDorai 


_.i  huld  during  the  taxable  period  ewiditionally  o 

ejcpre^ed  or  Implied,  and  st  ite  whether  such  arrangtments  are  considered  valid,  giving  supportiM  r« 

")  Indicate  whether  anvstcx  k is  held  by  emplovees  or  officersandstaietheir  relationship  to  thetwporauoo 


by  agreement, 

_ . ^ewporatioo 

uired  and  held  during  Um 


7.  If  bieorporated.  under  the  laws  of  what  statef 

$.  Axe  you  a snccessor  to  or  were  yon  formed  to  take  over  or  conduct  part  of  the  business  of  another  corporq  • 


and  eontractualrelatlonships  existing  between  yourselves  and  the  other  organiiatton..... — 

VALUATIONS  OF  CAPITAL  STOCK. 

9.  What  was  the  fair  value  of  the  total  capUal  stock  of  the  corporation  as  determined  in  the  lest  assessment, 

U any,  of  the  capital  stock  taxT 

Date  of  that  assesanlcnt.......... 


3ASIS  OF  VALUING  INVENTORIES. 

10.  State  which  of  the  methods  described  oo  page  2 Of  Instructions,  in  note  onder** 
to  valuing  


AFFIUATIONS  WITH  CORPORATIONS. 

(To  be  answered  by  eve^  partnership  or  persoual  service  corpora tloo.) 

. Do  you  own  directly  or  control  through  closely  affiliated  Interests  or  by  a nominee  o 


onj,,  either  expressed  or  implied,  under  w hich  such  stock  was  acqmrea  ana  was  new  ounng  w 
taxable  period.  Also  submit  the  following  information  in  r^peci  to  »uch  stockholdings  as  at  the  date  of  acquLa- 
lion:  (I)  Par  value  of  stock;  (2)  bo^iK  vafae  of  stock;  (3)  market  value  of  stock;  (4)  constdcrauoa  and  amount 
paid  (orsuch  stock:  (5)  method  of  payment  for  such  stock.  . „ 

(a)  H the  stock  in  aav  ony  or  more  of  the  cor-pora'-locs  Is  held  by  members  of  one  family,  or  related  families, 
state  Che  relation  existing  between  the  various  stockholders  and  whether  such  stock  was  acquired  by  gift,  pur- 
(.))  Explain  fully  the  nature  and  extent  of  any  Intercompany  traasacticms  or  arrangement  which  may  efle^ 
an  artificial  dLtributian  of  profits  or  a-siga  to  any  one  of  the  affiliated  corporations  a disproportionaie  « 
net  income  or  invested  capitAl.  . , , 

Foreign  corporations  may  net  be  included  m consolidations. 

GOVERNMENT  CONTRACTS. 

15.  Have  anv  adjustments  during  the  accounting  period  been  made  on  accMint  of  contract  w contr^  be- 
tween the  Government  or  its  agencies  or  in  any  Government  contraa  or  contracts  m which  you  derived  tacoina 

directly  orindirectly,  thro'jghtheoperations  of  aclaim board  or  otherwise?  (Answer*<ye8''or“Ka")-...— . 

If  so,  state  the  amounts  involved,  S whether  or  not  such  amounts  are  Included  In  thic 

return..-.-.. ; and,  if  not,  was  an  amended  return  for  1918,  accounting  for  the  additional  tDcome. 

filed? Submit  a schedule  showing  full  parUculars  of  the  contract,  date  entered  mto.'daie  the 

work  ceased  under  said  cixitract  or  contracts,  and  the  amount  and  nature  of  the  adjustment. 

PREPARATION  OF  RETURN. 

18.  Did  you  employ  any  person  especially  to  prepare  this  return?—— 


If  so,  give  name  ond  address — 


LIST  OF  ATTACHED  SCHEDULES.  , . _Jw- 

17.  Attach  u list  of  schedules  accompanying  this  return,  giving  for  each  a bdaf  tUW  ood  • Tinning 

(See  opening  paragraph  on  page  2 of  Instructloca.)  • •• 


[Page  2 of  Form  1065.1 


Income  Tax 

Supplementary  Page  18. 


1 ol  la»trae&tm 


GENERAL  INSTRUCTIONS. 

Partiierslap  and  Personal  Service  Corporation  Return  of  Income. 


PARTNERSHIPS  AND  PERSONAL  SERVICE  CORPORATIONS  REQUIRED  TO 
MAKE  A RETURN  OF  INCOME. 

1.  Partn-ersMps. — Every  domestic  partnersiiip  and  every  foreign 
partnership  doing  business  in  the  United  States  must  make  a return  of 
income  on  this  form  regariUess  of  the  amount  of  its  gross  or  net  income. 
(See  Articles  321,  1503,  1505-1507,  and  1509  of  Regulations  45.) 

2.  Personal  service  cor poratiaris.— Every  personal  service  corporation, 
as  defined  belo-w,  must  make  a return  of  income  on  this  form  regardless  of 
the  amount  of  its  grogs  or  net  income.  (See  Article  624  of  Regulations  45.) 

3.  Personal  ser^nce  corposyition  defined. — The  term  “personal  service' 
coiporation  ” means  a corporation,  not  expressly  excluded,  the  income  of 
which  is  derived  from  a profession  or  business  (a)  which  consists  prin- 
cipafiy  <jf  rendering  pereonal  service,  (5)  the  earnings  of.  which  are  to  be 
ascribed  primarily  to  the  activities  of  the  principal  owners  or  stock- 
holders (who  are  referred  to  in  this  return  as  “members"),  and  (c)  in 
which  the  employment  of  capital  is  not  necessary  or  is  only  incidental. 
The  genera!  principles  under  which  such  determination  will  be  made  are 
laid  down  in  Articles  1523  to  1532  of  Regulations  45. 

4.  Corporations  excluded. — ^The  following  classes  of  corporations  are 
expressly  excluded  from  classification,  as  personal  service  corporations: 
(a)  Foreign  corporations;  (b)  corporations  50  per  cent  or  more  of  whose 
gr^  income  consists  ©f  gains,  profits,  or  income  derived  from  trading  as  a 
principal;  and_  (c)  corporations  50  per  cent  or  more  of  whoso  gross  income 
consists  of  gains,  profits,  commissions,  or  other  income  derived  from  a 
Government  contract  or  contracts  made  between  April  6,1917,  and  Novem- 
ber n,  1918,  inclusive. 

A corporation  is  not  a personal  service  corporation  merely  because 
less  than  50  per  cent  of  its  gross  income  was  derived  from  trading  as  a 
principal  or  from  Government  contracts.  A .corporation  can  not  be 
considered  a personal  service  coi-poration  when  another  corporation  owns 
or  controls  substantially  all  of  its  stock,  or  when  substantially  all  of  its 
stock  and  of  the  stock  of  another  coriDoration  (not  itself  a personal 
service  corporation)  forming  part  of  the  same  business  enterprise  is 
owned  or  controlled  by  the  same  interests.  See  Section  240  of  the  statute 
and  Articles  631-638. 

5.  More  than  one  business.~A  corporation  engaged  in  two  or  more 
professions  or  businesses  which  are  more  or  less  related,  one  of  which 
does  not  consist  of  rendering  pcrannal^vice,  is  not  a personal -service 
oorporation  unless  the  nonpersonal  service  element  is  negligible  or  merely 
incidental  and  no  appreciable  part  of  its  earnings  are  to  be  ascribed  to 
such  Bources.  (See  also  Section  303  of  the  Revenue  Act  of  1918.) 

6.  Activities  of  stacTchdlders. — In  determining  whether  a corporation  • 
13  a personal  service  corporation,  no  weight  can  bo  given  to  the  fact  that 
It  renders  personal  services  unless  (a)  the  principal  owners  or  stock- 
holders are  regularly  engaged  in  the  active  conduct  of  its  a^airs  and  are 
engag^  m such  a manner  that  the  earnings  are  to  be  ascribed  primarily 
to  their  activities,  and  (J)  its  affairs  are  conducted  principally  by  such 
owners  or  stockholders.  If  employees  contribute  substantially  to  the 
services  rendered  by  a corporation,  it  is  not  a personal  service  corporation 
unless  in  every  case  in  which  services  are  so  rendered  the  value  of  and  the 
compensation  charged  for  such  services  are  to  bo  attributed  primarfiy  to 
the  experience  or  skill  of  the  principal  owners  or  stockholders. 

7.  StocTc  interest  of  active  mm5ers.— No  corporation  or  its  owners  " 
or  stockholders  shall  make  a return  in  the  first  instance  on  the  basis  of  its 

• service  corporation  unless  at  least  80  per  cent  of  its  stock 

13  held  by  those  regularly  engaged  in  the  active  conduct  of  its  affairs, 

8.  Capital.— In  determining  whether  a corporation  is  a personal  servi 
ice  coqioration,  no  weight  can  be  given  to  the  fact  that  the  invested  capital 
of  the  corporation  under  Tide  III  of  the  Act  or  ihc  actual  investment  of 
the  pnncipal  owners  or  stockholders  is  comparatively  cmpjl.  Iffheusedf 
capital  13  necessary  or  more  than  incidental,  capital  is  a material  income- 
producing  factor  and  the  corporation  is  not  a personal  service  corporation. 

INSTRUCTIONS  FOR  FILLING  IN  SCHEDULE  B,  PAGE  1. 

9.  If  any  stock  dividend  (1)  is  received  by  a taxpayer  between 
January  1 and  November  1,  1918,  both  dates  inclusive,  or  (2)  is  during 
B^h  period  bona  fide  authorized  or  declared,  and  entered  on  the  books 
of  the  corporation,  and  is  received  by  a taxpayer  after  November  1 
1918,  and  before  March  27,  1919,  then  such  dividend  shall,  in  the  mannet 
provided  in  Section  206,  he  taxed  to  the  recipient  at  the  rates  prescribed 
bylaw  for  Iho  years  in  wliich  the  corporation  accumulated  the  earnin.-3 
or  profiU  from  which  such  dividend  was  paid,  but  the  dividend  shall  bo 
deemed  to  have  been  paid  from  the  most  recently  accumulated  earnings 
or  profits. 


corporation  has  changed  during  the  accounting  period,  the  distributed 
portion  of  the  net  income  is  taxable  to  the  recipients,  while  the  undis- 
tributed portion  is  taxable  to  the  owners  as  at  the  end  of  the  accounting 
period.  (See  Articles  330  to  335,  Regulations  45.) 

11.  For  the  calendar  year  1919,  the  whole  amount  should  be  entered 
in  column  6.  For  a fiscal  year  ending  in  1920,  eater  in  column  6 as 
many  twelfths  of  the  total,  “Other  Income,”  as  the  number  of  months 
of  the  fiscal  year  that  fell  in  the  calendar  year  1919,  and  in  column  7 as 
many  twelfths  of  the  total,  “Other  Income,”  as  the  number  of  months 
of  the  fiscal  year  that  fell  in  the  calendar  year  1920.  For  a fiscal  year 
ended  in  1919,  use  Form  1065A. 

Enter  on  lines  {a),  (b),  (c),  etc.,  the  proportionate  amount  of  the 
totals  shown  in  columns  3,  4,  5,  6,  and  7 to  which  each  individual 
member  or  shareholder  is  entitled,  whether  distributed  or  not,  also  the 
proportionate  amount  shown  in  column  8.  If  commit ation  of  the  amount 
to  be  entered  in  columns  6 and  7 results  in  a loss,*  the  amount  should  be 
indicated  by  red  ink  or  othenvise. 

12.  If  the  space  provided  in  Schedule  C is  insufiicient  in  which  to 
make  the  necessary  entries,  attach  a supplemental  table  in  the  same 
form  as  Schedule  C. 


CREDIT  FOR  INCOME,  WAR-PROFITS,  AND  EXCESS-PROFITS  TAXES 
PAID  OR  ACCRUED  TO  A FOREIGN  COUNTRY  OR  TO  A 
POSSESSION  OF  THE  UNITED  STATES, 

13.  If  a credit  is  claimed  in  column  8 of  Schedule  C,  a copy  of 
Form  Ills,  completely  filled  out  and  sworn  to  or  affirmed,  must  be  sub- 
mtted  with  this  return,  if  credit  is  sought  for  taxes  already  paid,  the 
form  must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  If 
credit  is  sought  for  taxes  accrued,  the  form  must  have  attached  to  it  the 
return  on  which  each  such  accrued  tax  was  based.  (See  Article  611  of 
Regulation;  45.) 

14.  When  a credit  is  claimed  for  accrued  taxes,  the  Commissioner 
may,  as  a condition  precedent  to  the  allowance  of  this  credit,  require  the 
taxpayer  to  give  a bond  (Foim  1119),  with  sureties  satisfactory  to  and  to 
be  approved  by  him,  in  such  penal  sum  as  he  mqy  require,  conditioned  fop 
the  payment  by  the  taxpayer  of  any  amount  of  taxes  found  due  if  the  taxes 
when  paid  differ  from  the  amount  claimed  in  respect  thereof. 


PERIOD  COVERED. 

15.  The  accounting  period  is  the  calendar  year  1919  or  (if  the  part- 
nership or  corporation  makes  its  return  for  a fiscal  period  of  12  months 
ending  on  the  last  day  of  some  month  other  than  December)  the  fiscal 
period  ended  in  the  calendar  year  1920. 

16.  A partnership  or  corporation  desiring  to  change  the  period  for 
which  Its  return  is  made  from  a calendar  year  to  a fiscal  year  or  vice  versa, 
or  from  one  fiscal  year  to  another,  must  give  written  notice  to  tho  CoUoctor 
of  such  change  and  tho  reasons  therefor  at  least  30  days  before  tho  due 
date  of  its  return  on  tho  basis  of  its  existing  accoimting  period  and  at 
least  30  da3-3  before  the  duo  date  of  tho  return  on  tho  basis  of  the  pro- 
posed accoimting  period.  (See  Articles  26,  322-324,  411,  and  431  of 
RegiUations  45,  and  Section  226  of  the  Revenue  Act  of  1918.) 


TIME  AND  PLACE  FOR  FILING. 

17.  Returns  must  be  seat  to  the  Collector  of  Internal  Revenue  for  ftie 
cislrict  in  which  tho  partnership's  or  corpora-Sioii’s  principal  place  of 
business  is  located,  so  as  to  reach  tho  Collector's  ?>{fico  on  or  before  the 
loth  day  of  tho  third  month  foUowing  the  close  of  the  accounting  period 
unless  an  extension  of  time  has  been  granted.  ” ‘ 


SIGNATURES  AND  VERIFICATION. 

18.  Returns  of  partnerships  must  be  sworn  to  by  a mombor  of  the 
partnership.  Corporation  returns  must  be  sworn  to  bv  the  president,  vice 
president,  or  other  principal  officer  and  by  tho  treasurer  or  assistant 
troMurer  of  tlio  corporation.  If  receivers,  trustees  in  bankruptcy,  or 
assignees  are  operating  tho  property  or  business  of  tho  partnership  or 
corjioration,  such  receivers,  trustees,  or  assignees  shall  execute  tho  return 
under  oath. 


PENALTY  FOR  FAILURE  TO  FILE  RETURN  ON  TIME. 


INSTRUCTIONS  FOR  FILLING  IN  SCHEDULE  C,  PACE  I. 

10.  Tl^  Schedule  is  to  be  used  for  showing  tho  share  of  each  part 
or  member  in  the  income  of  the  partnership  or  personal  service  corporoti 
whether  distnbutcd  or  not.  Where  tho  ownership  of  a personal  scr\ 


19.  A penalty  of  not  more  than  .81,000  attaches  for  failure  to  file  a 
return  within  tlio  tune  required  by  law.  If  the  failure  is  willful  or  an 
attempt  is  made  to  defeat  or  evade  the  tor,  the  penalty  is  810,000  or 
impn-sonmcut  for  not  more  than  one  year,  or  botli,  together  with  costa 
of  prosecution. 


[Page  3 of  Form  1065.] 

Income  Tax 

-Supplementary  Page  19, 


Page  2 of  liutnictions 


SCHEDULES  SUPPORTING  SCHEDULE  A. 


The  schedules  called  for  below  should  be  prepared  and  firmly  attached  to  this  return.  Designate  each  echedde  with  the  number  of  the  item  m 
Schedule  A which  it  e.^plains.  Make  schedules  on  paper  of  uniform  size  so  far  as  practicable.  Attach  a list  of  sAedules  accompany^  this  return, 
giving  for  each  a brief  title  and  schedule  number.  Regulations  45  may  be  obtained  from  the  CoUector  of  Litemal  Revenue  of  your  distnct. 


SCHEDULE  A2:  COST  OF  GOODS  SOLD,  EXCLUSIVE  OF  EXPENSES, 
REPAIRS,  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY.  (Secure 
from  the  Collector  and  file  as  a part  of  this  schedule.  Certificate  of  Inventory, 
Form  1126.) 

In  support  ol  Item  2.  Schedule  A,  partnerships  or  corporations  en^ed  in  manufac- 
t'lrine  or  tradins  operations  should  submit  an  analysis,  in  reenable  deUil,  of  the  cost 
of  goods  sold.  This  statement  should  ordinarily  include  the  following  items  but  should 
not  include  any  expense  items  called  for  separately  in  Schedule  A. 

1.  Inventories  at  beginning  of  period  (to  be  reconciled  with  balance  sheet). 

2.  Purchases  during  period. 

3.  Labor  and  wages  ordinarily  charged  to  manufacturing  cost  on  the  jrartnership's 

or  corporation’s  books,  showing  the  principal  items  separately. 

4.  Other  expenses  ordinarily  charged  to  manufacturing  cost  on  the  partnership’s 

or  corporation’s  books.  (State  separately  large  or  unusual  items.) 

6.  Totai 
Deduct: 

6.  Inventories  at  close  of  period  (to  be  reconciled  with  balance  sheet). 

7.  Cost  of  goods  sold  (Item  5 less  Item  6). 

Note.— Inventories  must  be  valued  at  (o)  cost  or  (b)  cost  or  market,  whichever  is 
lower,  provided  that  whichever  basis  is  used  must  be  applied  to  each  item  in  the  inyentop- 
and  not  to  a part  only.  Inventories  at  the  end  of  the  taxable  period  must  be  valued  on  the 
same  basis  as  those  at  the  end  of  the  preceding  taxable  penod.  unless  permission  to  make 
a change  has  been  first  obtained  from  the  Commissioner.  1 f claims  for  losses  on  inventories 
or  rebates  on  sales  made  under  Section  214  (of  12  of  the  Act  have  been  allowed,  the  ojKmng 
inventory  must  be  correspondingly  adjusted.  (See  Articles  26G.  15S1  to  1585,  ol  Regu- 
lations 45.) 

SCHEDULE  A3:  GROSS  INCOME  FROM  SERVICES  OR  OPERATIONS 
OTHER  THAN  TRADING  OR  MANUFACTURING,  LESS  ALLOWANCES. 
Submit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
in  Item  3,  Schedule  A 

SCHEDULE  A4:  INTEREST  ON  OBLIGATIONS  OF  UNITED  STATES  ISSUED 
SINCE  SEPTEMBER  1,  1917. 

Information  regarding  the  amount  of  the  partnership's  or  corporatioii’s  holt&gs  of 
obligations  of  the  United  States  issued  since  September  1,  1917,  and  the 
reemved  thereon,  must  be  fimuehed  in  sufficient  detail  to  enable  the  members  of  the 
partnership  or  personal  service  corporation  to  report  correctly  the  amounts  on  their 
individual  returns. 

Submit  a schedule,  showing  in  separate  columns  the  following  information  mth 
respect  to  each  class  of  obUgations  of  the  United  States  issued  since  September  24,  191, ; 

1.  Description  ol  obligations. 

2.  First  and  last  dates  of  each  period  during  which  the  holdings  of  each  class  of 

obligations  remained  unchanged. 

3.  Amount  of  obligations  of  each  cla^  held  during  each  such  period. 

4.  Bate  of  interest. 

5.  Interest  derived  from  each  amoimt  ol  principal  stated  in  column  3. 

Enter  as  Item  4,  Schedule  A.  the  total  of  column  5 for  all  classes  of  obligations. 

Submit  also  a statement  in  similar  form  to  the  above,  with  regard  to  bonds  and  other 

obligstions  not  subject  to  income  tax.  (Soe  Section  213  (o)  (4)  of  the  Act  of  1918.) 

SCHEDULE  AS:  INTEREST  FROM  OTHER  SOURCES  (not  including  interest 
referred  to  in  Schedule  D,  Item  6). 

Submit  a echedule  showing  the  source,  nature,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  iu  one  figure.  The  total  of  the  schedule 
should  be  entered  as  Item  5,  Schedule  A. 

For  interest  on  foreign  bonds  show  (a)  name  of  country;  (6)  kind  of  obl^tiora 
(whether  national.  State,  municipal,  or  corporate  o’chgations) ; (c)  amount  of  prmcipal; 
and  (d)  amount  of  interest. 

SCHEDULE  A9:  DIVIDENDS.  CASH  OR  STOCK,  FROM  EARNINGS  OF  COR- 
PORATIONS TAXABLE  BY  THE  UNITED  STATES  UPON  ANY  PORTION 
OF  THEIR  NET  INCOMES  (including  dividends  on  stock  of  personal  serv-. 
ice  corporations  declared  out  of  profits  earned  prior  to  January  1,  1918). 
Submit  a schedule  showing  (a)  name  of  corporation;  (6)  State  in  which  organized; 
(c)  total  par  value  of  stock  held;  and  (d)  amount  oi  dudden^. 

With  respect  to  foreign  corporations  taxable  by  the  United  Sta^  upon  any  jw^on 
ol  their  net  uicom^  (a)  name  of  corporation*  (6)  country  in  which  organized;  (c)  total 
par  value  of  stock  held;  and  (d)  amount  of  dividends. 

SCHEDULE  AlO:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS  NOT 
TAXABLE  BY  THE  UNITED  STATES  UPON  ANY  PORTION  OF  THEIR 
NET  INCOMES. 

Submit  a schedule  showing  (a)  name  of  corporation;  (6)  country  iu  which  organized; 
(c)  total  par  value  of  stock  held;  and  amount  of  di^iden<ls. 

SCHEDULE  AH:  GROSS  INCOME  FROM  ALL  OTHER  SOURCES  (not  in- 
cluding any  amount  in  respect  to  sales  of  capital  assets  or  miscellaneous 
investments). 

Submit  a schedule  showing  the  source,  nature,  and  amou^  of  the  principal  itoiM 
included  herein,  the  .Minor  items  being  grouped  in  one  figiue.  total  of  the  schedule 
should  be  entered  as  ItcmTl;  Schedule  A 

SCHEDULE  A13:  ORDINARY  AND  NECESSARY  EXPENSES  (except  amounts 
called  for  separately  in  Schedule  A and  not  including  cost  or  value  of 
capital  assets  or  miscellaneous  investments  sold  during  accounting  period). 
Submit  a statement  showing  character  and  amount  of  the  principal  items  included 
under  other  expenses  in  Item  13,  Schedule  A. 

SCHEDULE  A14:  COMPENSATION  OF  MEMBERS  OF  THE  PARTNERSHIP 
• OR  CORPORATION. 

. Submit  a schedule  showing  for  each  member  of  the  partnership  or  for  each  sh^c- 
holder  who  was  performing  active  service  or  who  received  compensation  in  any  fem  &om 
the  corporation,  (1)  name,  (2)  duties,  (3)  time  devoted  to  such  duUes,  and  j4)  totai  com- 
pensation for  the  accounting  period.  A personal  service  corporation  should  also  explain 
fully  the  manner  and  d^ree  in  which  the  earnings  of  the  corporation  are  dependent  on 
the  activities  of  the  active  shareholders  or  ’•members.” 

SCHEDULE  AIS:  REPAIRS  (including  labor,  supplies,  overhead,  and  other 
items  properly  chargeable  to  repairs). 

Suhinit  a schedule  showing  the  nature  and  amount  of  the  principal  items  included 
under  other  expenses  in  Item  15,  Schedule  A. 

Incidental  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  life  of 
•ptoperty,  are  deductible  as-expenses.  Expenditures  for  new  buildings  or  lor  permanent 
WRWemenU  or  betterments  which  increase  the  value  of  the  property  are  chargeable 


to  capital  account.  Expenditures  for  restoring  or  replacing  property  are  not  deductiolo 
under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable,  to  capital 
account  or  to  depreciation  reserves,  depending  On  the  treatment  of  depreciaUon  on  ths 
books  of  the  taxpayer. 


SCHEDULE  A16:  INTEREST. 

Submit  a detailed  schedule  -with  respect  to  any  interest  wdd  or  credit^  to  each  meml« 
included  in  this  item.  State  the  character  and  origin  of  the  principal  upon  which  the 
interest  was  computed,  and  whether  such  principal  is  evidenced  bv  notes  or  other  forms 
of  contract.  Describe  fully. 


SCHEDULE  AIS:  DEBTS  ASCERTAINED  TO  BE  WORTHLESS  AND  CHARGED 
OFF  DURING  THE  ACCOUNTING  PERIOD. 

Submit  a schedule  showing  the  amount  (a)  arising  from  sales  or  services  preidoualy 
reported  as  income;  (6)  arising  from  other  sources  (interest,  rent,  rooties,  etc.)  previously 
reported  as  income ; (c)  arising  from  sources  other  than  those  specified  above  (to  be  itemued ). 


SCHEDULE  A19:  EXHAUSTION,  WEAR  AND  TEAR  (including  obsolescence). 

Submit  a columnar  schedule  containing  in  the  most  practicable  form  substantially 
the  following  information: 

1.  A classification  of  depreciable  assets  subdivided  on  the  basis  of  (a)  character  and 

(6)  term  of  useful  life. 

2.  The  year  of  acquisition  of  such  assets  if  prior  to  present  accounting  period.  If 

acquired  during  present  accounting  period,  give  actual  date. 

3.  Nature  and  amoimt  of  consideration  given  in  payment. 

4.  The  fair  market  value  of  such  assets  March  1, 1913,  if  acquired  prior  thereto. 

5.  (a)  Estimated  life  or  (b)  estimated  term  of  reasonable  usefulness  of  such  assets  from 

date  acquired  or  from  March  1 . 1913,  if  acquired  prior  thereto.  If  (6)  is  used , give 
reasons  with  supporting  evidence. 

6.  For  each  class  of  assets  state: 

(a)  The  total  amount  charged  off  the  books  for  depreciation  since  acquisition 

of  such  assets,  or  since  March  1, 1913,  if  acquired  prior  thereto. 

(b)  The  total  amount  of  exhaustion,' wear  and  tear  (depredation)  cUdmed  for 

present  accounting  period. 

(c)  The  total  amoimt  of  obsolescence  claimed  for  the  present  accounting 

period  and  the  basis  on  which  computed. 

7.  -A  reconciliation  of  all  figures  in  this  schedule  with  corresponding  figures  reflected 

in  the  balance  sheets. 

3.  The  capital  sum  to  be  replaced  should  be  charged  off'ever  the  useffil  life  of  the 
property  either  in  equm  annual  installments  or  in  accordance  ■with  any  other 
recognized  trade  practice,  such  as  an  apportionment  of  the  capital  sum  over 
units  of  production.  Whatever  plan  or  method  of  apportionment  is  adopted 
must  be  reasonable  and  should  be  described  in  the  return. 

SCHEDULES  A23  and  A24:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 
(including  liquidating  dividends  and  miscellaneous  investments)  and  LOSSES 
sustained  during  the  accounting  period  and  not  compensated  for  by  insur- 
ance or  othervrise. 

Submit  a columnar  echedule  setting  forth  for  each  sale  of  irapital  a^ts  or  <rf  misoeUane- 
ous  investments  and  for  each  loss  during  the  accounting  period  the  information  called  for 
below: 

I.  Description  of  property  sold  or  of  property  in' respect  of  which  a loes  is  claimed. 

• 2.  Date  acquired. 

3.  Fair  market  price  or  value  on  March  1,  1913,  if  acquired  before  that  date,  or  cost 

if  acquir^  after  February  28, 1913. 

4.  Cost  of  improvements,  if  any,  since  February  28, 1913,  or  since  date  of  acquiaitioa, 

if  acquir^  after  February  28, 1913. 

5.  Total  of  Items  3 and  4. 

Less — 

6.  Depreciation  or  depletion  of  property  subject  thereto— 

(a)  Shown  by  books. 

(5)  .Accrued  but  not  on  books. 

7.  Salv^e  value,  if  any,  of  property  on  which  aloas  is  claimed. 

8.  Amount  of  insurance  or  other  recovery  on  property,  if  any. 

9.  Proceeds  of  sale  or  cash  value  of  property  received  in  exchange  (for  tlMsefetioas 

falling  in  Item  23,  Schedule  A)  (see  Note  A). 

10.  Total  of  Items  6 to  9,  incl-Jsive. 

II.  Profit  or  loss. 

12.  Cause  of  loss  (for  losses  falling  in  Item  24,  Schedule  A). 

Note  A.^ubmit  evidence  substantiating  the  basis  used  by  you  in  arriving  at  the  ' 
cash  value  of  property  received  in  exchange  for  other  property. 

Note  B —It  any  of  these  assets  sold  or  lost  were  acquired  prior  to  March  1,  1913, 
state  how  the  fair  market  price  or  value  as  of  that  date  was  determined.  In  thu  connection 
give  primal  cost  of  propmy  sold  or  lost. 


SCHEDULE  A25:  AMORTIZATION  OF  WAR  FACILITIES. 

The  amount  claimed  as  a deduction  under  this  item  shonld  be  snhetotia^  by 
echedule  prepared  in  accordance  with  Section  214  (a)  9^  Revenue  Act  of 
181  to  188,  inclusive,  of  Regulations  45  and  Treasury  Decision  ^9,  ammding  Article  184, 
The  specific  information  to  be  submitted  is  outlined  in  .Article  188,  Regulations  45. 

CAPITAL  EMPLOYED  IN  BUSINESS. 

If  the  balance  sheet  (Schedule  E)  of  a personal  service  coippratmn^cates  • 
substantial  amount  of  capital  (invested  or  borrowed)  is  employed  in  the  businm, 
a statement  explaining  why  the  employment  of  such  capital  is  incidental  and  not 
necessaiy. 

WORKING  PAPERS, 

Every  partnerehip  or  corporation  should  preserve,  available  for  inspection  by  » 
revenue  officer,  working  papers  showing — 

1.  The  balance  in  each  account  on  the  partnership’s  or  corporation’s  books  that 

was  used  in  preparing  Schedule  A. 

2.  The  amount  deducted  from  each  such  balance  on  account  of  each  claw  of  no^ 

taxable  income,  unallowable  deductions,  and  other  adjustmento 
in  Schedule  D,  -with  a reference  to  the  number  of  the  item  in  Stffiedule  U, 
iu  which  each  amount  so  deducted  'was  included. 

3 The  remainder  of  each  such  balance,  analyzed  to  show  the  amorat  inchidsd 
in  each  item  of  Schedule  A,  with  a reference  to  the  number  of  Uie  ztam  w 
Schedule  A.  ’ ”** 


[Page  4 of  Form  1065.] 


Income  'Fax 

Supplementary  Page  20. 


CERTiFiCATE  CF  ALIEN  CLAIMING  RESIDENCE  IN  THE  UNITED  STATES 


11-17-20. 


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Income  Tax 

Supplementary  Page  22, 


tTfilTEC  STATES  INTERNAL  REVENUE  SERVICE 


Form  1096 
(Eevued  Jaou^y  1920) 

ANNUAL  INFORMATION  RETURN 

o r 

PAYMENTS  OF  INCOME.  ETC.,  REQUIP^D  TO  BE  REPORTED  UNDER  REVENUE  ACT  OF 

FEBRUARY  24,  1919 

FOR  CALENDAR  YEAR  1919 

FOR  INSTRUCTIONS  SEE  REVERSE  SIDE 


THIS  RETURN, 
ACCOMPANIED  BY 
EEPOPvTS  ON 
yORM  1C46.  MUST  BE 
FORTVABDED  SO  AS 
TO  REACH  THE 
COMMISSIONER  OF 
INTERNAL  REVENUE,  j 
SORTING-  SECnONp  j 
W.VSaiEGT03i,  D.  CL,  i 
OS  OR  BEFOSa  I 


(Ilams  of  person  or  organization  by  wham  pajripents  were  made.) 


rstreet  atd  ntmiber^r  rojai  route.) 


(Daia  tecafsed) 


(St^) 


A 

B 

c 

CHARACTEil  OF  INCOME  PAID. 

NUMBER 

OF  REPORT 
FOPJSS. 

TOT.4L  AMOUNT 

OF  PAYMENTS. 

FORM  1989. — Interest,  rent,  salaries,  wages,  premiums,  annuities,  compensation, 
remu aeration,  emoluments,  or  other  fixed  or  determinabio  gsina,  profits,  and  income 
of  11,00.")  or  moro  . . . 

$ 

(DO  NOT  WIUTE  IN  THIS  SPACE) 


ITAPORTANT  NOTICE 

Ketums  or  inTonnsiiozi  are  reqiilred  to  be  rcairdered  on  tZie  bs^  of  t&e  c^eaidaT  jear.  Retarns  for  any  other  period 
of  time  will  not  be  accepted. 

If  an  adding  machine  tape  waa  used  in  ascertaining  the  total  reported  in  column  0,  it  should  be  submitted  with  the  forms. 

The  name  of  the  individual,  corporation,  partnership,  etc.,  using  Form  1099  may  bo  printed  or  stamped  on  each  form,  if  ee 
desired,  but  this  return  must  be  made  under  oath. 

Returns  of  indi's'iduals  on  this  form  must  bo  signed  and  sworn  to  by  the  individual  or  his  duly  authorized  agent.  Returns  of 
corporations,  partnerships,  etc.,  must  bo  signed  and  sworn  to  by  an  officer  of  the  corporation  or  member  of  firm. 


I swear  (or  affirm)  that  to  the  best  of  my  knowledge  and  belief  the  foregoing  return  and  the  accompanying  reports  constitute'a  trus 
and  complete  statement  of  payments  of  the  above-described  classes  of  income  made  by  the  person  or  organization  named  at  the  head 
of  this  return  during  the  calendar  year  1919. 

Sworn  to  and  subscribed  before  mo  tin's day  

(Si^iature.) 

of  19 

(State  whether  Ic^^dnal  owner,  memter  of  film,  or  disbursing  officer  ol 
Ck>vem]noQt  bureau  or  office,  or  If  officer  of  corporation  give  title.) 

(Signature.) 

(Title.)  (State  ^oiees  of  person  siptUig  If  diiiuent  from  that  (^ven  at  LAd  of  return.) 


Income  Tax 
Supplementary  Page  23, 


ilVSTicUCTIONS 

actiuo’  who  made  payments  of  income  OS  desciibed  bclow  durfag  the  calcndw 

, .o„e.JpSLe„Mp,  P.»».«rvic  c.n»»a...  or 

••e<--uired  to  lecder  a return  on  this  form  on  or  betore  March  15,  1920. 

* . rr.  , • Of  nan  ni-  in  ore  —This  return  must  be  made  by  every  person,  corporauon, 

FORM  1099-Iiiterest,  Ee&t,  3 executors,  admi^ 

partndtsJnp.  assomation.  or  insurance  coropanj , inc-udang  Ic^  - 0 0 ^ho  paid  interest,  rent,  salaries,  etc.,  to  another 

tmtors,  receivers,  employers  and  during  the  ^endar  year  1919.  A separate  report  on  Form  1099  must  be 

partLl^ip,  personal  corporatte,  o,  ddud.ry  «,  who»  .del.  .dcop.0 

rL.,  »..de.  o«.,  ^e^^dlos.  o,  pdd  .o  dien  i.divid«d3,  .Wd  «o.  be  Uc.uded  id  «d,  eetue.  be. 

ehould  be  reported  on  return  Form  1042  and  individually  on  Form  1098. 

Reports  on  Form  1099  are  not  required  in  the  following  cases:  , - -n- 

t TTnlt/vl  Statos  of  States  Territories,  or  poUtical  subdivisions  thereof  or  of  the  District  ot 

Co,l“eS:;S:pain~de7Xb.^ 

Bill,  paid  ior  merctendi».  teloipain.,  telophode.  freight,  eterage.  add  elndar  charge.. 

Amounts  paid  to  employees  for  expenses  incurred  in  business 
Premiums  paid  to  insurance  companies. 

Annuities  representing  return  of  capital 

Interest  accrued  on  bank  deposits  if  not-crediteda  „ . 

Payarent,  dr»ie  b,  domert.c  edabliebment,  « foreign  branch  h.nee.  thereof  to  nonrrrddent  alien  employee,  for  eervree. 
performed  entirely  in  foreign  countries 

Interest  on  bonds  of  domestic  and  foreign  corporations.  (See  Forms  1012  and  1096A.) 

Salaries,  wages,  etc.,  paid  to  nonresident  alien  individuals  and  foreign  corporations.  (See  Form  1042.) 

ORGANIZATIONS  HAVING  A iqqqaNO  lOOe's^O^NG  ALI.^ATMENTs\aDE  BT  MAIN 

The  name  mid  addrem  of  flie  Indlvidnal  or  organi.atio.  nraldng  reporfo  on  Bonn  1009  may  he  printed  or  mamped  en  each  form,- 

but  the  return  Form  1096  must  be  made  under  catb.  ^ -rn  nvvrcvn^  OF  AN 

FOEM  1099  IS  EEQIJIEED  TO  BE  EXECUTED  EEPOETING  PAYMENTS  OF  SALARIES  xO  OFFICERS^^^ 

ORGANIZATION. 


Page  2 — Form  1096. 


Income  Tax 

Supplementary  Page  24. 


2-7-20. 


Form  lOOCA-UNITED  STATES  INTERNAL  REVENUE  SERVICE 

MONTHLY  INFORMATION  RETURN 

PAYMENTS  OF  INTEREST  ON  BONDS  OF  DOMESTIC  AND  FOREIGN  CORPORATIONS  AND 
COUNTRIES  AND  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS 

FOR  MONTH  OF 19 


THIS  RETURN, 
AC€OMPANiF.O  BY 
CERTinCATES  ON  FORM 
ICCI,  100  lA,  AND  10i«. 
MUST  B£  MAilED  10 
TOE  COMftMSSIONER  OF 
l.vrr.PNA?,  REVENUE. 
SUR7ING  DlVaON. 
VASiPNCTON,  D.C., 

ON  OR  BEFORE  THE 
2uii  DAY  OF  THE  MONTH 
SUCCC'DING  TiAT 
FOR  WHICH  MADE 


(Name  of  debtor  ort;.iaiidUoii) 


(KuU  po-l-oice  iiJJresi) 


(Suma  of  bani  or  payias  agent) 


(Full  pctol-ollice  addfosi) 


Class  or  Income 


A.  Interest  cu  bonds  and  other  eimilar^  obligations  of  domestic  and  reddeat 

(Foau  1001), 

$...- 

corporations  (pro\'ided  tax  was  not  withheld  at  source}...... 

B..  Interest  on  Uontls  and  ether  almilar  obligations  of  dcmestic  and  resident 

(FORK  1058) 

$ 

* corporationa  (proifided  tax  was  not  withhc-d  at  source) — — — 

C.  Interest  on  bonds  of  foreign  corporations  and  countries  and  dividends  on  stock 
of  foreign  corporations.  

(FORM  lOOIA)  , ^ 

i 

(Oat*  rec«lv3<i' 


Total  AifooNT  or 
Payments. 


INSTRUCTIONS 

A-  A ccrtiiTcatc  OQ  Form  1001  should  accompaiiy  this  return  for  every  payment  of  inUrai  on  bond*  and  oOur  tmUcr  ohligatvons  of 

clswes  paid  to  ciluona  and  reeidenta  of  the  United  Statoe  (ii^viduala^d  fiduckiiea) 
cSing  peraJnal  domestic  and  resident  corporationa.  and  foreign  corporations  haymg  an  o&ce  or  place  of 

buaineaa  in  the  United  States. 

In  the  absence  of  ownership  certificates  maio  by  individual  owners  of  tax-free  register^  bon^ 
prepare  reports  on  Form  1000  and  forward  them  to  the  collector  with  return  Form  1012.  If  o^ed  by 
tion,  or  foreign  corporation , having  an  ofSce  or  place  of  businesa  m the  United  States,  reports  on  Form  1001  shomd  be 

2.  clamet  paid  ^ citizens  and  reei^nts  of  the  Umted  States 

domestic  and  resident  pirtnerehipa  and  corporaUona,  nonresident  alien  partnerships,  and  foreign  corporations  having  an 
office  or  place  of  business  in  the  United  Sutes.  , ,,  . -n  Pr,«n  irwii 

In  the  case  of  registered  bonds  not  having  tax-free-covenant  clauses  the  debtor  organization  will  prep^  reports  on  t orm  1001 
and  forward  them  with  this  return  to  the  Commiaaionof.  When  so  used  the  form  (lOOp  ne^  not  be  pgnod.  _ 

B.  Resident  collecting  agents,  responsible  banks  aqd  bankers  receiving  interest  coupons  presented  by  in^vidual  ciUzens  or  r^uento 

of  the  United  States  for  col&tion,  may  dotach  certificate  Form  1001  and  forward  it  directly  to  tho  Conimi£aion<^  of  Internal 
Revenue,  provided  certificate  Form  1058  (revised)  is  substituted  for  the  certificate  detacned.  The  num^r  of  substi- 

tute certihcatea,  Foim  1058,  should  be  entered  by  the  debtor  corporation  on  line  B,  in  tue  column  Number  of  Certificates.^ 

C.  A certificate  on  Form  1001 A should  be  required  by  indiWduals,  partnerohipe,  and  cocporatioM  imdertaking  as  a mattor  of  bum- 

nc83  or  for  profit  the  coUection  of  tn(er«f  on  bonds  of  foreign  ccrporalwus  ^d  county  and  diw^ndt  <m  st^k  of  foreign  cor^ratio^ 
bv  means  of  coupons,  checks,  or  bills  of  exchange  tor  citizens  and  residents  of  the  United  Staf^  (individuals  and  fiducianes), 
domestic  and  reoident  partnerships  and  corporations,  and  nenrssideat  alien  individuals,  partneretops,  and  coiporatioM. 

If  the  payments  consist  of  interest  on  bonds  (and  there  is  no  poying  agent  m ihq  Umted  Stat®),  the  l^t  ban^  or  collectmg  agent 
bant^g  the  item  shaU  detach  the  certificate,  Form  lOOlA,  and  forward  it  directly  to  the  CommisaioDer  of  Internal  Revenue, 


accomnanied  by  a return  on  this  form.  ....  ...  . • • .i.  , 

If  the  payments  consist  of  dividends  on  stock  of  foreign  corporations,  the  fhat  bank  or  collecting  agen.  reoer^g  toe  ccrtLjoalo 
(Form  lOOlA)  is  requir^  to  detach  and  forward  it  directly  to  the  Commissioner  of  Internal  Revenue.  The  first  bank  shall 
indorse  upon  the  foreign  item  “Certificate  detached  and  information  furnished  (insert  name  and  adarees  of  licensee). 


_ _ ^ Sub- 

etitutTccrtificates  are  not  pennitt^  to  be  used  in  the  case  of  foreign  items.  , . . . , • c , 

If  bonds  are  owned  jointly,  separate  certificates  should  bo  made  by  or  for  each  joint  owner.  Fiduoanes  must  enter  pn  the  certificates 
under  “Oimer  of  bonds”  the  name  of  estate,  trust,  or  beneficiary  on  behalf  of  whom  toe  exemption  is  claimed,  licensed  banlus  and 
collecting  agents  not  acting  as  withholding  or  paying  agents  for  debtor  organizations  may  file  one  return  on  this  form,  making  no 
entries  in  the  spaces  at  the  head  of  the  form  for  name  and  addreaa  of  debtor  organization. 

1 CERTirr  that  the  foregoing  return  and  the  accompanj-ing  certificates  constitute  a true  and  complete  stotoiaent  of  paymento  of  the 
above-described  classes  of  income  made  by  the  pereon  or  organization  named  at  the  head  of  this  rotiun,  during  the  month  stated  above. 


liated 


(SJfoature) 


(Csp^ty  In  wUlcU  acUoL') 


(AdUiaaa  to  bUl) 


Income  Tax 

Supplementary  Page  25. 


Korm  109CB  (R<*vir*d  Janoary,  1920)-UNITKT>  6TATE3  TMTERNAI/  KEV'SNTJE  SSKVICE 

ANNUAL  INFORMATION  RETURN 

PAYMENTS  0?  INTEREST  ON  BONDS  OF  DOMESTIC  AND  FOREIGN  CORPORATIONS  AND  COUNTRIES  AND 
DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS 

For  Calendar  Year  19. 


THIS  RETURN  MUST 
BE  FORWARDED  SO  AS 
TO  REACH  THE 
COMMISSIONER  OF 
INTERNAL  REVENUE 
SORTING  DIVISION 
WASHINGTON,  D.  C. 

ON  OR  BEFORE 
MARCH  15,  OF  THE 
FOLLOWING  YEAR 


(Name  ol  debtor  organization.) 


(Full  post-olBco  address.) 


(Name  cl  bank  or  paying  agent.) 


(Full  post-oUice  address.) 


(Data  racatrsd) 


mcTnth 

A.  iXTEP.EST  OK  BONB8  AND  OTHER  SIMILAR  OBLIGATIONS  OF 
IX)MESTIC  AND  RESIDENT  CORPORATIONS 

B.  Interest  on  bonds  op  fobe] 

AND  DIVIDENDS  ON  STOCK 

IGN  CORPOKATIONS  AKD  COUNTBIES 

OF  FORSION  COaPOaATIONS 

NumlKT  of  certifioates 

Amount 

Number  of  certificates 

Amount 

|u_ 

January- 

February- 

March 

‘ 

April 

May 

• 

June 

July 

August 

September 

October — 

IIJ............... 

Thi?  rotum  must  bo  mode  bv  debtor  corporations,  paying  agents,  or.  bamrs,  and  miist  show,  fey  months  in  which  the  incirae  wm 
paid  and  reported  on  monthly  returns,  the  total  number  of  exemption  certiiicatos  filed  with  such  returns  and  the  to.al  income  paid 
without  deduction  of  tax,  as  shown  by  such  certificates  and  returns. . 

I swear  (or  affirm)  that  this  return  is  a full  and  complete  summary  of  the  number  of  exemption  certifica^  and  amount  of  income  of 

the  classes  shown  above  (iieretcfore  reported  on  monthly  returns,  which  are  hereby  made  a part  of  this  return),  paid  durmg  the  year. 


Sworn  to  and  subscribed  before  me  this 
of 19 


day 


(Signature.) 


( Capacity  in  whioli  acting.) 

(Signature.) 


■ (A  ddresn  in  luU.) 


Income  Tax 

Supplementary  Page  2$. 


IS 

£3 

bJ 

£22 
h 01 

S[: 

S2 


So 

Z 


Income  Tax 

Supplementary  Page  27, 


The  WnHHOLDiNd  Agent 

TREASURY  DEPARTMENT 

Form  1115— (Revised  Fob.,  1920)— United  States  Internal  Revenue  Service 

1 Do  Not  Wp.ite  Here 

OB  Collector  Recei-.tng 

This  Claim  Shall  Enter 
Date  of  Receipt  in  This 

CLAIM  BY  NONRESIDENT  ALIEN  INDIVIDUAL 

Space. 

Fob  iiENEFiT  of  Personal  Exemption  and  Credit  for  Dependents 

FOR  TAXABLE  YEAR 

rNameoY^rttWiordi’ng'ageat?) ^ (SYreet  and  number.) 

(CYty  or  town)' ^ (State.) 

Claim  is  hereby  made  for  benefit  of  the  personal  exemption  and  the  credit  for  dependents  (if  any) 
provided  imder  section  216  of  the  Revenue  Act  of  1918  by  (or  for) — 

Name  of  claimant - - - 

Address  in  thej - - 

United  States.] --.-j - 

1.  Of  what  country  are  you  a citizen  or  subject? - - 

2.  Are  you  single  1 3.  Are  you  married  and  hving  with  wife  or  husband?  — 

4.  Are  you  head  of  a family  ? — 5.  If  head  of  a family,  give  age  and  relationship  of  those 

dependent  upon  you — — - - 

6.  If  married,  has  your  wife  or  husband  derived  income  during  the  taxable  year  to  date  from  sources  in  the 

United  States  separate  from  your  own  ? - — - — — - 

7.  If  so,  is  such  income  included  in  the  income  stated  below?  - — 

8.  Have  you  filed  a return  of  net  income  for  all  or  any  of  the  past  four  years  ? 9.  If  so,  state 

for  which  years  and  the  Internal  Revenue  Districts  in  which  filed 


INCOME  OF  CLAmAKT.  DURING  TAXABLE  YEAR  TO  DATE,  FROM  SOURCES  WITHIN  THE  UNITED  STATES. 

(1)  S.^-i-Any  OR  Wages. 


Name  of  Emploter. 

Address.  j 

Period. 

Amount. 



1 1 

$ 

t':::::::::::;::::] 

1 1 

j' 

1 1 

1 1 

$ 

(2)  Other  Income. 

Name  of^ource. 

Address. 

Period  or  Date. 

Amount. 

|.  . 

$. 

1 

1 

1 i 

Total  income  of  claimant,  during  taxable  year  to  date,  from  sources  within  the  United  States  (X) 

$ - 

STATEMENT  OF  CREDITS  CLAIMED. 


Amount  of  credits  claimed : Personal  exemption,  $ — Credit  for  dependents,  $ — Total  (Y)  $ 

Total  income  of  claimant,  during  taxable  year  to  date,  from  sources  within  the  United  States  (item  X from  above) 

Balance  of  credit  (item  Y minus  item  X),... 

I swear  (or  afi&rm)  that  the  above  is,  to  the  best  of  my  knowledge  and  belief,  a true  and  complete  state- 
ment of  facts  in  connection  with  the  claim  for  credits  above  made. 

(If  claim  is  made  by  agent  the  reason  therefor  must  be  stated  on  this  iine.) 

Sworn  to  (or  afiirmed)  and  subscribed  before  me  this 
dav  of  — 19 

(Signature  of  iudividual  or  agent.) 

cs— S77S  (Oflieial  capacity.)  (OVER.)  (.\ddress  of  individual  or  agent.) 


Income  Tax 
Supplementary  Page  28 


[Page  1 of  I'orm  1115.] 


PROVISIONS  OF  REGULATIONS  45  APPLICABLE  TO  TIIH  USE  OF  THIS  FORM. 


APPLICABILITY  OP  CREDITS,  UNDER  SECTION  216  OF  REVENUE  ACT  OF  1918,  TO  NONRESIDENT  iULIEN  EHIPLOYEE. 


Art.  316  (of  Regulations  45).  Allo-wnnce  of.  pcrsoiial  ex- 
emption to  nonresident  nlien  employee. — A nonresident 
alien  employee,  provided  he  Is  entitled  under  section  216  of  the 
statute  (sec  the  articles  below,  particularly  the  lists  of  countries 
In  Article  307)  to  credit  for  a personal  exemption  or  for  dependents, 
or  both,  may  'claim  the  benefit  of  such  credit  by  filing  with  his  em- 
ployer this  form,  duly  filled  out  and  executed  under  oath.  On  the 
filing  of  such  a claim  the  employer  shall  examine  it.  If  on  such 
examination  it  appears  that  the  claim  is  in  due  form,  'that  it  con- 
tains no  statement  which  to  the  knowledge  of  the  employer  is  un- 
true; that  such  employee  on  the  face  of  the  claim  1?  entitled  to 
credit,  and  that  such  credit  has  not  yet  been  exhausted,  •such  em- 
ployer need  not  until  such  credit  be  in  fact  exhausted  withhold 
any  tax  from  payments  of  salary  or  wages  made  to  such  employee. 
Every  employer  with  whom  aflBdavits  of  claim  on  this  form  are 
filed  by  employees  shall  preserve  such  affidavits  until  the  following 
calendar  year,  and  shall  then  filethem,  attached  to  his  annual  with- 
holding return  on  Form  1042  (revised),  with  the  Collector  on  or 
before  March  1.  In  case,  however,  when  the  following  calendar 
year  arrives  such  employer  has  no  withholding  to  return,  he  shall 
forward  all  such  affidavits  of  claim  directly  to  "the  Commissioner 
(Sorting  Division),  with  a letter  of  transmittal,  on  'or  before  March 
15.  "Where  any  tax  is  withheld  the  employer  in  every  Instance  shall 
show  on  the  pay  envelope  or  shall  furnish  some  other  memorandum 
showing  the  name  of  the  employee,  the  date"  and  the'amount  with- 
held. This  article  applies  only  to  payments  of  compensatioi)  by  an 
employer  to  an  employee. 

Ap.t.  306  (of  Regulations  45).  Credits  4o  non-resident  alien 
individnal. — A nonresident  alien  individual,  similarly  to  a citizen 
or  resident,  is  entitled  for  the  purpose  of  the  normal  tax  to  credit 
• • • a personal  exemption,  and  $200  fdr  each  dependent,  except 

that  If  he  is  a citizen  or  subject  of  a country  which  imposes  an 
income  tax  a personal  exemption  or  credit  for  dependents  Is  allowed 
him  “ only  if  such  country  allows  a similar  credit  to  citizens  of  the 
United  States  not  residing  in  such  country.”  “ If  such  country 
allows  a similar  credit  ” means  if  such  country  in  imposing  its  In- 
come tax  allows  a personal  exemption  or  a credit  for  dependents,  as 
the  case  may  be,  and  allows  it  without  discrimination  to  citizens  of 
the  United  States  not  residing  in  such  country.  * * * 


AST.  307.  "When  nonresident  alien  individnal  entitled 
to  personal  exemption. — (c)  The  following  is  an  incomplete 
list  of  countries  which  either  Impose  no  income  tax  or  in  imposing 
an  income  tax  allow  both  a personal  exemption  and  a credit  for 
(Jependents  which  satisfy  the  similar  credit  requirement  of  thq.' 
statute : Argentina,  Celgium,  Bohemia,  Bolivia,  Bosnia,  Brazil, 
Bukowina,  Canada,  Carinthia,  Carniola,  China,,  Chile,  Cuba,  Dal- 
matia, Denmark,  Ecuador,  Egypt,  France,  Galicia,  Goritz,  Gradlsca, 
Greece,  Guatemala,  Herzegovina,  Istria,  Lower  Austria,  Luxemburg, 
Mexico,  Montenegro,  Moravia,  Morocco,  Nev/foundland,  Nicaragua, 
Norway,  Panama,  Paraguay,  Persia,  Peru,  Portugal,  Roumania, 
Russia  (including  Poles  owing  allegiance  to' Russia),  Salzburg,  Santo 
Domingo,  Serbia,  Siam,  Silesia,  Slovakia,  Styria,  Spain,  Switzerland, 
Trieste,  Tyrol,  Upper  Austria,  Union  of  South  Africa,  Venezuela, 
(6)  The  following  is  an  incomplete  list  of  countries  which  in  im- 
posing an  income  tax  allow  a personal  exemption  which  satisfy  the 
similar  credit  requirement  of  the  statute,  but  do  not  allow  a- credit 
for  dependents ; Bachka,  Banat  of  Temesvar,  Croatia,  Finland,  India, 
Italy,  Salvador,  Slavonia,  Transylvania,  (c)  The  following  Is  an 
incomplete  list  of  countries  which  in  imposing  an  income  tax  do  not 
allow  to  citizens  of  the  United  States  not  residing  in  such  country 
either  a personal  exemption  or  a credit  for  dependents  and,  there- 
fore, fail  entirely  to  satisfy  the  similar  credit  requirement  of  the 
statute  : Australia,  Costa  Rica,  Great  Britain  and  Ireland,  Japan, 
The  Netherlands,  New  Zealand,  Sweden.  The  former  names  of  cer- 
tain of  these  territories  are  here  used  for  convenience,  in  spite  of 
an  actual  or  possible  change  in  name  or  sovereignty.  A nonresi- 
dent alien  individual  who  is  a citizen  or  subject  of  any  country  in 
the  first  list  is  entitled  for  the  purpose  of  the  normal  tax  to  such 
credit  for  a personal  exemption  and  for  dependents  as  his  family 
status  may  v/arrant.  If  he  is  a citizen  or  subject  of  any  country  in 
the  second  list,  he  is  entitled  to  a credit  for  personal  exemption, 
but  to  none  for  dependents.  If  he  is  a citizen  or  subject  of  any 
country  in  the  third  list,  he  is  not  entitled  to  credit  for  either  a 
personal  exemption  or  for  dependents.  If  he  is  a citizen  or  subject 
of  a country  which  is  in  none  of  the  lists,  then  to  secure  credit  for' 
either  a personal  exemption  or  for  dependents  he  must  prove  to  the 
satisfaction  of  the  Commissioner  that  his  country  does  not  impose 
an  income  tax  or  that  in  imposing  an  income  tax  it  grants  the  simi- 
lar credit  required  by  the  statute. 


CREDITS  UNDER  SECTION  216  (c)  and  (d)  OF  REVENUE  ACT  OF  1918. 


PEKSONAL  EXEMPTIOlf. 
Status  of  taxpayer. 


Amount 
of  credit. 


Married,  and  living  with  husband  or  wife  (see  Article  303, 

below) $2,000 

Head  of  a family  (see  Article  302,  below)........,. ;.  2,000 

Married,  and  not  living  with  husband  or  wife  and.  not  head 

of  a family  (see  Articles  302-303,  below) 1,  000 

Single,  and  not  head  of  a family  (see  Article  302,  below)..- 1,  000 


CBEDIT  FOB  DEPENDENTS. 
Status  of.  dependent. 


Amount 
of  credit. 


Eor  each  person  (other  than  husband  or  wife)  v,’ho  is  (1)  (a) 
under  18  or  (b)  Incapable  of  self-support  because  defective, 
and  (2)  is  dependent  upon,  and  receiving  the  chief  support 
from,  the  taxpayer  (see  Article  304,  below) $200 


Art.  302  (of  Regulations  45).  Personal  exemption  of  head 
of  family. — A head  of  a family  is  a person  who  actually  supports 
and  maintains  In  one  household  one  or  more  Individuals  who  arc 
closely  connected  with  him  by  blood  relationship,  relationship  by 
marriage,  or  by  adoption,  and  whose  right  to  e.xci’cise  family  con- 
trol and  provide  for  these  dependent  individuals  Ls  based  upon  some 
moral  or  legal  obligation.  In  the  a"bscncc  of  continuous  actual  resi- 
dence together,  whether  or  not  a person  with  dependent  relatives  is 
a head  of  a family  within  the  moaning  of  the  statute  must  depend 
on  the  character  of  the  separation.  If  a father  Is  absent  on  busi- 
ness or  at  war,  or  a child  or  other  dependent  Is  away  at  school  or  oa 
a visit,  the  common  home  being  still  malntalm.'d,  the  additional  ex- 
emption applies.  . If,  moreover,  through  force  of  circumstances  a 
parent  is  obliged  to  maintain  his  dependent  children  with  relatives 


or  in  a boarding  house  while  he  lives  elsewhere,  the  additional  exemp- 
tion may  still  apply.  If,  however,  without  necessity,  the  dependent 
continuously  makes  his  home  elsewhere,  his  benefactor  is  not  the 
head  of  a family,  irrespective  of  the  question  of  support.  A resident 
alien  with  children  abroad  is  not  the  head  of  a family. 

Art.  303"  (of  Regulations  45).  Personal  exemption  of 
married  person. — In  the"  case  of  a married  man  or  married  woman 
the  joint  exemption  replaces  the  individual  exemption  only  if  the 
man  lives  with  his  wife  or  the  woman  lives  with  her  husband.  In 
the  absence  of  continuous  actual  residence  together,  whether  or  not 
a .man  or  woman  has  a wife  or  husband  living  with  him  or  her 
within  the  meaning  of  the  statute  must  depend  on  the  character  of 
the  separation.  If  merely  occasionally  and  temporarily  a wife  is 
away  on  a visit  or  a husband  is  away  oa  business,  the  joint  home 
being  maintained,  the  additional  exemption  applies.  The  unavoid- 
able absence  of  a wife  or  husband  at  a sanatorium  or  asylum  on  ac- 
count of  illness  does  not-  preclude  claiming  the  exemption.  If,  how- 
ever, the  husband  voluntarily  and  continuously  makes  his  home  at 
one  place  and  the  wife  hers  at  another,  they  arc  not  living  together 
for  the  purpose  of  the  statute,  irrespective  of  their  personal  rela-; 
tions.  A resident  alien  with  a wife  residing  abroad  is  not  entitled 
to  the  joint  exemption. 

Art.  304  (of  Regulations  45>..  Credit  for  dependents. — A tax- 
payer receives  a credit  of  $200  for  each  person  (other  than  husband 
or  wife),  whether  related  to  him  or  not  and  whether  living  with 
him  or  not,  dependent  upon  and  receiving  his  chief  support  from  the 
ta  ;payer,  provided  the  dependent  is  cither  (a)  under  eighteen  or 
(b)  Incapable  of  self-support  because  defective.  The  credit  is  based 
upon  actual  financial  dependency  and  not  more  legal  dependency.  It 
may  accrue  to  a taxpayer  who  is  not  the  head  of  a family.  But  a 
father  whose  chfldrcn  receive  half  or  more  of  thoit  support  from  a 
trust  fund  or  other  separate  source  Is  not  entitled  to  the  credit. 

02—8773 


Page  2 — Formal  115. 

Income  Tax 

Supplementary  Page  29, 


tREASURY 

BtmEATJ  OF  INTERNAL  RKVEN^. 

Form  me.— Revised  Jan.,  1920. 


CLAIM  FOR  CREDIT  ON  INDIVIDUAL  INCOME  TAX  RETURN  FOR  TAXES  PAID  OR  ACCRUED 
TO  FOREIGN  COUNTRIES  OR  TO  POSSESSIONS  OF  THE  UNITED  STATES 


Name  of  aaimant Address. 


(Street  and  number  or  rural  route.) 


(City  orto-BH.) 


On  behalf  of  the  above-named  claimant,  who  is  a citizen  or  subject  of — ,and  is  a resident 

credit  is  hereby  claimed,  on  his  attached  income-tax  return,  which  is  based  on  income 

for  taxes  paid  or  accrued  * as  follows: 


(Reoelved  oraccrued.) 


(Name  ol  country.) 

during  the  taxable  year 


(If  calendar  year  give  year— if  flscal  year  give  months.) 


SCHEDULE  Al. 

»Tax  Paid  or  Accrued*  to  a Possession  of  the  United  States  on  Behalf  of  Claimant  Individually. 


Name  of  possession  of  U.  S — 

Statute  imposing  tax 

Date  of  accjf  ual — 


Character  of  tax 


(Income,  war-profits,  or  excess-profits.) 


(To  be  named  luily  and  ciearly  so  as  to  be  easily  identified#) 


rate  of . 


(To  be  given  even  if  claim  is  based  on  payment.) 

y attached  receipt  or  return) .. 

*)  equals  in  dollars 


Date  of  payment  (if  paid) 


(To  be  given  even  if  claim  is  based  on  accrual,) 


1.  Amount  of  tax^  (evidenced  hy  attached  receipt  or  return)  which  (converted  at  an  exchange 


SCHEDULE  A2. 

' Tax  Paid  or  Accrued*  to  a Possession  of  the  United  Stales  on  Behalf  of  Claimant  Individually. 


Name  of  possession  of  U.  S Character  of  tax.  „. 

Statute  imposing  tax 

Date  of  accrual  ... 


(Income,  ■war-profits,  or  excess-profits.) 


named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  payment  (if  paid) 

Tf  o be  gYv^ii  eTenVf  cia.’mYs'to'ed  on  payment.)  (To  be  given  even  if  claim  is  based  on  accrual.) 

1.  Amount  of  tax^  (evidenced  by  attached  receipt  or  return)  which  (converted  at  an  exchange 

rate  of ®)  equals  in  dollars , ^ : 


SCHEDULE  Bl. 

* Tax  Paid  or  Accrued  * to  a Foreign  Country  on  Behalf  of  Claimant  Individually. 


Name  of  foreign  country Character  of  tax... 


(Income,  war-profits,  or  excess-profits.) 


Statute  imposing  tax. 


'(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 


Date  of  accrual yf  "^"j^Vn  evVn'u  Yi^'iY'b^'d  oY'paY^^^^^^  payment  (if  pa^d)  j,,,ruai.) 

1.  Total  net  income  on  which  this  tax  was  based — 

2 That  amount  of  such  total  net  income  which  was  derived  from  eourcos  in  that  foreign  country^  ...  - ■* 

s!  Ratio  of  total  net  income  derived  from  sources  in  that  foreign  country  to  total  net  income  on  which  this  tax  was 

based  (item  2 divided  by  item  1) ^ — 

4.  Total  amount  of  this  tax  ^ payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  retum)  * 

5,  That  amount  of  this  tax  which  was  based  on  income  derived  from  sources  in  that  foreign  country  (item  3 multi- 

plied hy  item  4) *7  which  (converted  at  an  exchange  rate  of ®)  equals  in  dollars..  $ 

(in  foreign  money  ) — 

SCHEDULE  B2. 

«Tax  Paid  or  Accrued  * to  a Foreign  Country  on  Behalf  of  Claimant  Individually. 


Name  of  foreign  country 

Statute  imposing  tax 

Date  of  accrual .. 


Character  of  tax. 


(Income,  war-profits,  or  exce^proflts.) 


Date  of  payment  (if  paid) 

(To  be  given  even  if  claim  is  based  on  accrual.) 


'(’i’obe  named  fully  and  clearly  so  as  to  be  easily  identified.) 

(To  bo  given  even  if  claim  is  based  on  payment.) 

1.  Total  net  income  on  which  this  tax  was  based 

2'.  That  amount  of  such  total  net  income  which  wca  derived  from  sources  in  that  foreign  country  . 

3.  Ratio  of  total  net  income  derived  from  sources  in  that  foreign  country  to  total  net  income  on  whicn  this  tax  was 
based  (item  2 divided  by  item  1) 

4 Total  amount  of  this  tax^  payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  return)  . — 

5'.  That  amount  of  this  tax  which  was  based  on  income  derived  from  sources  in  that  foreign  coimtry  (item  3 multi- 

')  equals  in  dollars—  


plied  hy  item  4) which  (converted  at  an  exchange  rate  of.. 

(In  foreign  money.)  


I See  note  1,  page  3. 


>'s^7Y^;Y2.pag6  3.  3 see  note  3,  page  3.  < See  note  4,  page  3.  » See  note  6,  page  3.  »Scenoio6,paC6  3.  ’ See  noie  7,  page  3. 


Pa^e  i of  I'orm  1116. 


Income  I’ax 

Supplementary  Page  30. 


SCEEDtrtS  Cl. 

•Tk  WXbhM  ai  Source  bjre  Cotpofafiofl  trader  & Foreign  XaGoiae  Tax  law,  oa  Behalf  of  cimaxnnt  Individually. 

Name  of  foreign  country Character  of  tax 

(Income,  war-profits,  or  excess-profits.) 

Statute  imposing  tax _ 

(To  be  named  fully  and  clearly  so  as  to  bo  e^y  identSed.)  

Date  of  Accrual Date  of  payment,  if  paid 

(To  be  ^ven  even  U claim  is  based  on  payment.)  (To  be  givMlvm  ifcWm  isTased  on  accn^^^^^^^ 

1.  Name  of -vidthholding  corporation 1(a).  Number  of  held  during  the  year 

2.  Number  of  shares  acquired  dunng  the  year. 2 (a) . Date  of  such  acquisition 

3.  NumbCT  of  shares  sold  during  the  year 3 (a).  Date  or  such  ale 

4.  Total  num^  of  shares  outstanding  on  which  dividend  was  declared  (regardless  of  whether  the  dividend  was 

paid  to  citizens  of  the  United  States  or  other  governments) 


5.  Total  dividends  paid  or  accrued 
exchange  rate  of 


such  shares  during  the  year 
.„.®,  equals  in  dollars 


which  convertel  at  an 


6.  Amount  of  tax  (evidenced  by  attached  receipts,  or  return)  paid  en  bloc  to  foreign  government . 

which  converted  at  an  exchange  rate  of J equals  in  dollars. 

7.  Portion  of  tax  paid  for  claiimnt  individually  (total  tax  withheld,  item  6,  divided  by  total  number  of 


$ 


corporation  stock  outstanding,  item  4,  and  tnis  result  multiplied  by  number  of  shai'es  held  during  the  year 

item  1 (a) $_ 

Less  amount  of  taxes  properly  allocated  to  the  -iriden^  declai^  (hiring  the  year  prior  to  acquisition  or  aftCT 
the  disposition  of  stock  not  held  during  the  entire  year 

Balance  of  tax  paid  for  claimant  individually  by  withholding  corporation  (item  7 minus  item  8) •$. 


SCHEDULE  C2. 

®Tax  Withheld  at  Source  by  a Corporation  Under  a Foreign  Income  Tax  Law,  on  Behalf  of  Cfeimant  Individually. 

Name  of  foreign  country Character  of  tax 

(Incxmie,  war-profits,  or  excess-profits. ) 

Statute  imposing  tax 

Date  of  Accrual 


(To  bo  named  ftdly  and  clearly  so  as  to  be  easily  Wentifled.) 

Date  of  payment,  if  paid 

(To  be  given  even  if  claim  is  based  on  payment.)  (To  be  given  evai  if  claim 

1.  Name  of  withholding  corporation 1 (a).  Number  of  shares  held  during  the  year 

2.  Number  of  shares  acquired  during  the  year 2 (a) . Date  of  such  acquirition 


onaccroal) 


3.  Number  of  shares  sold  during  the  year. i. 3 (a).  Date  (jf  such  sale 

4.  Total  number  of  shares  outstandmg  on  which  dividend  was  declared  (regardless  of  whetJw,  the  'dit^end  w 

paid  to  citizens  of  the  United  States  or  other  govemnsents) 


■*  which  converted  at  an 

$. 


5.  Total  dividends  paid  or  accrued  on  such  shares  during  the  year  . 

exchange  rate  of equals  in  dollars 

6.  Amount  of  tax  (evidenced  by  attached  receipts,  or  return)  paid  en  bloc  to  foreign  government 

which  converted  at  an  exchange  rate  of ® equals  in  dollars . $ 

7.  Portion  of  tax  paid  for  claimant  individually  (total  tax  withheH  item  6,  divided  by  total’  numberof  sharca’erf 

COTporation  stock  outstanding,  item  4,  and  this  result  multi^plied  by  number  of  shares  held  during  the  year, 

8.  Less  amount  of  taxes  properly  allocate(l  to  the  ^vidends  declar^  during  the  year  prior  to  acquisition  or  after 

the  (iispoeition  of  stock  not  held  during  the  entire  year $ 


9.  Balance  of  tax  paid  for  claimant  incKvidually  by  withholding  corporation  (item  7 minus  item  8)_ 


$- 


SCHEDULE  D. 

i'Tax  Paid  or  Accrued  ‘ to  a Possession  of  the  United  States  on  Behalf  of  a Partnership,  Estate,  or  Trust,  in  Which  Claimant  Has  an  Interest. 

Partnership,  estate,  or  trust 

(Nam(^5)  ^ " ■ (Addrea.) 

Fiduciary  (if  estate  or  trust) __  . . .. 

(Name.)  * ’(Ad‘dr'^)“ 


Character  and  extent  of  claimant’s  interest  in  partnership,  estate,  or  trust 

Name  of  possession  of  U.  S Character  of  tax.. 

Statute  imposing  tax 


(Income,  war-profits,  or  excess-profits.) 


(To  be  named  fully  and  clearly  so  as  to  be  easily  identified.) 

Date  of  accrual  — Date  of  payment  (if  paid) 

(To  be  given  even  iX  claim  is  based  on  paynwait.)  (To  bo  given  even  il  claim  is  based  on  acxirucl.) 

1 . Total  not  income  on  which  this  tax  was  based 

2.  That  amount  of  such  total  net  income  to  which  claimant  would  Jmve  been  entitled  as  partner  or  b^eficiary  hiLi 

no  such  tax  of  the  partnership,  estate,  or  trust  accrued  or  been  paid  to  that  possession  (claimant’s  share  of 

3.  Ratio  of  that  amount  of  total  net  mcome  to  which  claimant  WDuld’have  b©^  entitl^,  to  total  net  i 


which  this  tax  was  based  (item  2 divided  by  item  1) 

ax®  payment  or  accrual  to  that  jxiesei 
ax  which  was  based  on  claimant’s  shi 

which,  (converted  at  an  exchange  rate  of ®)  equals  in  dollars 


4.  Total  amount  of  this  tax®  payment  or  accrual  to  that  jxiesession  (evidenced  by  attached  receipt  or  return) 

5.  That  amount  of  this  tax  which  was  based  on  claimant’s  share  of  tho  income  taxed  (item  3 multiplied  by  item  4) 


(In  foreign  money.) 


> See  note  1,  page  3. 

CJ— 880» 


• Seo  note  2,  page  3. 


' Soe  note  3,  page  3. 


‘Seenerte  4,  pages. 


® See  nolo  5,  page  3 


Page  7.  of  I'orni  1116. 


Income  Tax 
Supplementary  Page  31 


(Kamo.) 


“Tax  Paid  or  Accrued  ’ to  a Foreii 
Partnership,  estate,  or  trust 

Fiduciary  (if  estate  or  trust) "(Kime’) 

Character  and  extent  of  claimant’s  interest  in  partnership,  estate,  or  trust . 


SCHEDULE  E. 

louuhT  on  Uehalf  of  a Partnerslrip,  Estate,  or  Trust  in  Which  Claimant  Has  an  Interest. 


(Address.) 


(Address.) 


Name  of  foreign  countrj'. 
Statute  imposing  tax  — 
Date  of  accrual. 


Character  of  tax 


(Income,  -war-proats,  or  excess-profits.) 


(To  be  named  luUy  and  clearly  so  as  to  be  easUy  identified.) 
Date  of  payment  (if  paid) . 


(To  be  given  even  If  claim  is  based  on  accrual.) 


(To  be  given  even  if  claim  is  based  on  payment.) 

1 . Total  net  income  on  which  tfiis  tax  was  based  

2.  That  amount  of  such  total  net  income  which  was  derived  from  so^c^  in  that 

3.  Ratio  of  total  net  income  from  sources  in  that  foreign  country  to  total  net  income  on  which  this  .ax  was  b^sed 

(item  2 divided  by  item  1) 

4.  Total  amount  of  this  tax*  payment  or  accrual  to  that  foreign  c^ntry  (emdenced 

That  amount  of  this  tax  which  was  based  on  income  derived  from  sources  in  that  foiugn  emmay  {Aeok  o meJU 

6.  'rfat^nmunt^S  t^taTnerincoiM'deriVe  from  sources  in, that  iorei^  coun-fry  to 

have  .been  entitled  as  partner  or  beneficiary  had  no  such  tax  accrued  or  been  paid  to  aiat  loreign  cou^itry 


7.  Eitio'Sthat  amount  S-ch  totei'nSin'^^mrdeiiv^'fr^^^^  in  that  foreign  j to  w^ch  cJai^t 

would  have  been  entitled,  to  such  total  net  income  derived  from  sources  in  teat  foreign  coimtxy  (item  6 

8.  That  amount  of^hie  tax  which  was  based  on  claimant’s  share  of  income  derii^  from  sources  in  tiit  foreign 

country  (item  5 mnltipUed  by  item  7) - -----S  ^ch  (converted  at  an  ex  Ji.nge  rate  cf 

^ (In  foreiga  numey.) 


J)  equals  in  doillars 


$--- 


Nora.-If  more  space  is  required  tor  any  of  the  preceding  schedules  use  a separate  sheet  of  paper  giving  information  as  iadiexted  on  this  ftn  m. 

SUMMARY  OF  CREDITS  CLAIMED 
For  Taxes  Paid  or  Accrued*  oa  Behalf  of  Ckimant  Individually. 

To  possessions  of  the  U.  S. : Item  1 of  Schedule  Al,  $ ; Item  1 of  Schedule  A2,  — ; Total,  $ 

To  foreign  countries : Item  5 of  Schedule  Rl,  $ ; Item  5 of  Schedule  B2,  $ ; Total,  S - 

To  foreign  countries:  Item  9 of  Schedule  Cl,  $ i.Item  9 of  Schedule  C2,  $. ; ToUl,  $ 

For  Taxes  Paid  or  Accrued*  on  Behalf  of  Partnership,  Estate,  or  Trust  in  Which  Cmimant  Has  an  Interest. 

To  toeign  countries:  Item  5 of  Schedule  D,  $ — ; Item  8 of  Schedule  E,  $ iota., 

Total  credit  claimed  (to  be  inserted  in  the  attached  income-tax  return  on  Form  ICHO  as  item  41) 

I swear  (or  afErm)  that  the  above  is  to  the  best  of  my  knowledge  and  belief  a trae  and  complete  statement  of  facts  in  connection 
with  the  credit  for  income,  war-profits,  and  excess-profite  taxes  aboi-e  claimed. 


(licteim  is  made  by  agent,  the  reason  therefor  must  be  stated  co  this  iine.) 

Sworn  to  (or  afl&rmed)  and  subscribed  before  me  this day  of 


(Signature  of  indiviiAual  & agent.) 


(Address  of  individual  or  agent.) 


(Official  capacity.) 


1 If  attached  incom^tax  return  is  based  on  income  “received,"  then  “paid  or  accrued  " wherever  it  appeamin  this  form  means  ‘'paid."  if  based  on  income  “accrued/' 
then  or  accrued**  means '*actTued.''  (See  Section  200  of  the  Revsnue  Act  oi  ISIS.)  r. 

« To  secure^^^for  taxes  paid  or  accrued  to  possessions  of  the  Vnited  States,  claimant  must  be  a citizen  or  resident  of  the  United  Sta.es.  (See  Section  222  (a)  an 


‘ State  this  item  in  terms  of  the  currency  used  in  making  the  return  on  which  this  tax  was  based  (e.  g.,  pconds,  Iraaos,  marks).  , . , ,,, 

6 Claimant  must  here  state  the  rate  of  exchange  used  and  must  also  attach  a statement  describing  in  reascnable  detail  why  and  how  he  determined  upoai  this 

^ » The  person^iMking  this^im  must  attach  to  it  a statement  describing  in  reasonable  detail  the  method  by  which  he  determined  the  amount  of  Uem  2 (“That 

locmt  of^ch  total  net  income  which  was  derived  from  sources  in  that  foreign  country  ).  (OVEE) 


Page  3 of  Form  1116. 


Income  [Tax 
Supplementary  Page  32. 


PROVISIONS  OF  STATUTE  AND  REGUUTIONS  GOVERNING  USE  OF  THIS  FORM 

SECTION  222  OF  KEVENUE  ACT  OF  1918. 


Sec.  222.  (o)  That  the  tax  computed  tmder  Part  II  of  this  title  shall  be  credited  with: 

(1)  In  the  case  of  a citizen  of  the  United  States,  the  amount  of  any  income,  war-profits,  and  excess-profits 

taxes  paid  during  the  taxable  year  to  any  foreign  country,  upon  income  derived  from  sources  therein, 
or  to  any  possession  of  the  United  States;  and 

(2)  In  the  case  of  a resident  of  the  United  States,  the  amount  of  any  Budh  taxes  paid  during  the  taxable  year 

to  any  possession  of  the  United  States;  and 

(3)  In  the  case  of  an  alien  resident  of  the  United  States  who  is  a citizen  or  subject  of  a foreign  coimtry,  the 

amount  of  any  such  taxes  paid  during  the  taxable  year  to  such  country,  upon  income  derived  from 
sources  therein,  if  such  country,  in  imposing  such  taxes,  allows  a similar  credit  to  citizens  of  the  United 
States  residing  in  such  coimtry;  and 

(4)  In  the  case  of  any  such  individual  who  is  a member  of  a partnership  or  a beneficiary  of  an  estate  or  trust, 

his  proportionate  share  of  such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the  ta'xable 
year  to  a foreign  country  or  to  any  possession  of  the  United  States,  as  the  case  may  be. 

(6)  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  credits  by  the  taxpayer,  or  if  any 
tax  paid  is  refunded  in  whole  or  in  part,  the  taxpayer  shall  notify  the  Commissioner,  who  shall  redetermine 
the  amount  of  the  tax  due  under  Part  II  of  this  title  for  the  year  or  years  affected,  and  the  amount  of  tax 
due  upon  such  redetennination,  if  any,  shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the  coUector, 
or  the  amoimt  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with  the 
provisions  of  section  252.  In  the  case  of  such  a tax  accrued  but  not  paid,  the  Commissioner  as  a condition 
precedent  to  the  allowance  of  this  credit  may  require  the  taxpayer  to  give  a bond  with  sureties  satisfactory 
to  end  to  he  approved  by  the  Commissioner  in  such  penal  sum  as  the  Commissioner  may  require,^  conditioned 
for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  due  upon  any  such  redetermination;  and- the 
bond  herein  prescribed  shall  contain  such  further  conditions  as  the  Commissioner  may  require. 

(c)  These  credits  shall  be  allowed, only  if  the  taxpayer  furnishes  evidence  satisfactory  to  the  Commis- 
sioner showing  the  amount  of  income  derived  from  sources  within  such  foreign  country  or  such  possession  of 
the  United  States,  and  all  other  information  necessary  for  the  computation  of  such  credits. 

AETICLES  882  AND  383  OF  REGITIATIONS  45. 


Akt.  382.  Meaning  of  terms. — “Amount  of  * * * taxes  paid  during  the  taxable  year”  means  taxes 
proper  (no  credit  being  given  for  amounts  representing  interest  or  penalties)  paid  or  accrued  during  tho 
taxable  year  on  behalf  of  the  individual  <iraitning  credit.  “Foreign  coimtr/’  includes  within  its  meaning  any 
foreion  sovereign  state  or  seK-governing  colony  (for  example,  the  Dominion  of  Canada) , but  does  not  mcludo 
a foreign  municipality  (for  example,  Montreal)  unless  itself  a sovereign  State  (for  example,  Hamburg).  “.Iny 
possession  of  tha United  States”  includes,  among  others,  Porto  Rico,  the  Philippines  and  the  Virgin  Islands. 
As  to  the  meaning  of  “sources”  see  abides  91-93.  See  also  section  1 of  the  statute. 


Art  383.  Conditions  of  Allowance  of  Credit.— (a)  When  credit  is  sought  for  income,  war-profits,  or  excess- 
profits  taxes  paid  other  than  to  the  United  States,  the  income-tax  return  of  the  individual  must  be  accom- 
panied by  this  form,  carefuDy  filled  out  with  ail  the  information  called  for  and  with  the  calculations  of 
credits  indicated,  and  duly  signed  and  sworn  to  or  affirmed.  When  credit  is  sought  for  taxes  an  -ady 
paid  the  form  must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  When  credit  is  sought  for 
taxes  accrued  the  form  must  have  attached  to  it  the  return  on  which  each  such  accrued  tax  was  based.  This 
receipt  or  return  so  attached  must  be  either  tho  original,  a dupbeate  original,  a duly  certified  or  authcmicated 
copy  or  a sworn  copy.  In  case  only  a sworn  copy  of  a receipt  or  retimn  is  attached,  there  must  bo  kept 
roadiiy  available  for  comparison  on  request  tho  original,  a duplicate  original,  or  a duly  certified  or  authenti- 
cated copy,  (b)  In  the  case  of  a credit  sought  for  a tax  accrued  but  not  paid,  tho  CommisFionor  may  require, 
as  a condition  precedent  to  the  allowance  of  credit,  a bond  from  tho  taxpayer  in  addition  to  this  form.  It 
such  a bond  is  required.  Form  1117  shall-bo  used  for  it.  It  shall  bo  in  such  penal  sum  as  the  Commissioner 
may- prescribe,  and  shall  be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  duo 
upon  any  redetennination  of  the  tax  made  necessary  by  such  credit  provmg  inconect,  with  such  further 
conditions  as  the  Commissioner  may  require.  This  bond  shaU  bo  executed  by  the  taxpayer,  his  agent  or 
represenutivo,  as  principal,  and  by  sureties  satisfactory  to  and  approved  by  the  Commissioner.  Soo^lso 
section  1320  of  the  statute. 


Income  Tax 

Supplementary  Page  33. 


Page  4 of  Form  1116. 


•rHEAffCTRY  dsparthknt 

INTEKHAI,  RKVSNUB  BUB*AT7 

Form  llW 

Income  and  Profits  Tax  Bond 

UNDER  . SECTION  222  (b)  OP  THE  REVENUE  ACT  OP  1918 


KNOW  ALL  MEN  BY  THESE  PRESENTS,  That  we,  

as  principal,  and 

of 


as  surety,  are  held  and  firmly  bound  unto  the  United  States  of  America  in  the  sum  of. 

Dollars,  lawful  money  of  the  United  States,  for  the  pay- 
me7t  wtoeorwTbindTuidriT'our  administrators,  successom,  and  assigns,  jointly 

and  severally,  firmly  by  these  presents. 

Whereas,  at  the  time  of  filing  his  return  of  income  for  the  taxable  year  1918  the  above-bounden 
principal  claimed  a credit  on  his  income  tax  return  for  taxes  accrued  but  not  paid  to  foreign  ooimtri^ 
It  to  ^possessions  of  the  United  States,  and  duly  attached  thereto  Form  1116  prescnbed  for  such 

purpose;  and 

Whereas,  Section  222(b)  of  the  Revenue  Act  of  1918  provides -that  in  the  case  of  such  a tax 
accrued  but  not  paid,  the  Commissioner,  as  a condition  precedent'  to  the  allowance  of  the  credit,  may 
require  the  taxpayer  tp  give  bond,  with  satisfactory  sureties,  in  such  penal  sum  as  the  Com^ioner 
may  require,  conditioned  upon  the  payment  by  the  taxpayer  of  any  amount  found  to  be  due,  and 
the  amount  of  this  bond  is  equivalent  to  the  amount  of  the  credit  claimed,  which  is  m accordance 
with  the  Commissioner’s  requirements: 

Now,  therefore,  the  condition  of  the  foregoing  obligation  is  such  that  if  the  principal  shall,,  on 
notice  and  demand  by  the  Collector,  duly  pay  any  income,  war  profits,  or  excess  profits  tax  foimd  by 
the  Commissioner  to  be  due  from  the  principal,  under  the  Revenue  Act  of  1918,  and  shall  other^e 
well  and  tnily  perform  and  observe  all  of  the  provisions  of  law  and  the  regulations,  then  this  obhgation 
is  to  be  void,  but  otherwise  to  remain  in  full  force  and  virtue. 

Witness  our  hands  and  seals,  this , day  of - > 1919* 

Signed,  sealed,  and  delivered  in  ike  ‘presence  of—^ 

8-1 


Principal. 


-[L.  B.] 


Surety. 


-[l.  8.1 


Bond  approved  this 


day  of - 1919. 


Commissioner  of  Internal  Revenue. 


Income  Tax 

Supplementary  Page  34. 


Form  1118 — United  States  Inteskal  tlrrEmrE  Sebttce. 


CLAIM  FOR  CREDIT  ON  INCOME  AND  PROFITS  TAX  RETURN  OF  DOMESTIC  CORPORATION  FOR 
TAX-ES  PAID  OR  ACCRUED  TO  FOREIGN  COUNTRIES  OR  TO 
POSSESSIONS  OF  THE  UNITED  STATES 


Name  of  coi-poration Address. 


(Clty  or  town.) 


(Street  and  number.) 
(State.) 


Oa  liehalf  of  tho  abovo-aamed  domestic  corporation,  credit  ia  hereby  claimed,  on  the  attached  corporation  income  and  profits  tax 


return,  which  is  based  on  income  


(Ilecelved  or  accrued.) 


for  the  taxable  year 


'ir  calendar  year,  give  year;  if  fiscal  year,  give  months.) 


ot  the  above-named  corporation,  for  taxes as  follows: 

(Paid  or  accruett.) 


Taxes  Paid  or  Accrued'  During  the  Taxable  Year  to  Possessions  of  the  United  States  on  Behalf  of  the  Corporatioiu 

Schedule  A1. 

Name  of  p»)6seseion  imposing  ta.t Character  of  tax 

(Income,  war  profits,  or  excess  profits.) 

Date  of  accrual Date  of  payment  (if  paid) i 

Statute  imposing  ta.x 

(To  be  named  fully  and  clearly  so  as  to  be  easily  Identifirt.) 

1 . Amount  of  tax  payment  (evidenced  by  attached  receipt  or  return) J which  (converted 

(In  foreign  money.) 

at  an  exchange  rate  of ®)  equals  in  dollars $ j., 


Taxes  Paid  of  Accrued'  During  the  Taxable  Year  to  Possessions  of  the  United  States  on  Behalf  of  the  Corporation. 

Schedule  A2. 

Name  of  poaecsBion  imposing  tax Character  of  tax 

Date  of  accrual Date  of  payment  (if  paid) 

Statute  imposing  tax , 


ncome,  war  profits,  or  excess  profits.) 


(To  be  named  fully  and  clearly  so  .as  to  be  easily  identified.) 

1.  Amount  of  txr  payment  (evidenced  by  attached  receipt  or  return) 2 -which  (converted 


(In  foreign  money.) 


at  an  exchange  rate  of  ^)  equals  in  dollars. 


Taxes  Paid  or  Accrued'  During  the  Taxable  Year  to  a Foreign  Country  on  Behalf  of  the  Corporation, 

Schedule  Bl. 

Name  of  foreign  country  im  posing  tax Character  of  tax 

Date  of  accrual 

•Statute  imposing  tax 

1.  Total  net  income  on  which  tax  was  based 

2.  That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  foreign  country  ‘ 


(Income,  war  profits,  or  excess  profits.) 
Date  of  payment  (if  paid) 


(To  be  oamod  fully  and  clearly  so  as  to  bo  easily  identifle<U 


d.  Ratio  of  total  net  income  derived  from  sources  in  that  foreign  country  to  total  net  income  on  which  tax  was  bas^ 
(item  2 divided  by  item  1) 

4.  Total  amount  of  this  tax  payment  or  accrual  to  that  foreign  country  (evidenced  by  attached  receipt  or  return) 

6.  That  amount  of  this  tax  payment  or  accrual  which  was  based  on  income  derived  from  sources  in  that : 


country  (item  3 multiplied  by  item  4)  * which  (converted  at  an  exchange  rale 

(In  foreign  money.) 

of *)  equals  in  dolhus  $ 


See  notes  on  page  3. 


[Page  1 of  Form  1118.1 


Income  Tax 

Supplementary  Page  35, 


Taxes  Paid  or  Accrued*  During  the  Taxable  Year  to  a Foreign  Country  on  BehaH  of.  the  Ccrporationw 

Schedule  B2. 

Character  of  tax 

Date  of  pa>'inent  (if  paid)  


income,  war  profits,  or  excess  profits.) 


Name  of  foreign  country  imposing  tax 

Date  of  accrual 

Statute  imposing  tax easUy  ideaUfied.) 

1,  Total  net  income  on  which  tax  was  based ^ 

2,  That  amount  of  such  total  net  income  which  was  derived  from  sources  in  that  ^ 

3,  Ratiooftotalnetincomederivedfromsourbesinthatforeign  country  to  total  net  income  on  w^chtoxw^^  ^ 

(item  2 divided  by  item  

4 Total  amount  of  this  tax  paymout  or  accrual  to  that  forcigu  couutry  (evidcuced  thatS™  '■ 

•s!  tL  amount  of  thi.  tax  paymeut  or  accrual  which  waa  baaed  op  income  derived  rrom  eources  in  that  foreign 

1-  4 V * which  (converted  at  an  exchange  rate 

country  (item  3 multiphed  by  item^) 5 


of equals  in  dollarB 


Taxes  Paid®  during  the  Taxable  Year  to  a Foreign  Country  or 

Schedule  C 


a Possession  of  the  United  States  by  a ControUed  Foreign  Corporation. 


(Nora.— No  credit  can  be  claimed  for  taxes  paid  on  behalf  of  a 
the  act.) 


foreign  corporation  the  dlvldends-from  which  are  deductible  from  gross  income  under  section  234  ol 


'Name 


Foreign  , 
Corporation 


Address 


(Street  and  number.) 


(Caty  or  town.) 

Incorporated  under  the  laws  of  — 

Number  of  shares  outstanding 

Number  of  shares  owned  by  above-named  domestic  corporation 
Has  preferred  stock  voting  rights?  . — 

N ame  of  foreign  country  or  possession  of  United  States  imposing  tax 


(Country.) 

Preferred  Common. 


Total 


Capital  stock 


....  Character  of  tax 

(Income,  war  profits,  or  excess  profits.) 


Statute  imposing  tax  ---^"j^g—g^YiiuyMTclwiyioas'to 


Date  of  pajTnent  of  tax. 


Was  any  part  of  the  net  income  on  which  this  tax  ' 


based,  derived  from  sources  within  the  United  States?  .... 


(Yes  or  no.) 


I Period  of  accrual  of  this  tax  payment « 

2.  Amount  of  this  tax  payment  (evidenced  by  attached 


receipt)’ 


Total . 


Total 


3.  Net  income  on  which  this  t^x  was  based  ® - 

4.  Amount  received  during  the  taxable  year  by  the  above-named  domestic  corporation 


foreign  corporation 

6 Ratio  of  the  amount  of  such  dividends  to  total  net  income  on 


which  this  tax  was  based  (item  4 divided  by 


(total  items  2 multipliedf  by  item  5.  unless  this  product  is  in  excess 
items  2 must  be  entered  here  instead  of  such  product) vfn (orei^'monefd*  ’ 

exchange  rate  of  .v .^)  equals  in  dollars - " — 


See  notes  on  page  a 


[Page  2 of  Form  1118.] 


Income  Tax 

Supplementary  Page  36. 


SUMMARY®  OF  CREDITS  CLAIMED  FOR  TAXES  PAID  OR  ACCRUED  OW  BEHALF  OF  CORPORATION. 


To  a possession  of  the  United  States  (item  1 of  Schedule  Al) 

To  a possession  of  the  United  States  (item  1 of  Schedule  A2) 

To  a foreign  country  (item  5 of  Schedule  Bl) 

To  a foreign  country  (item  5 of  Schedule  B,2) 

of  th^United  States  ^nbeMfTfr'cTnlrolWfor;^^^ 


— $... 


Sworn  to  and  subscribed  before  me  this 

day  of 


President. 


(Officii  capacity.) 


« S .ate  this  Item  m terms  o!  the  currency  used  in  making  the  return  on  which  this  tax  was  based  (e.  g pounds  francs  marks) 

Claimant  must  here  state  rate  of  exchange  used  and  must  also  attach  a statement,  describing  In  reasonable  detil  why 'and  how  ho  determined  upon  this  particular 

^ Xll6  DCPSrtTi  rn!\lrint>  tlii  e r»lni  rr*  mi^o*  a i*...  -a. . 


o — ..iijf  «x»v*  uww  uv  uci-crimucu  upon  ems  pi 


1918)  \V^cre  beginning  and  ending 

pSen^a^ed  columns  1 

I f*  0'  ‘Ws  tax  payment  which  uccnicd  in  such  period 

additional  schedules  should  bo  attached,  and  the  credit  claimed  on  each  such  schiKlulokouKvi^itten  InloTwsTuE^^^  “ cpntroUod  forci^orpomtion. 


[Page  3 of  Form  1118.] 


Income  Tax 

Supplementary  Page  37. 


iMSTRUCTiONS  REGARDING  USE  OF  FORM  1118 


CREDIT  FOR  TAXES 


Provisions  of  Revenue  Act  of  191.8 

Seo.  238.  (a)  That  in  the  case  of  a domestic  corporation  Ihe  total  taxes  imposed  for  the  taxable  year 
by  this  title  and  by  Title  III  shall  be  credited  with  the  amount  of  any  income,  war-profits  and  exceas-profits 
taxes  paid  during  the  taxable  year  to  any  foreign  country,  upon  income  derived  from  sources  therein,  or  to 
any  possession  of  the  United  States. 

If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as  credits  by  the  corporation,  or  if  any  tax 
paid  is  refunded  in  whole  or  in  part,  the  corporation  shall  at  once  notify  the  Commissioner  who  shall  redeter- 
mine the  amount  of  the  taxes  due  under  this  title  and  under  Title  III  for  the  year  or  years  affected,  and  the 
amount  of  taxes  due  upon  such  redetermination,  if  any,  shall  be  paid  by  the  corporation  upon  notice  and 
demand  by  the  collector,  or  the  amount  of  ta.xes  overpaid,  if  any,  shall  be  credited  or  refunded  to  the.co^ora- 
tion  in  accordance  with  the  provisions  of  section  252.  In  the  case  of  such  a tax  accrued  but  not  paid,  the 
Commissioner  as  a condition  precedent  to  the  allowance  of  this  credit  may  require  the  corporation  to  give  a 
bond  with  sureties  satisfactory  to  and  to  bo  approved  by  him  in  such  penal  sum  as  he‘may  require,  conditioned 
for  the  pajment  by  the  taxpayer  of  any  amount  of  taxes  found  due  upon  any  such  redetermihation ; and.  the 
bond  herein  prescribed  shall  contain  such  further  conditions  as  the  Commi^ioher  may  require. 

(b)  This  credit  shall  be  allowed  only  if  the  taxpayer  furnishes  evidence  satisfactory  to  the  Commissioner 
showing  the  amount  of  income  derived  from  sources  'within  such  foreign  country  or  such  possession  of  the 
United  States,  as  the  case  may  be,  and  all  other  information  necessary  for  the  computation  of  such  credit. 

(c)  If  a domestic  corporation  makes  a return  for  a fiscal  year'  beginning  in  1917  and  ending  in  1918, 
only  that  proportion  of  this  credit  shall  be  allowed  which  the  part  of  such  period  within  the  calendar  year 
1918  bears  to  the  entire  period. 

Sec.  240.  (c)  For  the  purposes  of  section  238  a domestic  corporation  which  owns  a majority  of  the  voting 
stock  of  a foreign  corporation  shall  be  deemed  to  have  paid  the  same  proportion  of  any  faicome,  war-profits 
and  excess-profits  taxes  paid  (but  not  including  taxes  accrued)  by  such  foreign  corporation  dming  the  taxable 
year  to  any  foreign  country  or  to  any  possession  of  the  United  States  upon  income  derived  from  sources 
without  the  United  States,  which  the  amount  of  any  dividends  (not  deductible  under  section  234)  received  by 
such  domestic  corporation  from  such  foreign  corporation  during  the  taxable  year  bears  to  the  total  taxable 
income  of  such  foreign  corporation  upon  or  with  respect  to  which  such  taxes  were  paid:  Provided^  That  in 
no  such  case  shall  the  amoimt  of  the  credit  for  such  taxes  exceed  the  amount  of  such  dividends  (not  deductible 
under  section  234)  received  by  such  domestic  corporation  during  the  taxable  year. 

Conditions  of  Allowance  of  Credit. — (a)  When  credit  k sought  for  income,  war-profits  or  excess- 
profits  taxes  paid  other  than  to  the  United  States,  the  income  and  profits  tax  return  of  the  corporation  must 
be  accompanied  by  this  form,  carefully  filled  out  with  all  the  information  called  for  and  with  the  calculations 
of  credits  indicated,  and  duly  signed  and  sworn  to.  When  credit  is  sought  for  taxes  already  paid  the  form 
must  have  attached  to  it  the  receipt  for  each  such  tax  payment.  When  credit  is  sought  for  taxes  accrued 
the  form  must  have  attached  to  it  tho  return  on  which  each  such  accrued  tax  was  based.  This  receipt  or 
return  so  attached  must  be  either  the  original,  a duplicate  original,  a duly  certified  or  authenticated  copy, 
or  a sworn  copy.  In  case  only  a sworn  copy  of  a receipt  or  return  is  attached,  there  must  be  kept  readily 
available  for  comparison  on  request  the  original,  a duplicate  original,  or  a duly  .certified-  or  authenticated 
copy,  (b)  In  the  case  of  a credit  sought  for  a tax  accrued  but  not  paid,  the  Commissioner  may  require  as  a 
condition  precedent  to  the  allowance  of  credit  a bond  from  the  taxpayer  in  addition  to  this  form.  If  such 
a bond  is  required.  Form  1119  shall  be  msed  for  it.  It  shah'  be  in  such  penal  sum  as  the  Commissioner  may 
])rescribe,  and  shall  be  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  tax  foimd  due  upon, 
any  redeterraination  of  the  tax  made  necessary  by  such  credit  proving  incorrect,  ■with  such  further  conditions 
as  the  Commissioner  may  require.  This- bond  shall  be  executed  by  the  taxpayer,  its  agent  or  representative, 
as  principal,  and  by  sureties  satisfactory  to  and  approved  by  the  Commis.sioner.  See  also  section  1320  of  the 
Revenue  Act  of  1918.  Articles  611  and  383,  Regulations  45. 

[Page  4 of  Form  1118.] 


Income  Tax 

Supplementary  Page  38, 


.DELIVER  OR  SEND  THIS 
RETURN  SO  AS  TO 
REACH  COLLEaOR  OF 
INTERNAL  REVENUE  ON 
OR  BEFORE  THE  ISTh 
DAY  OF  THE  THIRD 
MONTH  AFTER  THE 
CLOSE  OF  THE  PERIOD 


IF  EXTENSION  OF 
TIME  FOR  FIUNG  RETURN 
HAS  BEEN  GRANTED 
THE  AUTHORIZATION 
MUST  BE  ATTACHED  TO 
THIS  return  . 


Page  1— Simmiary 

Form  1120-A— tTNITED  STATES  INTERNAL  REVENUE  SERVICE 

CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

FOR 

Fiscal  Period  begun , and  ended—; , 1919 

(Print  plainly  corporation’a  name  and  principal  place  of  butinets) 


Auditad  by 


^OT  WUTE  IN  TKS  STACt) 
PAYMENT 


(Caahier’a  Stamp) 


• bCHLDULL  1 — NET  INCOME. 

iTClf.  1 

1 wa 

2913 

i 191S 

1«  Net  Incoue  for  Each  Prewar  Year  (an  finallv  determined  on  inrome  retIlpn^ 

1 

1 

1 

2.  Plus  amount  of  corooration  excise  or  income  tax  paid  in  each  vear 

Tl 

1” 

3.  Totals  for  1911, 1912,  and  1913  (If  in  any  of  these  years  there  was  a loss, 'enter  zero  I 

for  that  vear  l . 

9i 

i 

1 

4.  Less  dividends  received  in  191.3. 

8.  Net  Total  FOR  1913  I 

$ 

6.  Average  Net  Income  for  Prewar  Period  (sum  of  items  on  line  3 for  1911  and  1912  and  Item  5 for  1913^ivided  by  nunlbi 

7.  Net  Income  por  Taxarle  Year  (Item  27,  Schedule  A.  pace  21  ' 

sr  of  vearsl 

4.  Imb  adjustmentB  by  way  of  deductions  (from  Schedule  G). 

5.  Remainder  

0.  Plus  of  minus  clian^es  in  invested  capital  during  year  (from  I 

Schedules  J and  II)..  ' 

7.  Total  (or  Remainder).  

8.  Less  deduction  on  account  of  inadmissible  assets  (from  I 

Schedule  L) ' 

9.  Invested  Capital  por  Each  Yea»_ 


10.  Average  Invested  Capital  for  Prewar  Period  (sum  of  items  on  line  9 for  1911, 1912,  and  1913,  divided  by  number  of  years). 


11.  Increase  or  Decrease  in  Invested  Capital  for  Taxable  Year  as  Compared  with  Average  Prewar  Invested  Capital  (indicate  decrease  hv  “D”l 

1$ 

. SCHEDULE  III-EXCESS-PROFITS  AND  WAR-PROFITS  CREDITS. 

(If  this  return  ii  made  for  a period  less  than  a full  year;  Items  3 and  8 must  be  reduced  as  provided  in  paragraph  1,  page  1 of  Instructions.) 

Yicess-propits  credit. 

1.  Eight' per  cent  of  invested  capital  for  taxable  year  (Item  9. 
last  column.  Schedule  III 

WAH-PROFTTS  CREDIT. 

4.  Average  net  ipcome  for  prew  period  (Item  6,  Schedule  I)... 

$ 

2.  EzemptioD.  Except  for  forGign  mrpnrAtinnR  ^<^'1 

5.  Plus  10%  of  increase  or  minus  10%  of  decicase  shown  by 
Item  11,  Schedule  II 

3.  Excess-Propits  Credit  (Item  l.nliw  Item  21 

t 

1 

6.  (a)  TotaIfOp  (or  Difference  Between)  Items  4 and  5, 
or  (6)  10®  of  invested  coital  for  taxable  year  (Item 

9 laBt  COiUTTIT)  Schedule  11)  is  laryAr 

7.  Exemption,  except  for  foreign  corporations  ($3,000).. 

8.  War-Profits  Credit  (Item  6 plus  Item  7) 

$-  _. 

1.  Bcackets. 

2.  Amount  op  Net  Income  (Item 
7.  Schedule  IfTiV'EAcn  Bracket. 

3.  ExcEss-pRonrs  Credit 
(Item  3,  Scheduij!  III). 

4,  Remaindee  Subject  to  Tax. 

5.  Rate. 

1J)19  RATES. 

R.  AVOTTKT  np  Tat 

7.  TlAtP 

1>'.8  RATES.  

1.  Not  over  20®  of  in- 

vested capital 

$ 

$ 

$ 

20% 

J. 

2.  Over  20®  oi  invested 
capital 

40% 

o\jyo 

65® 

0). 

9.  Totals 

$ 

WAR. 

-PROFtTS  AND 

EXCESS.PROF 

ITS  ta: 

1 

K (Brack 

1 

ot  thr 

omputat 

in  Sectio 

n 301  (a) 

and  (fc 

Net  income  for  taxable  year  (Item  7,  Schedule  I)_ 


$ 


7.  Eighty  petient  of  Item  6 

8.  Less  Item  3 column  8 (if 

smaller  than  Item  7) 

9.  Tax  in  Bracket  three  (Item  7 minus  Item  8— if 


Item  8 is  the  larger,  make  no  entry).... 


Leas  amount  of  war-profits  credit  (Item  8,  Schedule  HI) 

Remaindee  _____________________ 

Total  at  1918  Rates  por  War  Profits  and  Excess  Profits  as  Computed  under  Section  301  (a)  (Item 3,  columns,  plus  Item  9) 

Total  at  1918  Rates  for  War  Profits  and  Excess  Profits,  ip  Computed  under  Section  302  (see  Instructions,  page  1,  paragraphs  6 and  7) . 
Total  at  1919  Rates  por  War  Paoms  and  Excess  Profits,  if  Computed  under  Sections  301  (c)  and  302. 


55==?=^====== ............... -WiOr.>ft6PlTS  AND  EXCfeaa-PhOFlYS  tAXr 

numb^o7  months*i™the*p'^d  computed  under  Section  .303,  So't,  or  337,  w’hich  the  numbcr'of  months  in  1919  is'ofThe 


.1  ..  I 


..I I. 


I-  I 


Zicmptlon,  •xctpt  for  forr  Ipi 
eorporvllMit  |2,0rj0  uxiIcm 
murti  It  for  lest  than  a year 


22.  Income  tax.  1919  rates,  10J6,  Item  20 : 

23.  That  proportion  of  Item  21  which  the  number  of  months 

in  1918  IS  of  the  number  of  months  in  the  period 

24.  That  proportion  of  Item  22  which  the  number  of  months 

in  1919  is  of  the  number  of  months  in  tho  period 

II  25.  Total  income  tax  (Item  23  plus  Item  24) ^ 


War  and  cxceas-profita  Ux  (Ite.-n  15).. 
Income  tax  (Item  25) 


Total  of  Iteina  28  and  27 

htm  allowable  credit  for  iDcome,  wor-proBto. 
iniat  **Total  credit  claimed  " item  from  Form  1118, 

Total  Tax  (ToUl  of  Items  26,  27,  28,  and  20) 

Tax  peid:  On  lubmission  of  tenUtive  return  (1031T).  * 


excees-prorits  taxes  paid  or  accrued  to  loreign 

which  must  be  filled  out  and  attached  if  auch  credit  ie  nugbt). 


of  tho  United  States,  (llcre 


; by  remittanroaerompanving  this  return.  8 


Page  1 of  Form  1120A 


Income  Tax 

Supplementary  Page  39, 


Page  2— Incom©  Schediiles 


corporations,  banks,  insurance  companies,  and  other  corporations  required  to  submit  statements  of  ^rnings  and  expenses  to  any  nationat  slate 
ublic  officer  mav  eubmitinstead  of  Scheciulo  A,  a statement  of  earnings  and  expenses  in  the  form  in  wMch  submitted  to  such  officer  In  sue  h cases  the  taxable  net  earnings  will  be  reconciled 
- c ..  and  exncnse  statement  submitted,  and  should  be  entered  as  Item  7,  Pchediile  1.  page  1.  


SCHEDULE  A— TAXABLE  NET  INCOME 

Note. — Railroad 

public  officer  may  subu,,v  i.—v..™  — — . 

by  means  of  Schedule  B with  the  net  profit  shown  by  the  earnings  and  expense  statement 
■ ~ CROSS  INCOME. 

1.  Gross  sales.  Ices  returns  and  allowances — rv i'V 

2.  cost  of  g^s  sold,  exclusive  of  expenses,  repairs,  and  other  items  called  lor  separately 

below  (tom  Schedule  A2) 


Gro®  income  tom  operations  other  than  trading  or  manufacturing,  less  allowances  (tom  Schedule  A3)... 

Interest  on  obligations  of  the  United  States  or  its  possessions  not  exempt  (tom  Schedule  A4) 

Interest  tom  other  sources  (from  Schedule  A5) 


3. 

4. 

5. 

6.  Rentals. 


7.  Royalties 

8.  Share  of  net  income  earned  during  period  by  personal  service  corporations  (whether  received  or  not) — 

9.  Dividends  on  stock  of  foreign  corporations  (from  Schedule  A9),  $.— ; dividends  on  stock  of  domestic 

corporations  other  than  personal  service  corporations,  8 

— . J__ 

elow) 

Total  of  Items  1 to  10 


.;  total.. 


10.  Oro«‘^income  tom  all  other  sources  except  dividends  (not  including  any  amount  in  respect  of  sales  of  capital  assets  or 

cellaneous  investments— see  Item  22,  below)  (tom  Schedule  AlO) - 

11. 


DEDUCTIONS. 


12.  Ordinary  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  includ- 
ing cost  or  value  of  capibd  assets  or  miscellaneous  investments  sold  during  taxable  year—see  Item  22)  (from  j-chedule  At.). 
13  Compensation  of  officers  (including  salaries,  commissions,  and  other  compensation  in  whatever  form  paid)  (from  bchcduic 
A13) 


14.  Repairs  (including  labor,  supplies,  overhead,  and  other  items  properly  chargeable  to  repairs)  (from  Schedule  A14) ......... 

la"  Interret  (except  on  indebtedness  incurred  or  continued  to  purchase  or  carry  obligations  or  securities,  other  than  obligations 
of  the  United  States  issued  alter  September  24,  1917,  the  interest  on  which  is  wholly  exempt  from  income  lax)... 

I (except  Federal  income,  war-profits,  and  excess-profits  taxes,  taxes  which  are  a credit  under  Section  238,  and  taxes 
issed  against  local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  assessed) 


17,  Debts  ascertained  to  be  worthless  and  charged  off  within  the  taxable  year. 


18.  Exhaustion,  wear  and  tear  (including  obsolescence)  (tom  Schedule  A18). 

19.  Depletion.  If  depletion  is  claimed  bv  a mining  company,  the  information  called  for  by  Form  A (revised),  or  it  by  an  oil 

or  gas  company.  Form  N (which  forms  can  be  obtained  from  the  Callector),  must  be  submitted  vnth  this  return 


Total  of  Items  12  to  19 


Diffebence  Between  Items  11  and  20  ... 


22.  Profit  or  loss  on  sales  of  capital  assets  and  miscellaneous  investments  (from  Schedule  A22)..............-..--...--.;.— 

23.  Loas^sustained  during  the  taxable  year,  and  deducted  under  Section  234  (a)  (4)  (from  Schedule  A23)  (extend  in  last  column 

net  total  of  Items  22  and  23) - 


24.  Net  incxime  for  taxable  year  exclusive  of  deductions  for  dividends  and  amortization  (total  of  or  difference  between  Items  21  and  23,  the  latter  ^ extended) 

25.  Dividends  received  tom  domestic  corporations,  not  personal  service  corporations  

26.  Amortization  of  war  facilities  (tom  Schedule  A26)  (extend  total  of  Items  25  and  26) 

27.  Net  Income  for  Taxable  Yeah  (Difference  between  Items  24  and  26,  the  latter  t 


1 extended)  (to  be  entered  as  Item  7,  Schedule  I,  page  1). 


SCHEDULE  B— RECONCILIATION  OF  NET  PROFIT  PER  BOOKS  WITH  TAXABLE  NET  INCOME. 


adjustments  are  j ! ! I'  6.  Nontoxabte  income^^^  | 

. ! 1 

and  contributions > 1..........' •--1  • (6) 

i 1 

(f>)  Income,  war-proSts,  and  eiceei-proflts  taxeis  paid  or  accroed  to 

llie  I'nited  Statvt,  iU  posfiCSbioiti.  or  a loictgu  country 

1 ' 

poiiucai  suoaiviMoujs  uitriwi 

(c)  Interest  on  Farm  Loan  Bonds  issued  under  I- ederal  | j 1 

(c)  Special  improvement  taxes  tending  to  increase  the  1 

vcilno  rrf  tho  nmnprtv  1 

...i 1 

1 1 1 

(d)  Furniture  and  fixtures,  additions,  or  betterments 

****  pvppnRP.'^  nn  flie  hooks  ..  

(J)  Dividends  on  stock  of  domestic  corporations—. 

(f)  Dividends  on  slock  of  pcr.'onal  service  corporations 
declared  out  of  piolitsearucd  jirior  to  taxable  period. 

1 

(r)  Replacements  covered  by  depreciation—......—..— 

(/)  Insurance  premiums  paid  on  tho  life  of  any  ofiicer  or 
employee  for  the  benelilofthecorporalionor  business. 
(y)  InUrett  on  inlebteJuttss  incurred  or  coDtiDUcd  to  purchase  of 
carry  obligaiiuutor  sefuriiiet  {other  thau  ohligalions  of  the 
baited  Siaies  issued  alter  September  li:4,  1917j  the  interest 

- 

(/)  Other  items  of  uonffi.vablc  income  (to  be  detailed)... 

VJ)  

npoL  which  is  wholly  exempt  trom  income  tat.. 

(h)  Additions  to  reserves  for  bad  debts,  conliugcncies,  etc. 

(to  be  detailed) 

(') 

7.  Charges  against  reserves  for  bad  debts,  contingencies,  etc. 

(j)  - - 

— 

( ) . 

(0  — 

(m)  Other  imallowable  deductions  (to  be  detailed) 

(n)  



a AmoOBl  necessary  to  a.ljust  profit  or  loss  with  the  amonnts  reported 

'Z.  Distributive  shareof  net  income, earned  during  period  by  per- 
sonal service  corporations  not  received  or  acciuedou  books... 

4,  Amoant  necessary  to  adjust  book  profit  or  lost  with  the  amonnts  reported 

9.  Taxable  net  income  (Item  27,  Schedule  A) 

5.  Total 

1 1 . 

SCHEDULE  C— BALANCE  SHEETS.  i r i i 

Attach  hereto  balance  sheets  as  of  the  beginning  and  end  of  the  taxable  year  (preferably  in  Jiarallel  columii."\  showing  as  nearly  as  practica  et  e et.u  s ca 

balance  sheeta  should  be  prepared  from  the  hooka  and  should  be  in  agreement  therewith,  or  any  differences  should  be  retoncii  .d.) 

ASSETS  (Continued). 

Taed  AmcU— Continued. 

Less  reserve  for  doiircciation. 

Net  Value. 


1 hand,  certifl* 


ASSETS. 

Cosh  (Including  cash  in  bank  a 
cates  of  deposit,  etc.). 

Tra^e  icceasU  ud  Det«»  tecchtble  (before  deducting 
reserves  for  lossc.v). 

Otber  Accouats  ud  ootes  re«eiT«bte  (to  be  classified). 


Raw  materials. 

Work  in  progress. 

Finisbed  products. 

Supplies. 

S.  Bonds  and  obUgatioDs  (each  issue  t 
^ stated  separately). 


ASSETS  fCDDtloued). 
lofestmenu— Continued— Bonds- 

Exempt  (municipal,  state,  etc.)* 
Other, 

Lotos  tod  tdvaecet: 

To  olTicers  and  employees. 

To  others. 

Deferred  chtrgea  U fei 
Filed  tssett: 

Laud. 

Buildings. 

Uachiuery 
Tools  ana  minor  . 

Delivery  equipment. 

OfTicc  fumiiuJ'e. 

Other  (state  character). 

Total. 


leafs,  good  irtll.  tod  ether  latto^blc  ttsefs: 

Paid  for  in  cash  or  other  tangible  property. 
Paid  for  In  stock  (other  than  stock  dividends). 
Created  by  stock  dividend  or  otherwise, 

tcenot: 

On  bonds. 

On  slock. 

Total. 


LIABILITIES. 

Notes  piyable: 

To  olficers  and  stockholders. 

To  others  (iucludiug  bank  loahs). 

Accounts  ptyttle: 

Trade. 

Other. 

Accrued  erpeoses  aod  reserret.  tho  charges  erwting  which  ar* 
allowable  dedueuous  from  income  (to  be  dvlailcd). 

Reserve  for  losses  ©a  ooics  and  occooots  receirthlo. 

Rc8cr>es  for  eooiinienclcs.  etc.,  thc  charges croaltng  which  aro  not 
allowable  deuuctious  from  iocome  (tc  bouttauwj). 

Cipiul  slock  ooist.iHlia*  (lobcclasnflcil). 

Snrplai  .al  godividcA  piokts. 

Total. 


A corporation  having 
in  parallel  columns)  as  of 


a net  income  of  $3,000  or  more,  which  was  in  exUtcnce  during  at  IcMt  c 
the  beginning  of  .its  tirst  full  prewar  year  and  as  of  December  31, 1913. 


! full  prewar  year,  should  also  attach  to  this  return  similar  balance  sheets  (preferably 


SCHEDULE  D-ANALYSIS  OF  SURPLUS  ACCOUNT. 

iccount,  Bhowin 

1.  Surplus  at  beginning  of  year  per  books. 

d:  2.  Total  net  profat  per  books  and  per  ^hedule  B (Item  1). 


L/— 1 •Jiw  vt  i-iv/k-F  w.  w . - e r II  i 


Deduct:  5.  Dii-idcnds  (state  date  payable  and  amount  of  each,  and  whether  in  cash 
or  in  stock).  , 

6.  Other  debits  to  surplus  (to  be  detailed). 

4 Total  ol  Items  1 2 and  3'  I - Surplus  at  end  of  year  per  books. 

A corporation  having  a net  income  of  $3,000  or  more,  which  was  in  existence  during  at  least  one  full  p-  war  year,  should  also  attach  to  tins  return  a simH».anJyrU  ol  its^lut 
account  for  its  first  full  prewar  year  and  for  each  subsequent  year  down  to  the  beginning  of  the  taxable  year. 


Add;  2.  Total  net  profit  per  books  ana  per  tscneai 
3.  Other  credits  to  surplus  (to  be  detailed). 


Page  2 of  Form  1 120A 


Income  Tax 

Supplementary  Page  40. 


Page  9— Income  Schedules — Ck>nclu^od 
SCHEDULES  SUPPORTING  SCHEDULE  A 

The  Bchedulcfl  called  for  below  should  be  prepared  and  firmly  stapled  to  this  return.  Desimato  each  schedule  with  the  number  of  the  item  in 
Schedule  A which  it  explains.  Make  schedules  on  paper  of  uniform  size  so  far  as  practicable.  In  the  space  provided  for  the  purpose  on  page  6 list 
fJl  schedules  attached  to  this  return,  giving  the  title  and  schedule  number  of  each.  References  to  Regulations  45  are  to  revised  edition. 


SCHEDULE  A2:  COST  OF  GOODS  SOLD,  EXCLUSIVE  OF  EXPENSES, 

REPAIRS,  AND  OTHER  ITEMS  CALLED  FOR  SEPARATELY. 

In  support  oMtem  2,  Schedule  A,  eorporetione  engaged  in  manulacturing  or  tnding 
operations  should  submit  an  analysis,  in  reasonable  detail,  of  the  cost  of  goods  sold.  This 
etatement  should  ordinarily  include  the  following  items  but  should  not  include  any  ex- 
pense items  called  for  separately  in  Schedule  A. 

1.  Inventories  at  beginning  of  period  (to  be  reconciled  with  balance  sheet). 

2.  Purchases  during  period. 

3.  Labor  and  wages  ordinarily  charged  to  manufacturing  coat  on  the  corporation’s 

books,  showing  the  principal  items  separately. 

4.  Other  expenses  ordinarily  charged  to  manufacturing  cost  on  the  corporation’s 

books.  (State  eepaiately  large  or  unusual  items.) 

6.  Totai,. 

Deduct: 

6.  Inventories  at  close  of  period  (to  be  reconciled  srith  balance  sheet). 

7.  Cost  of  goods  sold  (Item  6 lese  Item  6). 

Note. — Inventories  should  be  valued  at  (s)  coat  or  (6)  cost  or  market,  whichever  is 
lower,  provided  that  whichever  basis  is  used  must  be  applied  to  each  item  in  the  inventory 
and  not  to  a port  only.  Inventories  should  be  recorded  in  a legible  manner,  properly 
computed  and  summarized,  end  should  be  preserved  as  a part  of  the  accounting  records 
of  the  taxpayer.  (See  Articles  1531  to  1685  of  Regulations  No.  45.) 

If  claims  lor  losses  on  inventories  or  rebates  on  sales  made  under  Section  214  (a)  12 
of  the  Act  have  been  allowed,  the  opening  inventory  must  be  correspondingly  adjusted. 
(.See  Article  266  of  Regulations  45.) 

State  here  which  of  the  above-mentioned  bases  for  valuing  inventories  is  used  in  this 
return  


SCHEDULE  A3:  GROSS  INCOME  FROM  OPERATIONS  OTHER  THAN  TRAO< 

ING  OR  MANUFACTURING,  LESS  ALLOWANCES. 

Submit  a schedule  showing  the  nature  and  amount  of  the  prindpsl  items  included 
in  Item  3,  Schedule  A. 

life  insurance  companies  should  enter  as  Item  3,  Schedtile  A,  the  total  premiums 
received  from  policyholders  less  such  portion  thereof  as  has  been  paid  back  or  credited  to, 
or  treated  as  an  abatement  of  premiums  of,  such  policyholders  within  the  taxable  year. 
(See  Articles  54S  and  649  of  Regulations  45.) 

Mutual  marine  insurante  compamea  should  report  as  Item  3,  Schedule  A,  the  gross 
premiums  collected  and  received  by  them  less  amounts  paid  for  reinsurance. 

SCHEDULE  A4:  INTEREST  ON  OBLIGATIONS  OF  UNITED  STATES  OR  ITS 

POSSESSIONS  NOT  EXEMPT. 

For  exemptions  on  intcreet  on  Liberty  Bonds  or  other  obligations  of  the  United  States, 
see  :Vrticles  77  to  82,  Regulations  45. 

Attach  hereto  schedule  showing  in  separate  columns  the  following  information  with 
respect  to  obligations  of  the  United  States  issued  since  September  24, 1917: 

(1)  Class  of  obligations  (list  each  issue  separately). 

(2)  First  and  last  dates  of  each  period  during  which  the  corporation’s  holdings  of  that 
class  of  obligations  remained  unchanged. 

(3)  Amount  of  obligations  of  that  class  held  by  the  corporation  during  each  such 
period. 

(4)  Amount  by  which  each  amount  entered  in  column  (3)  exceeds  the  maximum 
exemption  lor  that  class  of  obligations. 

(5)  Kate  of  interest. 

(0)  Interest  derived  from  each  amount  of  principal  stated  in  column  (4). 

Enter  as  Item  4,  Schedule  A,  the  toUl  of  column  (6)  for  all  classes  of  obligations. 

Submit  also  a sUtement  showing  the  amount  of  interest  derived  from  bonds  and  other 
obligations  of  the  United  Stales  and  its  pcsseaaiona,  exclusive  of  those  described  in  the 
table  above. 


SCHEDULE  A5:  INTEREST  FROM  OTHER  SOURCES. 

Submit  a schedule  showing  tho  source,  nature,  and  amount  of  the  piindpel  itema 
included  herein,  the  minor  items  being  grouped  in  one  figure.  The  total  of  the  schedule 
riiould  be  entered  as  Item  5,  Schedule  A. 

lor  intcreet  on  foreign  bonds  submit  a schedule  showing  (a)  name  of  country;  (6)  kind 
of  obhgadons  ( whether  national,  state,  municipal,  or  corporate  obligationa);  .(c)  amount 
of  p.-incipal ; and  (<f)  amount  of  interest. 


SCHEDULE  A9:  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS. 
Submit  a ahedulo  showing  (a)  name  of  corporation;  (6)  country  in  which  oiganized; 
total  par  value  o(  stock  held;  and  (rf)  amount  of  dividends. 


INCOME  FROM  ALL  OTHER  SOURCES  EXCEPT 
DIVIDENDS  (not  includ  ng  any  amount  In  reapoct  of  capital  aaaata  or 
miacellanaoua  jnverjjnenta). 


Submit  a schedule  showing  the  source,  nature,  and  amount  of  the  principal  items 
included  herein,  the  minor  items  being  grouped  in  one  figure.  The  total  of  the  schedule 
ahouid  be  eubj-eJ  us  Item  10,  Schedule  A. 


SCHEDULE  A12:  OP-DINARY  AND  NECESSARY  EXPENSES  (except  amounta 
called  for  aeparately  Iti  Schedule  A and  not  including  coat  w value  of 
capital  aaaata  or  mlacellaneoua  inveatmanta  aold  during  taxable  year). 

Submit  a aUlem.  nt  showing  chara^.ter  and  amount  of  tho  principal  items  included 
in  22,  .Schedule  A, 

I-uuratce  compaiiiee  should  state  separately  in  Schedule  A12  (a)  the  net  addition 
rn<iuired  by  law  to  be  made  within  tho  taxable  year  to  reserve  funde  (including  in  the 
cuse  of  artcaament  insurance  companiee  tbo  actual  deposit  of  sums  with  state  or  terri- 
mrud  oin.  era  pui.aiut  to  law  as  additions  to  guarantee  or  reseno  funds;  and  (4)  tho  total 
ol  sums  otiier  than  dividends  paid  within  the  year  on  policy  and  annuity  contracts. 

Cerprmiiorj  covering  life,  health,  and  accident  insurance  combined 

111  one  p-ili-y  i-micI  in  the  weekly  premium  r»yment  plan  continuing  far  life  and  not 
subjea  t/,  . anc.lls.ion  should  reprrt  in  Schedule  A12  such  part  of  the  net  addition  (not 
reumied  f,y  law)  made  within  the  taxable  year  to  reoervo  funds  as  tho  Commiaeioncr 
tiudu  L b'-  *"cnui/‘,:d  ior  tho  protectiou  o(  tho  huldon  of  auch  polidea. 

Mnl.mi  marine  inrirance  companioi  should  report  In  Schedule  A12  amounta  repaid 
!,u  S'-'  previously  poid  by  them  and  intoroot  paid  upon 

’ tainmeut  and  the  payment  thercoL 


auch  amounta  between  tbo  i 


Mutual  insurance  companies  (other  than  mutual  life  and  mutual  marine  insutanM 
companies)  that  require  their  members  to  make  premium  deposits  to  provide  for  leases 
and  expenses  should  report  in  Schedule  A12  the  amount  of  premium  depeeita  returned 
to  their  policyholders  and  the  amount  of  premium  deposits  retained  for  the  payment  of 
losses,  expenses,  and  reinsurance  reserves  (unless  deducted  elsewhere  in  Schedule  A). 

SCHEDULE  A13.  COMPENSATION  OF  OFFICERS, 

Submit  a schedule  showing  for  each  officer  (1)  name;  (2)  duties;  (3)  time  devoted  to 
auch  duties;  (4)  shares  of  stock  owned,  (a)  common,  (6)  preferred;  (5)  total  annual  com* 
pensation  for  the  taxable  years  1917, 1918,  and  1919;  and  (6)  reasons  for  increases. 

SCHEDULE  A14:  REPAIRS  (Including.  labor,  supplies,  overhead,  and  othar 

items  properly  chargeable  to  repairs). 

Submit  a schedule  shouting  the  nature  and  amount  of  the  principal  items  incliufed 
in  Item  14,  Schedule  A. 

Incidental  repairs,  whidi  do  not  add  to  tho  value  or  appreciably  prolong  the  life  of 
property,  are  deductible  as  expenses.  Expenditures  for  new  buildings  or  for  permanent 
improvements  or  betterments  which  increase  the  value  of  the  property  are  chargeable 
to  capital  account.  Expenditures  for  restoring  or  replacing  property  are  not  deductible 
under  this  or  any  other  item  of  the  return.  Such  expenditures  are  chargeable  to  capital 
account  or  to  depreciation  reserves,  depending  on  the  treatment  of  depreciation  on  the 
books  of  the  taxpayer. 


SCHEDULE  A18:  EXHAUSTION,  WEAR  AND  TEAR  (including  obaolsacenca). 

Submit  a columnar  schedule  containing,  in  the  most  practicable  form,  substantially 
the  following  information: 

1.  A classification  of  depreciable  assets  subdivided  on  the  bases  of  (a)  character,  (6) 
term  of  useful  life. 

2.  The  year  of  acquisition  of  such  assets  if  prior  to  tax  year.  If  acquired  during  tax 
year,  give  actual  date. 

3.  Nature  and  amount  of  consideration  given  in  payment. 

4.  The  fair  market  value  of  such  assets  March  1, 1913,  if  acquired  before  that  Aafa 

6.  The  estimated  life  or  term  of  reasonable  usefulness  of  such  assets  from  date  aiKiuired 
or  from  March  1,  1913,  if  acquired  prior  thereto.  Give  reasons  for  your  conclusionB, 

6.  For  each  class  of  assets  state — 

(o)  The  total  provision  for  depreciation  made  on  the  books  of  the  corporation 
from  date  of  acquisition  to  the  beginning  of  the  taxable  year, 

(6)  The  total  amount  of  depreciation  (exhaustion,  wear  and  tear,  including  obso- 
lescence) claimed  for  the  taxable  year. 

7.  A reconciliation  of  all  figures  in  this  schedule  with  corresponding  figures  ^fleeted 
in  thc'balance  sheets. 

8.  If  ^y  plan  of  depreciation  other  than  the  “straight  line’’  method  contemplated  by 
the  above  instructions  is  used,  a full  explanation  thereof,  with  justification,  should  be  given. 

SCHEDULES  A22  and  A23:  PROFIT  OR  LOSS  ON  SALES  OF  CAPITAL  ASSETS 

and  miscellaneous  investments,  and  losses  sustained  during  the  taxable 

year  from  fire,  storm,  or  other  casualty,  or  from  theft,  not  compensated  for 

by  insurance  or  otherwise.  " 

Submit  a columnar  schedule  setting  forth  for  each  sale  of  capital  assets  or  of  miscella- 
neous investments  and  for  each  loss  during  the  taxable  year  the  information  called  for  below: 

1.  Description  of  property  sold  or  of  property  in  respect  of  which  a loss  is  claimed! 

2.  Date  acquired. 

3.  Fair  market  price  or  value  on  March  !,  1913,  if  acquired  before  that  date,  or  cost 

if  acquired  after  February  28,  1913.  ’ 

4.  Cost  of  improvements,  it  any,  since  February  23,  1913,  or  since  dale' of  acquisition 

if  acquired  after  February  28, 1913.  ' 

5.  Total  of  Items  3 and  4. 


6.  Depreciation  or  depletion  of  property  subject  thereto— 

(a)  Per  books. 

(5)  Accrued  but  not  on. books. 

7.  Salvage  value,  if  any,  of  property  on  which  a loss  is  claimed. 

8.  Amount  of  insurance  or  other  recovery  on  property,  if  any. 


9.  Proceeds  of  sale  or  cash  value  of  property  received  in 
falling  in  Item  22,  Schedule  A)  (see  Note  below). 

10.  Total  of  Items  G to  9,  inclusive. 

11.  Profit  or  loss. 

12.  Cause  of  loss  (for  losses  falling  in  Item  23,  Schedule  A). 


exchange  (for  transactiona 


Note.— Submit  evidence  substantiating  the  basis  used  by  you  in  arriving  at  the  cash 
value  of  property  received  in  exchange  for  other  property. 


SCHEDULE  A26:  AMORTIZATION  OF  WAR  FACILITIES. 


Taxpayers  making  claim  for  amortization  ahouid  spread  the  amortization  allowance 
in  accordance  with  tho  profiU  of  tho  business  over  tho  entire  amortization  period  in 
monthly  estimates,  and  should  enter  as  their  amortization  deduction  in  this  return  the 
aggregate  amount  assigned  to  those  months  of  tho  amortization  period  wliich  arc  included 
in  the  fiscal  year  of  the  taxpayer.  Taxpayers  making  return  for  a fiscal  year  endirig  in 
1919  should  interpret  Article  185  of  Regulations  45  as  above  set  forth.  Taxpayers  will 
also  submit  a schedule  containing  information  called  for  in  Article  188,  Regulations  45. 


COMPENSATION  AT  RATE  OF  $3,000  OR  MORE  PER  ANNUM. 
Submit  a schedide  showing  for  each  employee  (U  a stockholder  of  tho  corporation), 
whose  compensation  is  at  tho  rate  of  $3,000  or  more  per  annum,  facts  similar  to  those  called 
for  in  Schedule  A13. 


WORKING  PAPERS. 

Every  corporation  should  preserve,  available  for  inspection  by  a revenue  officer 
working  papers  showing—  ‘ 

1.  The  balance  in  each  aecoupt  on  tho  corporation’s  Looks  tliat  was  used  in 

preparing  Schedule  A. 

2.  Tho  amount  deducted  from  each  such  balance  on  account  of  each  class  of  non- 

taxable  income,  unallowable  deduetions,  and  other  adjustments  indicated 
in  Schedule  1),  with  a reference  to  tho  number  of  the  item  in  Schedule  B 
in  whic  h eac  h amount  so  deducted  was  included. 

3.  The  remainder  of  eac  h such  balance,  analyzed  to  show  tho  amount  included 

in  each  item  of  Schcdulo  A,  with  a referciico  to  Iho  number  of  tho  item  in 
Schedule  A in  wlcicb  each  such  amount  was  includccL  a um 


Page  3 of  Form  1 120A 


Income  Tax 

Supplementary  Page  41 


Page  4 — rnvestecL  Capital  Scliediiles 

' SCHEDULE  E-CAPITAl,  SURPLUS,  AND  UNDIVIDED  PROHIS  AS  SHOWN  BY  BOOKS  BEFORE  ANY  ADJUSTMENTS  ARE  MADE  THEREIN. 


E4.  Stock  actually  outstanding  at  tho  end  of. the  preceding  taxable  year  should  be 
entered  in  this  schedule  to  the  extent  that  it  is  paid  up.  If  stock  or  shares  were  imu^  at 
a nominal  value  or  without  par  value,  the  entries  should  reflect  the  amounts  on  the  books 
in  respect  thereof  at  the  close  of  the  preceding  taxable  year. 

ES.  This  item  should  include  paid-in  surplus  per  books  at  the  end  of  tee  prw^mg 
year.  It  any  amount  is  claimed  under  Section  326  (a)  (2)  of  tee  Revenue  Act  of  1918  or 
under  Article  837  of  Regulations  45  the  amount  claimed  should  be  entered,  under  Item  l. 
Schedule  F,  and  not  in  this  schedule. 

E7.  Reserves  which  repr^et 
deductions  made  in  computing 
explained,  be  entered  on  line 
reconciled  with  balance-sheet  rc 
E9.  The  cost  (or  book  value 
the  preceding  taxable  year  shoi 
included  in  amount  entered 

the  corporation  and  not  cancele 

it  allocations  of  surplus  and  w 
net  income  as  returned  in  pr< 
7.  Such  entries  should  be 
Mcrvea. 

if  different  from  cost)  of  trea 
lid  be  deducted  on  line  9,  if  t 
on  line  4.  Treasury  stock  inc 
d,  regardless  of  the  reason  tor 

ere  not  accumulated  terou*h 
ivious  years  may,  if  properly 
identified  and  if  necessary 

sury  stock  held  at  the  end  of 
:he  par  value  of  such  stock  is 
dudes  all  stock  reacquired  by 
the  acquisition. 

Inn. 

isir 

1912 

Taxable  Yeab. 

Capital  stock  paid  up  and  actually  outstanding  at  the  close  of  the 
preceding  year: 

1 

$ 

$ — 

1.  First  preferred 



t' 

3.  Common 

$ 

$ 



$ 



4.  Total 

Surplus  and  undivided  profits: 

6.  Paid-in  surplus 



6.  Earned  surplus  and  undivided  profits ; 

7.  Reserves,  additions  to  which  are  not  deductible  in  comput- 

ing net  income  (to  be  reconciled  with  balance-sheet  items)  - 

r 

$ 



$ — 

-- 

8.  Grand  totals  of  Items  4,  6,  6,  and  7 

9.  Deduct  cost  of  treasury  stock  (or  book  value  if  different  from 



cost),  if  any  is  included  above  as  outstanding — . — 
10.  N ET  TOTAL  (Item  8 minus  Item  9) 

$ 

— 

.Is 1 

1 

SCHEDULE  F— ADJUSTMENTS  BY  WAY  OF  ADDITIONS. 


FI.  If  an  addition  to  invested  capital  is  claimed  in  Item  1,  Schedule  F,  mlinut  a stete- 
ment showing  (a)  the  kind  of  property,  (5)  the  year  in  white  it  was  paid  in,  (c)  from  whom 
acquired,  explaining  his  relationship  to  the  corporation,  (d)  the  ^tual  cash  value  of  such 
property  at  the  date  when  paid  in,  (<)  tee  par  val^ue  of  stock  or  tearra  issued  therefor  ^d 
the  amount  at  which  such  property  is  entered  m the  accounts,  (f)  the  basis  uMn  which  the 
actual  cash  value  of  the  property  was  determined  and  the  date  when  such  determination 
was  made,  and  M the  amount  of  depreciation  sustained  on  such  property  from  the  date 
of  acquisition  to  tee  beginning  of  the  taxable  year. 

Ft  If  an  addition  to  invested  capital  is  claimed  in  Item  2,  Schedule  F,  submit  a 
statement  showing  (a)  the  kind  of  prope^,  (6)  the  year  m wl^  it  w^ 
cost,  (d)  tee  amount  of  depreciation  sustained  on  such  property  from  the  date  of  acquimtion 
to  the  beginning  of  tee  taxable  year.  State  also  whether  each  item  sought  to  be  i^tered 
was  actusuly  used  or  usable  at  tee  beginning  of  the  taxable  year.  Were  these  expenditures, 

when  made,  written  off  in  Ueu  of  depreciation? M »,  explain  what  adjustments 

have  been  made  to  provide  for  depreciation,  in  view  of  the  pn 
Additions  in  this  item  aie  cumulative  to  the  beginn^  of  t 
For  all  additions  hereunder,  provifiion  must  be  made  for  depi 
the  respective  taxable  years.  ^ ^ 

F3.  If  any  addition  to  invested  capital  is  claimed  m Item 
cally  the  amount  of  depreciation  written  off  each  year  in  the  b 
amount  allowed  m -a  deduction  in  computing  net  income, 
cumulative  to  the  beginning  of  the  respective  taxable  years. 

F4.  If  any  jasets  of  the  trade  or  business  in  existence  ^ 
and  any  prewar  year  are  included  in  the  invested  capital  for 
such  prewar  year^  or  are  valued  on  a different  basis  in^mpi 
the  taxable  year  and  ^ch  prewar  y^r,  entries  should  be  ma 
the  invested  capital  for  each  prewar  year  affected  bo  as  to  val 
tkoflia  in  the  prewar  period  as  m the  taxable  year. 

iposed  restoration  to  surplus, 
he  respective  taxable  years.  ■ 
reciation  to  tee  beginning  of 

1 3,  Schedule  F,  state  specifi- 
ooks  of  tee  company,  and  the 
Additions  in  this  item  are 

luring  bote  tee  taxable  year  • 
tee  taxable  year  but  not  tor 
iting  the  invested  capital  for 
de  in  this  schedule  adjusting 
ue  such  assets  upon  the  same 

ItZM. 

19U 

19U 

L9U 

Taxable 

yea*. 

1.  Actoil  ash  taloe  of  tangible  propertj  clearl, 

oar  ralae  of  stock  issued  therefor  or  of  the  cash  or  other  coneldeimUoQ  paW 
therefor  (Articles  836  and  837) 

f 

$ 

$ 

$ — 

2.  Additions  to  surplus  (Articles  840  to  843) — — — 

3.  Depreciation  charged  in  the  accounts  of  the  corporation  but  not 

— 

— 

— 

— 

— 

allowable  as  a deduction  on  income  tax  returns , 

4.  Adjustment  of  valuation  of  assets  in  existence  both  during  tax- 

XXX 

XXX 

XXX 

X X . 

able  year  and  in  prewar  period  (Article  934) — — 

5.  . __  _____ 

— 

— 

— 

0. — — 

7.  - 

8.  Total—  — — 

$ — 

$ 

-J. 



I 

— 

— 

SCHEDULE  G— ADJUSTMENTS 

GI.  I8  any  patent,  copyright,  secret  process,  or  formula,  good  will,  trade-mark,  trade 
brand,  franchise,  or  other  mmilftr  intangible  property,  paid  in  for  stock,  carried  as  an  asset . 

by  the  corporation? If  so,  is  it  entered  on  the  books  at  a value  in  excess  of  ito 

actual  cash  value  when  paid  in? In  excess  of  the  par  value  of  the  stock  issued 

therefor? Is  the  aggregate  of  such  assets  acquired  prior  to  March  3, 1917, 

entered  on  the  books  at  a value  in  excess  of  25  per  cent  of  the  par  value  of  the  stock  out- 
standing on  March  3, 1917? Is  the  aggregate  of  such  assets  entered  on  the 

books  at  a value  in  excess  of  25  per  cent  of  the  par  value  of  the  stock  outstanding  at  the 
beginning  of  the  taxable  year? ^ ^ 

If  the  answer  to  any  of  the  foregoing  questioM  is  “yes,”  sub^t » 
separately  with  respect  to  such  assets  acquired  (1)  before  Mar^  3,  1917,  and  (2) 
aftCT  that  date:  (a)  Date  of  acquisition;  (6)  cash  value  at  that  dat^  mth  a complete  ex- 
planation of  the  basis  upon  which  such  cash  value  was  detenmn^;  (cj  v^ue  of  the 
stock  issued  therefor;  (d)  par  value  of  total  stock  outstan^ 

of  total  stock  outstanding  at  the  beginning  of  the  taxable  year;  (/)  the  value  at  which 
such  assets  are  entered  on  the  books  of  the  corporation. 

If  all  the  intangibles  were  acquired  before  March  3, 1917,  the  amount  by  which  (/)  ex- 
ceeds (iy,  (c),  25  per  cent  of  (d),  or  25  per  cent  of  (e),  whichever  is  lowest,  must  be  ^ter^  M 
Item  1,  Schedule  G,  for  the  t^ble  year  and  for  each  year  of  the  prewar  period  that  is 
affected. 

If  the  intangibles  were  acquired  on  or  after  Itoch  3, 1917,  the  amount 
entry  in  (/)  relafing  to  such  intangibles  exceeds  (5)  or  (c)  reUting  hereto,  or  25  per  cent  of 
(«),  whichever  is  lowest,  must  be  included  in  Item  1,  Si^etWe  G,  for  the 
Provided,  that  if  intai^bles  were  acquired  before  March  3, 1917,  and  also  on  or  af^  that 
date,  deduction  shall  bo  made  so  that  the  amount  included  m mvMted  capital  tte 
gate  of  intangiblea  shall  hot  exceed  26  per  cent  of  the  par  value  of  the  total  etocK  ouwtana* 
mg  at  the  beginning  of  the  taxable  year. 

Note.— If  the  stock  of  the  corporation  was  issued  at  a nomM  value  or  without  pM 
value,  for  the  purpose  of  the  computation  under  Item  1 the  par  value  shall  be  d^mea  te  do 
the  fair  market  value  as  of  the  date  or  dates  of  issue.  The  aggregate  value  so  determin^ 
of  s^k  outstanding  on  March  3, 1917,  or  at  the  beginning  of  the  taxable  year,  shaU  be  the 
basis  for  the  computation. 

G2.  Is  any  tangible  property,  paid  in  for  stock,  carried  as  an  asset  by  the  corporation? 
______  If  so,  is  it  entered  on  the  books  at  a value  in  excess  of  its  actual  cash  value  when 

received? In  excess  of  the  par  value  of  the  stock  paiitherefor? 

If  the  answer  to  either  of  the  foregoing  questions  is  “yes,”  *“*’““* 

fhen  acquiredT^)  par  value  of  the  stock  paid  therefor;  (<0  act^ 

’ when  paid  in;  (e)  the  basis  on  which  that  value  wM  detennin^; 

I property  is  entered  on  the  corporation's  ]^ks;  Md  .(s) 
which  such  value  exceed  the  allowable  value  under  eectioii  326  (a)  (2)  of  the  Itevenuo 
Act  of  1918.  Enter  this  amount  as  Item  2,  Schedule  G,  for  the  taxable  year  and  for  each 
year  of  the  prewar  period  that  is  affected. 

G3.  (a)  Was  any  stock  issued  by  the  corporation  ever  returned  as  a gift  or  fora  conrider- 

ation  substantially  leas  than  its  par  value?  _____  ^1)  If  e®,  what  was  the  total  par 
value  of  siich  stock?  - (e)  What  was  the  conridetation  paid  for  the  return 


BY  WAY  OF  DEDUCTIONS. 

thereof?  ¥ — (<0  What  amount  of  cash  or  its  equivalent  was  derived  from  the 

resale  of  such  stock?  $ («)  What  entries  were  made  in  the  accounts  to  evi- 
dence the  return  and  the  resale  of  such  stock?  — — 

The  excess  of  (M  over  (di  must  be  entered  aa  Item  3,  Schedule  G,  for  the  toable  year 
and  for  each  year  of  the  prewar  period  that  is  affected.  However,  no  d^uction  la  neces- 
sary if  adequate  adjustment  has  been  made  under  Item  2 of  this  schedule. 


G4.  Was  the  business  reorganized  or  consolidated  or  was  its  ownership 

was  there  a change  in  ownership  of  property  after  March  3, 1917?  K so,  answer 

thd  following  queatloDs: 

(a)  Did  an  interest  of  50  per  cent  or  more  in  the  businesB  or  in  the  property  which 
changed  ownership  remain  in  the  control  of  the  same  peraons,  corporations,  assodations,  or 
partnerships,  or  of  any  of  them? 

(5)  Were  any  of  the  assets  entered  on  the  books  of  the  corporation  making  this  return 
at  a higher  value  than  on  the  books-of  its  predecessor? 

(c)  If  such  previous  owner  was  not  a corporation  attach  a stetement  ehowiM  (1)  the 
cost  of  acquisition  to  the  previous  owner  of  any  asset  so  transferred  or  received ; (2)  expendi- 
tures sub^uent  to  that  date  for  betterment  or  development,  not  deducts  M exp^e  or 
otherwise  since  March  1, 1913,  by  such  previous  owner;  (3)  the  allowance  for  depreciation, 
depletion,  or  impairment  since  the  date  of  acquisition  by  such  previous  owner. 

(d)  If  all,  or  substantiaUy  all,  of  the  property  was  ^quired  from  a corporation  during 

the  taxable  year  attach  hSreto  balhnce  sheets  of  such  predecessor  corporation  as  of  the  begin- 
ning of  the  taxable  year  and  aa  of  the  date  immediately  prior  to  the  transfer  of  the  property 
toSe  corporation  making  this  return,  and  also  a balance  sheet  or  statement  of  the  co^ra- 
tion  this  return  showing  the  values  at  which  such  property  received  or  transferred, 

was  entered  on  the  books. 

Tie  increase  in  book  value  of  any  property  acquired  by  reorganization,  coi^Udation, 
or  change  of  ownership,  over  the  amount  aUowable  to  the  predecessor  corporation  or  over 
the  amount  as  computed  under  (cl,  if  the  previous  owner  wm  not  a corporation,  must 
be  deducted  from  the  invested  capital  for  the  taxable  year  as  Item  4,  Schedule  G, 

G5.  Is  any  property  (including  physical  property,  securities,  and  intangible  proper^) 
paid  for  with  c£h  or  with  other  tangible  property  entered  on  the  broks  of  the  corporation- 
at  a value  in  excess  of  the  amount  of  cash  paid  therefor  or  the  actual  cash  value  of  tho 

tangible  property  paid  therefor? If  so,  submit  a stetement  showing  (a)  kind  pt 

proMrty ; (6)  amoimt  of  cash  paid  therefor;  (c)  actual  cash  value  of  other  tangible  property 
paid^therefor;  (d)  how  that  value  was  deten^ed;  (<)  value  at  which  Uie  prop^y  M 
entered  on  the  books  of  the  corporation;  and  (/)  excess  of  (c)  over  (6)  or  (c).  T^ 
must  be  entered  as  Item  6,  Schedule  G,  tor  the  taxable  year  and  for  each  year  of  the  prewar 
period  that  is  affected. 

GC.  Has  adequate  provirion  been  made  in  the  expense  accounts  of  the  company  for 

(a)  losses  of  every  kind? _;  (5)  depreciation?  ...._— — ; (c)  obsolescence?  ' 

(d)  depletion  of  mineral  deposits,  timber  supplies,  and  the  like? 

If  adequate  charge  haa  not  been  made  for  depreciation,  depletion,  obfloleecence,  and 
other  loas^,  and  the  value  of  the  property  has  not  been  maintained  by  replacements  that 
have  been  charged  to  expense,  proper  additional  charges  therefor  must  be  compute  f^ 
all  years  in  which  they  were  not  made  on  the  books,  and  the  tot^  amount  of  such  ^arge® 
must  be  entered  as  Item  6,  Schedule  G,  for  the  taxable  year  (and  for  each 
war  period  that  wa*  affected)  and  deducted  in  amvin^j  at  the  iurplus  and  undivided  prufiU. 


Page  4 of  Form  1120A 


Income  Tax 

‘Supplementary  Page  42. 


Page  6 — Invested  Capital  Schedules — Continued 
SCHEDULE  G— ADJUSTMENTS  BY  WAY  OF  DEDUCTIONS  (Concluded). 


Item. 

1911 

1912 

1913 

Taxule  Yeab. 

1.  V^oatlon  oTpaleotj^  cojyrighLi^__s«re^proces«s,j)rJormulx.  good  will, 

$ 

$ 

3 

$ 

3.  Stock  returned  to  the  corpoiution  as  & gift,  etc.^ 

4*  Valuation  of  assets  acquired  in  reorganizations 

5*  Appreciation.  ^ . . . , 

4 T^epr^iatiof)  and 

7.  

9.  Total  Deductjons 

3 1 

$. 

* 1 

8 



SCHEDULE  H— CHANGES  IN  INVESTED  CAPITAL  DURING  TAXABLE  YEAR. 


1.  Change)  in  invested  capital  during  the  taxable  year  ordinarily  arise  in  one  or 
more  oi  thelollowing  ways: 

(«)  AddnioM  by  resjoa  of  th«  sale  of  capital  stock  or  the  Issue  of  capital  stock  for  tangible  or  other  assets. 

(b)  Liquidation  of  part  of  the  capital  by  retirement  of  stock  or  purchase  of  treasury  stock  not  out  of  current 

earnings. 

(c)  Payment  of  cash  dirldends  out  of  earnings  of  prior  years. 

(i)  Dednetion  of  the  amount  of  Federal  Income  and  eicess-proflts  taxes  for  the  previous  year. 

(r)  Payment  of  assessments  by  stockholders,  or  creation  of  pald>ln  surplus  by  contribution  of  stockholders. 

The  changed  with  reepect  to  taxes  probably  will  occur  in  every  case,  and  with  respect 
to  dividends  m most  cases.  Should  no  changes  respecting  these  be  not^,  the  reasons  for 
their  omission  should  be  stated. 

2.  The  following  instructions  should  be  followed  in  making  the  above  adjustments. 
Each  item  should  be  designated  as  an  addition  or  distribution,  distributions  being  desig- 
nated by  red  ink  or  otherwise. 

(a)  U stock  li  Issued  lor  cash,  the  actual  cash  received  (but  not  the  amount  of  discount)  should  bo  entered 
In  this  schedule.  Assets  (other  than  cash)  paid  In  lor  stock  must  be  valued  in  accordance  with  Section 
SaS  (a)  (3)  of  the  Be  venue  Act  ol  1818. 


(6)  If  capital  stock  of  the  corporation  Is  reacquired  but  not  paid  for  out  of  current  profits,  the  oast  of  such 
stock  should  be  deducted  from  investea  capital. 

(e)  Report  dividends  paid  out  ol  profits  of  prior  years  but  not  dividends  paid  out  of  profits  of  the  taxable 
year.  Any  distribution  made  during  the  first  60  days  of  the  taxable  year  shall  be  deemodto  have  been 
made  from  eornings  or  profits  accumulated  during  preceding  taxable  years;  but  any  distribution 
made  during  the  remainder  of  tho  taxable  year  shall  do  deemed  to  have  been  made  frem  the  profits 
for  that  year  to  the  oxtont  that  such  profits  are  sufficient.  (See  Article  1542.) 

(<f)  Tho  amount  ol  Federal  Income  and  excess-profits  taxes  payable  should  bo  deducted  os  of  tho  date  when 
duo  and  payable  whether  reserves  have  been  set  up  on  the  books  or  not.  (Soo  Article  S45.) 

3.  The  data  called  for  in  columns  1 to  5 should  Ije  given  for  all  transactions,  except 
that  columns  3 and  4 are  applicable  only  to  the  issue  or  reacquisition  of  the  corporation’s 
stock. 

4.  In  Column  6 enter  the  number  of  days  remaining  in  the  taxable  year  (incUidiqg 
the  date  of  change). 

6.  The  net  changes,  if  not  in  accordance  with  the  increasee  or  decreases  reflected  in 
the  balance  sheets,  should  be  fully  reconciled  therewith. 


L NaTCEE  or  ASDRIONa  add  DOTBIBUnOKS. 

3.  Date. 

3.  Nouber  or 
SSAKEa  Sols 

OE 

BEACqUIEED. 

4,  IrroRCASH, 
State  Peicb 
TEE  SHABE. 

B.  Amount  or  Cash  ob  Cash 
Value  Actually  Receiyeo 
OB  Paid  Out. 

6.  Nombee 
or  Days 
Eyfecuve. 

7.  Adjusted  Aveeaob, 

/ Column  5 X Column  0 \ 

1 Number  of  days  in  taxable  year./ 

1 

$ 

$ 

2 



3.  _ 

4. 

B 

8.  

7.  . . 

8. 

— 

— 

9.  



SCHEDULE  J-GHANGES  IN  INVESTED  CAPITAL  DURING  PREWAR  YEARS. 

(Compute  the  net  addition  or  reduction  separately  for  each  year.  See  instructions  under  Schedule  H.) 


1.  Nature  or  Assnion  and  Duteibutione. 

X Date. 

3.  Number  or 
Shares  Sold 

OB 

Bbacquxred. 

4.  Ir  FOR  Case, 
State  Peicb 
FEB  Shabe. 

5.  Amount  or  Cash  or  Cash 
Value  Actually  Received 
OE  PAm  Out. 

6.  No.  or 
Days  ' 
ErrsctiFt. 

7.  Aojubted  Atibaob. 

/ Column  0 X oolomn  0\ 
^Number  ofdaytlo  year./ 

1.  .. 

$ 

$ 

$ 

2.  . 

3.  _.. 

B.  

6. 

1 

1 

R 

1 

9.  _ _ 

1 

r" - 

10.  

r 

1 

12. 

13.. 

14  ..  

SCHEDULE  K— CHANGES  IN  INVESTED  CAPITAL  FROM  END  OF  PREWAR  PERIOD  TO  BEGINNING  OF  TAXABLE  YEAR,  NOT  SHOWN  IN  SCHEDULE  IX 


Income  Tax 

Supplementary  Page  43. 


Page  5 of  Form  1120A 


Page  6— Invested  Capital  Schedtiles  (Concluded)  and  Questions 


SCHEDULE  L— INADMISSIBLE  ASSETS. 


TTm  Uie  ccvpcntion  any  inadmisaible  aeseta  (i.  e.,  (tocka,  bonds,  and  other  obligationa, 

•xcept  obligationa  of  the  United  States,  the  income  from  which  is  not  taxable)? 

If  BO,  attach  hereto  a atatement  showing  for  1911,  1912,  1913,  and  the  taxable  year, 
separately,  the  facts  called  for  in  Items  (a)  to  (j)  of  this  schedule. 

If  the  income  from  such  assets  consists  in  part  of  or  proht  from  the  sale  or  other 
dispoeition  thereof,  or  if  all  or  part  of  the  interest  derived  from  such  assets  is  in  eSect 
included  in  the  net  income  because  of  the  limitation  on  the  deduction  of  interest  under 
Section  234  (a)  (2)  of  the  Revenue  Act  of  1918,  then  a correeponning  part  of  the  capital 
invested  in  su^  amets  is  deemed  an  admisible  asset  In  such  case,  set  forth  in  detail — 
(a)  The  various  kinds  of  incmne  derived  from  such  assets  7 nd  the  computation  of  the 
part  of  the  capital  invested  therein  which  is  deemed  an  admiserhle  asset 

For  the  purpoee  of  this  schedule,  inadmissible  assets  shall  be  valued  at  cost  of  acquiai- 
tion  except  that  if  the  taxpayer  has  in  previous  years  bt«n  allowed  a deduction  on  account 
of  the  fall  in  the  market  value  of  sectiriues,  such  assets  shall  be  valued  at  cost  leas  the  deduc- 
tion allowed.  Admissible  assets  shall  be  valued  as  provided  in  Sections  326,  330,  and  331 
of  the  Revenue  Act  1918  and  Articles  831-869,  931-934,  and  941  of  Regulations  45.  The 
aver^  amount  of  assets  of  each  Idnd  held  during  any  year  may  ordinarily  be  determined 
by  dividing  by  2 the  sum  of  the  amount  of  such  assets  held  at  the  beginning  of  the  year 


and  the  amount  held  at  the  end  of  the  year.  In  such  case  the  amount  of  admianble  aaets 
may  beet  be  determined  from  (1)  the  balance  sheet  as  of  the  beginning  of  the  year 
adjuzUd  with  respec^to  the  items  in  Schedules  F and  G,  and  (2)  the  balance  sheet  ia  of 
the  end  of  the  year  correspondingly  adjusted.  But  if  at  any  time  during  the  year  a sub- 
standal  change  has  taken  place  in  the  amount  of  such  assets,  the  average  amount  must  be 
determined  as  provided  in  Article  852  of  Regulations  45.  In  such  case,  show  in  detail— 
(5)  The  computation  of  such  amount. 

State  also — 

(c)  Amount  of  inadmissiblo  assets  held  at  beginning  of  the  year; 

Amount  of  inadmissible  assets  held  at  end  of  year; 

I Average  amount  of  inadmissible  assets  held  during  year, 

I Amount  of  admissible  assets  held  at  beginning  of  the  year; 

I Amount  of  admissible  assets  held  at  end  of  year; 

I Average  amount  of  admissible  aseets  held  during  year; 

Sum  of  («)  plus  (A): 

, Percentage  which  (<)  is  of  (i). 

lis  percentage  (j)  for  each  year  should  be  applied  to  the  figures  for  that  year  appearing 
uu  uus  7,  Schedule  11,  in  order  to  obtain  the  drauction  on  account  of  inadmiseibfe  aaets 
which  should  be  entered  on  line  8,  Schedule  IL  , ' 


QUESTIONS. 


KIND  OF  BUSINESS. 

1.  Explain  below  the  nature  of  the  coipontlDn’s  business  in  sufficient  detail  to  show 
in  which  of  the  following  general  classes  of  activitiee  it  falls: 

(1)  Agriculture  and  related  industries,  including  fishinr,  (2)  mining,  quarrying,  and 
relate  industries;  (3)  manufacturing;  (4)  construction;  (5)  trading;  (6)  transportation; 
(7)  storage;  (8)  other  services;  (9)  haiiMng  and  insurance. 

2.  If  the  businees  falls  in  any  of  the  classes  from  1 to  6,  state  the  special  product  or 
products  handled;  if  in  class  5,  state  whether  wholesale  or  retail,  or  both;  if  in  class  6,  rmte 
whether  rail,  water,  or  other,  whether  general  or  local,  and  the  special  commodities  (if 
any)  transported;  if  in  class  7,  state  the  special  commodities  stored  (if  any)  or  the  special 
kind  of  storage;  if  in  class  8,  state  in  detail  the  kind  of  service  rendered;  ii  in  class  9,  state 
the  branch  01  banking  or  insurance  engaged  in. 

3.  In  all  cases  state  whether  the  corporation  acta  as  principal  (using  its  own  capital) 
or  as  agent  or  broker  (on  cemmission)  or  as  both. 

(a)  Maiti  business : 


(6)  Collateral  businesses,  if  any 


9.  If  so,  furnish  a brief  narrative  history  of  the  busmese  and  submit  • eUtement 
dicwing— 

(a)  The  name  of  the  concern  taken  over  (or  from  which  the  property  was 
acquired);  ' 

(5)  The  nature  of  the  aseets  and  liahilitiee  so  acquired; 

(rt  The  total  par  value  of  the  stock  issued  therefor; 

(d)  The  value  at.  which  each  class  of  assets  was  carried  on  the  books  of  the  con 

cem  from  which  acquired  (if  obtainable,  submit  a balance  sheet  of  the 
predecessor  conce.m  as  of  the  date  of  acquisition  or  as  of  the  close  ol  its 
last  accounting  period  prior  thereto); 

(e)  The  value  at  whidi  each  item  was  entered  on  the  books  of  the  corporation 

makiDg  thia  return* 

10.  If  patents,  copyrights,  secret  processes  or  formula,  good  will,  trade-marks,  trade 
brands,  franchisee,  or  other  intangible  properly  were  acquir^,  stale  a1«^  the  on  which 
their  value  was  determined  and  bow  they  were  paid  for. 

11.  If,  at  the  time  of  any  purchase  or  reorganization  as  contemplated  in  question  8, 
any  property  was  entered  on  the  books  of  the  reorganized  concern  or  any  vendee  pred- 
cceaeoratavalneineicesscf  that  at  which  it  was  carried  on  the  broks  of  the  vendor  con- 
cern, state  the  basis  on  which  the  revaluation  was  made. 

AFriUATIONS  WITH  OTHER  CORPORATIONS  gO  BE  ANSWERED  BT  EVERT  CORPORATION). 

12.  Do  you  own  directly  or  control  through  closely  affiliated  interests  or  by  a nominee 
or  nominees  over  50  per  cent  of  the  outstanding  capital  stock  of  another  corporation  or  of 

other  cognitions? 

13.  Is  over  50  per  cent  of  your  capital  stock  owned  by  another  coiporatiim  or  by  two 

or  more  corporations  that  are  affiliated? 

14.  Is  over  50  per  cent  of  your  capital  slock  as  well  as  over  50  per  cent  of  the  capital 
stock  of  another  corporation  or  of  other  corporations  owned  or  controU^  by  the  same  indi- 

vddual  or  partneTship  or  by  the  same  individuals  or  pArtnpnatiijM? 

15.  Is  this  return  a consolidated  return  within  the  meaning  of  Articles  631  to  638,  in- 


OTHER  CONCERNS  IN  SAME  BUSINESS. 

4.  Enter  on  the  following  lines  the  names  and  addreseet  of  five  repreeentative  con- 
cerns in  your  locality  or  section  of  the  country  engaged  in  the  same  kind  of  businese: 


JNCORPORATION. 

5.  Date  of  incorporation 

6.  Under  the  laws  of  what  State  or  country? 

predecessor  BUSINESSES, 

7.  If  the  corporation  was  not  in  ecdstence  during  the  whole  of  any  one  of  the  calendar 
years  1911-1913,  is  it  in  any  way  an  outgrowth,  resmt,  continuation,  or  reorganization  of 

a busineas  which  wasin  existence  during  the  whole  of  any  one  of  these  years? 

If  the  answer  to  preceding  question  is  “Yes,”  give  name  under  which,  and  address  at 

which,  the  buainesB  of  the  predecessor  was  then  carried  on 


Is  the  present  organization  subetantially  a continuation  of  the  predecessor?.- 

Give  reasons  for  your  last  conclusion 

Have  you  used  the  prewar  data  of  the  predece«or  organization  in  the  preparation  of  this 
return? 

■ REORCUNEATION  AND  ACQUlsmON  OF  MIXED  ACfUtEGAUES  OF  ASSETS. 

8,  Has  the  corporation,  or  any  of  ilt  jrrtdmtton,  ever  been  reorganized,  or  has  It, 
or  a pTtdecator,  ever  taken  over  a going  busmese  or  acquired  a mixed  aggregate  of  tangible 
propWty,  patents,  and  copjtights,  arid  good  will  and  other  similar  intangible  property, 

and  paid  lor  such  property  in  whole  or  in  pert  with  stock  or  other  securities? 


elusive,  of  Regulations  45? 

16.  .AffJirled  corporatijns  as  indicated  in  12,  13,  or  14  above  must  comply  with  the 
foilcwii:-  requiremems: 

17.  If  the  answer  to  question  12  is  “yes.”  submit  a statement  showing  fc  ear*  of  the 
corparation.1  over  60  per  cent  of  whose  stock  is  owned  or  controlied  by  you,  either  di^ily 
CT  through  ciceely  aliiliated  interests  or  by  a nominee  or  nominees — 

(a)  The  name  and  address; 

(U  The  total  par  value  of  the  outstanding  ^pitAl  stock  at  the  beginriing  of  th# 
taxable  year,  and  the  date  and  amount  of  each  change,  mssaifying  itii* 
data  as  to  common  and  preferred,  voting  and  nonvoting  stock; 

(c)  The  total  par  ^'alue  of  such  outstanding  capital  stock  owned  or  controlled  by 
you  at  the  beginning  of  the  taxable  year,  or  at  the  date  of  acquisition  if 
acquired  during  the  taxable  year,  and  the  date  and  amount  ol  each  cbuigs 
therein. 

18.  If  the  answer  to  question  13  is  "yes,"  state — 

(a)  The  name  and  address  of  such  corporation  or  corporatioiis; 

(fr)  The  par  value  and  percentage  of  your  stock  h^d  by  each,  classified  as  to 
common  and  preferred,  voting  and  nonvoung. 

19.  If  the  answer  to  question  14  is  “yes,”  submit  a statoment  showing— 

(а)  The  names  and  addresses  of  such  corporations; 

(б)  The  name  or  names  and  address  or  aadresses  of  the  owning  or  controBing 

interest  or  interests; 

(c)  The  total  par  value  of  the  outstanding  capital  stock  of  each  oorpotadoa  at 

the  beginning  of  the  taxable  year,  anH  the  date  and  smoont  of  change 
therein,  clasrafying  this  data  as  to  common  and  prefened,  voting  boO- 
voting  stock; 

(d)  The  total  par  value  of  each  class  of  the  outstanding  capital  stock  of  each 

corporation  owned  or  controlled  by  each  one  of  the  several  iulividasls  or 
partnerships  at  the  begirming  of  the  taxable  year,  and  the  data  and  amount 
of  each  change  therein. 

20.  If  the  answer  to  question  15  is  “yea,"  the  information  fumitiied  nwJar  17  jnd 
should  identify  the  corporations  included  in  the  consolidation. 

I 21.  If  one  corporation  owns  95  per  cent  or  more  of  the  outstanding  voting  stock  of 
I another,  or  ii  95  per  cent  or  more  of  the  outstanding  voting  stock  ol  twe  or  acre  coipon- 
I lions  is  owned  by  the  same  individual  or  individirals  in  substantially  the  sama  ptopor- 
tion,  a consolidated  return  must  be  filed,  except  that  the  limitations  as  to  coesoadaticn 
I under  Article  635  must  be  observed.  If  the  owneraMp  is  less  than  93  per  cent  of  theoot- 
I standing  voting  stock,  but  exceeds  50  per  cent,  the  parent  corporation  or  principal  cor- 
I poration  of  any  group  of  affiliated  corporations  must  furnish  the  iniooBktion  osUed  far 
I above  and  in  addition  must  file  a statement  fully  disclosing  the  details  of  ntf  liarim.  ether 
I than  stock  ownership  and  all  other  information  which  will  be  helpful  in  detetmlniitt 
j whether  or  not  a consolidated  return  should  he  filed. 

VALUATION  OF  CAPITAL  STOCK. 

22.  Vth&t  was  the  fair  value  of  the  total  capital  stock  of  the  corporation  as  determined 
in  the  last  assessment  of  the  capital  stock  tax  (if  any)?  $ Date  of  that 


LIST  OF  ATTACHED  SCHEDULES. 

Attach  hereto  a list  of  all  ecbedulea  accompanying  this  return,  gii-ing  for  each  a brief 
title  and  the  schedule  number. 


We,  the  undersigned,  president  and  treasurer  of  the  corporation  for  which  this  return  is  made,  being  severally  duly  sworn,  each  for  himself 
deposes  and  says  that  this  return,  including  the  accompanying  schedules  and  statements,  has  been  examined  by  him  and  is,  to  the  best  of  his 
knowledge  and  belief,  a true  and  complete  return  made  in  good  faith  pursuant  to  the  Revenue  Act  of  1918  and  the  Regulations  issued  thereunder. 


Sworn  to  and  sub-1., , 
scribed  before  me  /thisx. 


day  of , 19 


(OOiciri  rapociij  ) 


Page  6 of  Form  1120A 


Income  Tax 

Supplementary  Page  44. 


Pago  1 of  Instructions 

INSTRUCTIONS  REGARDING  DETERMINATION  OF  CREDITS,  COMPUTATION  OF  TAX,  ETC. 


PROVISIONS  AFFECTING  INVESTED  CAPITAL  AND  CREDITS. 

RETURNS  FOR  PART  OF  A YEAR. 


1.  If  OuB  return  U for  a period  leas  than  a full  year,  Itcma  3 and  8,  Schedule  III; 
Itema  1 and  2,  column  2,  Sch^ule  TV;  and  Item  19,  Schedule  IV;  shall  be  reduced  to  as 
many  twelfths  of  the  fi^tirao  for  a full  year  as  there  are  months  in  the  period  for  which  the 
return  is  made. 

If  the  period  for  which  the  return  is  made  includes  fractions  of  months,  there  shall  be 
added  to  the  number  of  complete  months  as  many  thirtieths  of  a month  as  there  are  days 
in  the  fiactioiial  parts  of  months. 

CORPOIUVTIONS  NOT  IN  EXISTENCE  DURING  PREWAR  PERIOD. 

2.  If  a corporation  was  not  in  existence  during  the  whole  of  at  least  one  calendar  year 
In  the  prewar  period,  provided  a majority  of  its  capital  stock  was  not  owned  or  controlled, 
directly  or  inirectly,  at  any  time  during  the  taxable  year  by  a corporation  in  existence 
during  the  whole  of  at  least  one  calendar  year  in  the  prewar  period,  and  provided  its  gross 
Income  does  not  include  50  per  cent  or  more  of  gains,  profits,  commissions,  or  other  income 
derived  from  a Government  contract  or  contracts  made  after  April  5,  1917,  and  before 
November  12,  1918,  the  war-profits  credit  shall  be  (a)  the  sum  of  $3,000  plus  (b)  the  same 
percentage  of  the  Invested  capital  for  the  taxable  year  (not  less  than  10  per  cent,  however) 
as  the  average  per  cent  of  net  income  to  invested  capital  for  the  prewar  period  of  corpora- 
tions engaged  in  a trade  or  businesB  of  the  same  general  class  as  the  taxpayer. 

3.  Pending  a determination  of  the  deduction  by  tho  Commissioner,  such  corporation 
shall  deduct  10  per  cent  of  the  invested  capital  for  the  taxable  year.  (See  Section  311 
(e,  d)  of  the  Revenue  Act  of  1918  and  Articles  783  and  784  of  Begulations  45.) 

CREDIT  FOR  INCOME,  WAR-PROFITS,  ANU  EXCESS-PROFITS  TAXES 

PAID  OR  ACCRUED  TO  FOREIGN  COUNTRY  OR  POSSESSION  OF  THE 

UNITED  STATES. 

i.  If  a credit  is  claimed  in  Item  29,  Schedule  TV,  a copy  of  Form  1118,  completely 
filled  out  and  sworn  to  or  affirmed,  must  be  submitted  with  this  return.  If  cr^t  is  sought 
for  taxes  already  paid  the  form  must  have  attached  to  it  the  receipt  for  each  such  tax  pay- 
ment. If  credit  is  sought  for  taxes  accrued  the  form  must  have  attached  to  it  the  return 
on  which  each  such  accrued  tax  was  baaed.  (See  Article  611  of  Regulations  45.) 

5.  Whea  a credit  is  claimed  for  accrued  taxee,  the  Commissioner  may,  as  a condition 
precedent  to  the  allowance  of  this  credit,  require  tho  corporation  to  give  a bond  (Form 
1119X  with  Buretiee  satisfactory  to  and  to  be  approved  by  him,  in  such  penal  eiim  as  ho 
may  require,  conditioned  for  the  payment  by  Ae  taxpayer  of  any  amount  of  taxes  found 
duo  if  the  taxee  when  paid  differ  from  the  amount  claimed  in  respect  thereof. 

PROVISIONS  AFFECTING  COMPUTATION  OF  WAR-PROFITS 
AND  EXCESS-PROFITS  TAX. 

6.  In  moet  instances  the  amount  of  the  tax  will  be  found  as  follows: 

(A)  By  finding  the  amount  of  war  and  excess-profits  tax  at  the  rates  for  1918  and  for 
1919. 

(B)  By  finding  the  proportion  of  the  amount  of  war  and  excess-profits  tax  computed  for 
1918  which  the  number  of  months  in  1918  bears  to  the  total  number  of  months  in  the  period. 

(C)  By  finding  the  proportion  of  the  amount  of  war  and  excess-profits  tax  computed 
at  the  rates  for  1919  which  the  number  of  months  in  1919  bears  to  the  total  number  of 
months  in  the  period. 

(D)  By  adding  the  amounts  found  under  (B)  and  (C)  above. 

(E)  By  finding  tho  amount  of  the  income  tax  at  the  rates  for  1918  and  for  1919. 

(F)  By  finding  such  proportion  of  the  income  tax  computed  at  the  1918  rates  as  the 
total  of  months  in  1918  bears  to  the  total  of  months  in  tho  period. 

(G)  By  finding  such  proportion  of  the  income  tax  computed  at  the  1919  rates  as  tho 
total  of  months  in  1919  bears  to  the  total  of  months  in  the  period. 

(B)  By  adding  (F)  and  (G)  above. 

(I)  Total  tax  will  be  the  sum  of  (D)  and  (II)  above. 

Should  computation  be  necessary  under  other  sections  than  301(a)  or  301(5),  the 
following  applies: 

(а)  Limitation  on  total  tax. — iTio  maximum  war-profits  and  excess-profits  tax 

imposed  for  1918  shall  in  no  case  be  more  than  30  per  cent  of  tho  net  income  in  excess  of 
$3,000  and  not  in  excess  of  $20,000  plus  80  per  cent  of  the  net  income  in  excess  of  $20,000; 
for  1919  the  amounts  shall  be  no  more  than  20  per  cent  of  the  net  income  in  excess  oi 
$3,000  and  not  in  excess  of  $20,000,  plus  40  per  cent  of  the  net  income  in  excess  of  $20  000 
(Section  302.)  ' ’ 

If  the  compuUtion  at  the  rates  specified  in  Section  301  as  for  1918  exceeds  the  limita- 
tion as  for  that  year,  then  the  limited  amount  for  1918  latea  is  the  amount  computed  at  the 
rata  for  that  year;  if  the  computotion  at  the  rata  specified  in  Section  301  as  for  1919  ex- 
ceeds the  limiution  as  for  that  year,  then  the  limited  amount  for  1919  rata  is  tho  amount 
computed  at  the  rata  for  that  year. 

(б)  Gorarnment  contract.— If  net  income  has  been  derived  from  a Government 
contract,  or  Government  contracts,  made  between  April  6,  1917,  and  November  11  1918 
both  data  inclusive,  in  excea  of  $10,000,  the  computation  would  be  at  tho  rata  for  each 
year  u under  Section  301,  regardlea  of  the  fact  that  the  contract  may  have  been  concluded 
to  1918,  or  may  not  have  continued  throughout  the  fiscal  year.  (See  Articla  714  and  719 
of  Regulations  45.) 

W profits  from  sal#  of  mineral  deposits. — In  the  case  of  a bona  fide 

sale  of  mines,  oil  or  gas  wells,  or  any  interest  therein,  where  tho  principal  value  of  the 
prei*rty  has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work  done 
by  the  toxpaycr,  the  portion  of  the  war-profits  and  excess-profits  tax  attributable  to  ouch 
alo  shall  not  exceed  20  per  cent  of  the  selling  price  of  such  property  or  intcrat.  (See 
Articles  971  and  972  of  Regulations  45,  and  Section  337  of  tho  Act.) 

Tho  Art  step  is  to  find  tho  war  and  excess-profits  tax  computed  without  regard  to 
this  provision;  tho  second  is  to  find  of  the  tax  thus  computed  such  portion  as  tho  net  in- 
come from  tho  tale  bears  to  the  total  net  income.  If  this  portion  erpiala  or  doa  not  exceed 
20  per  cent  of  the  soiling  price  then  no  adjustment  is  permitted.  Should  such  portion 
*iceed  20  per  cent  of  the  nelHng  price,  then,  finrt,  find  such  portion  of  tho  war  and  excess- 
profits  tax  as  the  net  inroino  not  attributable  to  the  sale  bears  to  tho  total  net  income;  and 
secondly,  add  to  this  20  per  cent  of  the  soiling  price  of  tho  mineral  ddfxauts. 

(<0  Tax  of  corporation  engaged  In  mining  of  gold.— If  a Corporation  was  engnged 
in  tho  mining  of  gold,  itx  wur  and  cxccss-pn-tts  tax  shall  bo  that  prr,p(.rti<,n  of  Item  15, 
Seh^ulo  IV,  which  tho  net  inrorao  not  derived  fro/u  the  mining  of  gold  hoam  to  Iho  total 
net  income  (Articles  762  and  753,  ileg  ilations  45— l ectmn  301  (c)  of  tho  Act.) 

(«)  Tax  of  corporation  whose  income  is  derived  in  port  from  "personal  serv- 
ice. ’—If  pyt  of  the  net  inromo  (not  Ic  : ibaii  30  per  cent)  la  derived  from  n separate 
trade  or  busuioa  of  tho  character  of  ‘‘jerronal  service,"  tho  tax  nhall  bo  {ornjnilcd  in 
•crordanco  with  the  provisions  of  Articla  741  to  743,  Regulations  45  (See.  303  of  tho  Act). 


7.  Statement  of  basis  of  claims.— If  the  corporation  claims  the  benefit  ol  one  or 
more  of  thae  provisions,  it  should  attach  to  the  return  a complete  statement  of  the  basis 
for  such  claim  and  a computation  of  the  tax  payable  in  the  event  that  euch  'claim 
is  allowed.  Ihe  amount  of  tax  so  computed  should  be  entered  in  Schedule  IV, 
but,  except  in  cases  falling  under  (a)  above,  the  taxpayer  must  nevertheless  fill  out  all 
the  schedules  of  this  form.  Submit  a schedule  rapecting  each  Government  contract 
made  between  April  6,  1917,  and  November  11,  1918,  both  data  inclusive,  fro.Ti  which 
tocomo  was  derived  during  the  taxable  year.  In  the  case  of  affiliated  compania,  tiiia 
information  should  bo  shown  separately  for  each  company.  This  schedulo  will  be  in  the 

■ form  of  columns,  the  left-hand  column  specifying  the  following  information  as  resjiecta 
each  contract: 

(a)  Amount  of  contract; 

(5)  Gross  income  from  contract  during  period; 

(c)  Expensa  directly  applicable  to  each  contract. 

Total  of  each  column  should  be  shown.  There  should  also  be  shown  in  the  rnost 
practicable  form: 

(d)  Total  groa  income  of  corporation; 

'(<)  Percentage  which  total  of  column  (5)  is  of  (<f); 

(/)  Total  general  expensa,  lossa,  and  deductions  of  corporation: 

(g)  Amount  of  (/)  allocated  to  Government  contracts  (total); 

(A)  Percentage  which  (g)  is  of  (/). 

If  the  allocation  of  general  expensa,  losses,  and  deductions  differs  from  the  percentage 
which  the  gross  income  from  the  Government  contract  or  contracts  bars  to  the  total  gross 
. income,  there  shall  be  submitted  a statement  showing  what  items  and  the  amounts  thereof 
have  been  otherwise  allocated,  and  the  reasons  therefor.  If  a claim  is  made  under  Section 
327  of  the  Statute,  gains,  profits,  commissions,  or  other  income,  derived  on  a cost-plus 
basis  from  a Government  contract  or  contracts  made  between  April  6, 1917,  and  November 
11, 1918,  both  data  inclusive,  should  be  shown  separately  from  income  from  Government 
contracts  of  different  character. 

SPECIAL  CASES. 

8.  Definition  of  special  cases.— Section  327  of  the  Act  provlda  that  in  tho  followin'g 
casa  the  tax’shall  be  determined  as  provided  in  Section  328: 

(a)  Where  the  Commissioner  is.  unable  to  determine  the  invated  capital  as  provided 
in  Section  326;  • 

(5)  In  the  case  of  a foreign  corporation; 

,(.c)  Where  a mixed  aggregate  of  tangible  property  and  intangible  property  has  been 
paid  in  for  stock  or  for  stock  and  bonds  and  the  Commissioner  is  unable  E.atisfactoriiy  to 
determino  the  rapective  valua  of  the  several  classes  of  property  at  the  time  of  payment,  of 
to  distinguish  the  clasSa  of  property  paid  in  for  stock  and  for  bonds,  rapectively; 

(d)  Where,  upon  application  by  the  corporation,  the  Commissioner  finds  and  declares 
of  record  that  the  tax  if  determined  without  benefit  of  this  section  would,  owing  to  abnor- 
mal conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the  corpora- 
tion an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  repraentative 
corporations  specified  in  Section  328.  This  subdivision  shall  not  apply  to  any  case  (1)  in 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  because  the  cor- 
poration earned  within  tho  taxable  year  a high  rate  of  profits  upon  a normal  invated  capital 
nor  (2)  in  which  50  per  centum  or  more  of  the  gross  income  of  the  corporation  for  the  ta-xable 
year  (computed  under  Section'  233  of  Title  II)  consists  of  gains,  profits,  commissions,  or 
other  income  derived  on  a cost-plus  basis  from  a Government  contract  or  contracts  made 
between  April  6, 1917,  and  November  11,  1918,  both  data  inclusive. 

9.  Treatment  of  special  cases.— In  the  casa  specified  in  Section  327  tho  tax  will  bo 
specially  determined  under  the  provisions  of  Section  328,  but  the  tax  will  not  ordinarily 
be  computed  under  Section  32S  merely  because  the  corporation’s  form  or  manner  of  organi- 
zation, or  the  limitations  iniposed  by  Section  32G,  rault  in  a greater  Ux  than  would  other- 
wise be  payable.  A corporation  which  coma  within  the  provisions  of  subdivision  (d)  of 
Section  327  (paragraph  8,  above)  may  make  application  for  assessment  under  the  provisions 
of  Section  328,  which  application  shall  be  attached  to  its  return  in  the  form  of  a statement 
setting  forth  in  full:  (a)  The  reasons  why  the  tax  should  be  so  determined;  (5)  the  facts 
upon  which  such  reasons  are  based;  (c)  an  exact  dacription  of  each  trade  or  business  or 
important  branch  of  a trade  or  business  carried  on  by  it;  (d)  a statement  of  the  invated' 
capital  and  net  income  for  each  year  since  the  beginning  of  tho  prewar  period;  and  (s)  a 
statement  showing  the  amount  of  gains,  profits,  commisiions,  or  other  income  derived  on  a 
cat-plus  basis  from  Government  contracts  made  after  April  5,  1917,  and  before  November 
12, 1918,  and  showing  the  per  cent  which  such  income  is  of  tho  total  income  of  the  corpora- 
tion. (See  Article  901.) 

10.  Determination  of  first  installment  of  tax  in  special  cases. — In  tho  case  of  any 
corporation,  other  than  a foreign  corporation  where  absolutely  no  data  are  available  for 
tho  determination  of  tho  invated  capital  for  the  taxable  year,  tho  installments  of  tho  tax 
shall,  in  the  first  instance,  be  computed  and  tho  first  installment  paid  upon  the  basis  of  a 
war  and  excess- profits  tax  equal  to  50  per  cent  of  the  net  income,  plus  income  tax,  which 
latter  tax  shall  be  computed  on  the  basis  of  a credit  to  net  income  of  this  amount  for  war 
and  excess-profits  tax.  In  the  case  of  a foreign  corporation  the  installments  of  the  tax 
shall,  in  the  first  instance,  bo  determined  upon  the  basis  prescribed  in  Article  913  of 
Regulations  45.  In  any  other  case  under  Section  328,  including  a caso  where  the 
invested  capital  for  tho  taxable  year  can  not  bo  accurately  determined,  but  where  » 
minimum  amount  of  invated  capital  as  to  which  there  is  no  question  can  bo  determined 
tho  installmenta  shall  in  tho  first  instance  be  computed  and  the  first  installment  paid 
upon  llio  basis  of  a tax  upon  the  minimum  amount  of  invested  capital,  not,  however, 
exceeding  a tax  upon  tho  basis  of  50  per  cent  cl  tlio  net  iucome.  In  any  of  the  above  cast-a 
the  actual  ratio  when  ascertained  by  tho  Coiui.iissioiier  will  ho  used  in  determining  tho 
correct  amount  of  the  tax.  (See  Article  912  of  Regulations  45.) 

11.  Returns  in  special  cases.— Corporations  ot'.icr  than  foreign  corj)oration.s  making 
claim  for  assessment  under  Section  328  of  tho  Act  should  answer  all  quo-stions  and  file  all 
schedules  as  far  as  possible  and  attach  a statemcr.t  explaining  why  it  is  imi)racticabIo  to 
fill  out  thp  entiro  return. 

UNDISTRIBUTED  PROFITS  TAXABLE  TO  STOCKHOLDERS. 

12.  If  any  corporation,  liowevcr  created  or  organized,  is  formed  or  availed  of  for  tho 

purpaeof  preventing  the  imposition  of  the  surtax  upon  its  slock  holders  or  uiomhcr.r  through 
tho  medium  of  permitting  il.a  gains  or  profits  to  atemnulalo  instead  of  being  dividial  or 
dbtribuled,  such  corporat  ion  shall  not  bo  subject  to  tho  tax  impreicd  by  Section  230  of  tho 
Revenuo  Act  of  19IS,  but  tho  slockholdors  or  iiieinbcrs  thoroof  shall  bo  subject  to  taxation 
under  Title  2 in  tho  samo  manner  os  in  tho  caso  of  stockholders  of  a personal  service  cor- 
peratinn,  except  that  tho  tax  imposed  by  Title  3 of  tho  Rovenuo  Act  of  l!)18  slmll  bo  de- 
ducted from  tlio  net  income  of  tlio  corporation  betoro  tho  ]>roporlioiiatu  sbaro  of  car  h stAci.- 
holdcr  or  member  is  computed.  (Section  220,  Arlielo  351.)  — s.so> 


Page  7 of  Form  1120A 


fncome  Tax 

Supplementary  Page  45, 


Page  2 of  instructions 

GENERAL  INSTRUCTIONS 

1.  For  complete  instructions  concerning  the  filling  in  of  the  schedules  in  this  return,  read  the  explanato^  notes  at  the  head  thereof,  and  Fart  II  of 
Regulations  45,  revised,  relating  to  the  income  tax  and  war-profits  and  excess-profits  tax  on  corporations.  Copies  of  the  regulations  can  bo  ob- 
tained from  any  collector  of  internal  revenue  or  any  bank. 


RETURNS. 

UABILITY  FOR  HUNG. 

9.  Corporations  generally. — Every  corporation,  joint-stock  com- 
pany, association,  and  insurance  company  not  specifically  exempted  by 
Section  231  of  the  revenue  act  of  1918,  and  having  a net  income  for  the 
taxable  year  of  $3,000  or  more,  is  subject  to  the  war-profits  and  excess- 
profits  tax  and  must  file  a complete  return  on  this  form. 

•3.  A corporation,  joint-stock  company,  association,  or  insurance 
company  (not  exempted  by  Section  231)  having  a net  income  less  than 
$3,000  must  also  file  a retxirn  on  this  form,  filling  that  part  of  Schedule  IV 
under  the  headings  “Income  tax”  and  (if  necessary)  “Adjustment  of  tax 
for  fiscal  year  ended  in  1918,”  and  all  the  schedules  called  for  on  pages 
2 and  3;  and  answering  all  questions  on  page  6. 

4.  Foreign  corporations. — ^A  foreign  corporation  subject  to  the 
law  is  required  to  make  return  to  the  collector  in  whose  district  is 
located  its  principal  office  or  agency  through  which  is  transacted  the 
business  in  the  United  States.  The  gross  income  to  be  returned  includes 
only  the  gross  income  from  sources  within  the  United  States,  including 
interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of  resiv 
dents,  corporate  or  otherwise,  and  all  amounts  received  representing 
profits  on  the  manufacture  and  disposition  of  goods  within  the  United 
States.  (See  Articles  91,  92,  550,  and  625  of  Regulations  45.) 

5.  A foreign  corporation  should  fill  in  and  submit  all  the  schedules 
called  for  on  pages  2 and  3 of  the  return  with  respect  to  its  incofiie  from 
sources  within  the  United  States,  and  should  compute  its  income  tax 
(Schedule  IV),  claiming,  however,  no  specific  exemption  (Item  19).  Its 
war-profits  and  excess-profits  tax  should  be  computed  in  the  first  instance, 
as  provided  in  Article  913. 

6.  Partnerships  and  personal  service  corporations. — Partner- 
ships and  personal  service  corporations  must  make  a return  on  Form 
1065  A.  (See  Article  624  of  Regulations  45.) 

CONSOLIDATED  RETURlfs. 

7.  Affiliated  corporations,  as  defined  in  Section  240  of  the  Act  and 
Articles  632  and  633  of  the  Regulations,  must  file  a consolidated  return. 
As  provided  in  Article  632,  the  parent  or  principal  reporting  company 
must  file  the  consolidated  return  on  this  form  with  the  collector  of  the 
district  in  which  its  principal  office  is  located.  All  supplementary  and 
supporting  schedules  should  be  prepared  in  colimmar  form,  one  column 
being  provided  for  each  corporation  included  in  the  consolidation,  so  that 
the  composition  of  consolidated  nej  income  and  consolidated  invested 
capital  may  be  readily  examined. 

8.  Subsidiary  corporations  and  other  affiliated  corporations  whose  net 
income  and  invested  capital  are  included  in  the  return  of  a parent  cor- 
poration or  a principal  reporting  corporation  must  fill  in  and  file  Form 
1122  with  the  collector  in  whose  district  their  principal  office  is  located. 

PERIOD  COVERED. 

9.  The  taxable  year  is  the  fiscal  period  ended  in  the  calendar  year 

1919. 

10.  A corporation  desiring  to  change  the  period  for  which  its  return 
is  made  from  a calendar  year  to  a fiscal  year  or  vice  versa,  or  from  one 
fiscal  year  to  another,  must  give  written  notice  to  the  collector  of  such 
change  and  the  reasons  therefor  at  least  SO  days  beforp  the  due  date  of 
its  return  on  the  basis  of  its  existing  taxable  year  and  at  least  30  days 
before  the  due  date  of  the  return  on  the  basis  of  the  proposed  taxable 
year.  (See  Articles  26  and  431  of  Regulations  45  and  Section  226  of  the 
revenue  act  of  1918.) 

TIl^E  AND  PLACE  FOR  FILING. 

11.  Returns  for  a fiscal  period  ending  in  1919  must  be  sent  to  the 
collector  of  internal  revenue  for  the  district  in  which  the  corporation’s 
principal  office  is  located  so  as  to  reach  the  collector’s  office  on  or 
before  the  fifteenth  day  of  the  third  month  following  the  close  of  the 
fiscal  period,  unless  an  extension  of  time  has  been  granted. 

12.  If  the  fiscal  year  ended  prior  to  April  1,  1919,  and  if  it  is  not 
possible  to  file  a completed  return  on  this  form  on  or  before  the  date  the 
return  would  be  due,  an  extension  of  time  may  be  obtained  by  filing,  on 
or  before  such  date,  a tentative  return  and  estimate  of  taxes  assessable, 


in  duplicate,  on  Form  1031 T,  and  remitting  with  such  return  at  leitst  one- 
fourth  of  the  estimated  taxes  shown  thereon. 

13.  In  case  of  neglect  to  file  either  a completed  return  or  a tentative 
return  within  the  prescribed  time  the  collector  is  authorized  to  grant  an 
extension  of  not  more  than  30  days,  ^provided  such  neglect  was  due  to 
absence,  or  sickness,  find  provided  an  application  for  such  extension  is 
made  in  writing  prior  to  the  expiration  of  the  period  for  which  an  exten- 
sion may  be  granted.  In  meritorious. cases  the  Commissioner  is  author- 
ized to  grant  a further  extension;  but  no  such  further  extension  will 
bo  granted  (except  on  account  of  absence  or  sickness),  unless  a tentative 
return  has  been  ffied  on  Form  1031  T and  at  least  one-fourth  of  the  esti- 
mated tax  has  been  paid.  (See  Articles  442  to  444  of  Regulations  45.) 

SIGNATURES  AND  VERIFICATION. 

14.  Returns  must  be  sworn  to  by  the  president,  vice  president,  or 
other  principal  officer  and  by  the  treasurer,  assistant  treasurer,  or  other 
principal  fiscal  officer.  The  return  of  a foreign  corporation  having  an  agent 
in  the  United  States  shall  be  sworn  to  by  such  agent.  If  receivers,  trustees 
in  bankruptcy,  or  assignees  are  operating  the  property  or  business  of 
the  corporation,  such  receivers,  trustees,  or  assignees  shall  execute  the 
returns  for  such  corporations,  under  oath. 

PAYMENT  OF  TAXES. 

15.  The  tax  should  be  paid  by  sending  or  bringing  with  the  return 
a check  or  money  order  drawn  to  the  order  of  “Collector  of  Internal 
Revenue  at  [insert  name  of  city  and  State].” 

16.  Do  not  send  cash  through  the  mail  or  pay  it  in  person  except  at 
the  office  of  the  collector  or  a regularly  established  internal-revenue 
stamp  office. 

17.  At  least  one-fourth  of  the  tax  is  due  at  the  same  time  that  the 
return  is  due. 

18.  An  additional  amount  sufficient  to  bring  the  total  payments  up 
to  one-half  of  the  tax  must  be  paid  on  or  before  the  fifteenth  day  of  the 
third  month  after  the  time  fixed  by  law  for  filing  the  rettun. 

19.  An  additional  amount  sui^ient  to  bring  the  total  payments  up 
to  three-fourths  of  the  tax  must  be  paid  on  or  before  the  fifteenth  day  of .. 
the  sixth  month  after  the  time  fixed  by  law  for  filing  the  return. 

20.  The  remainder  of  the  tax  must* be  paid  on  'or  before  the 
fifteenth  day  of  the  ninth  month  after  the  time  fixed  by  law  for  filing  the 
return. 

21.  If  any  payment  is  not  made  when  due,  the  impaid  balance 
of  the  tax- will  become,  due  10.  days  after  demand  therefor  by  the  col- 
lector. 

22.  If  you  pay  in  cash,  do  not  fail  to  get  a receipt  at  the  time  of  pay- 
ment. If  you  pay  by  check  or  money  order,  your  canceled  check  or 
your  money-order  receipt  will  serve  as  a receipt. 

PENALTIES. 

UNDERSTATEMENT  OF  TAXES  DUE  TO  NEGLIGENCE  OR  FRAUD. 

23.  If  taxes  are  understated  through  negligence  on  the  part  of  the 
taxpayer  and  without  attempt  to  defraud,  there  shall  be  added  as  part  of 
the  tax  5 per  cent  of  the  total  amount  of  the  deficiency  pl\is  interest  at 
the  rate  of  12  per  cent  per  annum  on  the  amount  of  the  deficiency  of  each 
installment  from  the  time  the  installment  w’as  due.  If  an  understate- 
ment is  false  or  fraudulent  with  intent  to  evade  the  tax,  there  shall  be 
added  as  part  of  the  tax  50  per  cent  of  the  amount  of  the  deficiency. 

FOR  FAILING  TO  PAY  TAX  WHEN  DUE. 

24.  If  any  tax  remains  unpaid  after  the  date  when  it  is  due  and  for  10 
days  after  notice  and  demand  by  the  collector  there  shall  be  added  as 
part  of  the  tax  the  sum  of  5 per  cent  of  the  amount  due  but  unpaid,  plus 
interest  at  the  rate  of  12  per  cent  per  annum  on  such  amount  from  the 
time  it  became  due. 

FOR  FAILING  TO  MAKE  RETURN  ON  TIME. 

25.  A penalty  of  not  more  than  $1,000  attaches  for  failure  to  lile  a 
re*-*irn  or  to  pay  thd  tax  within  the  time  required  by  law.  If  the  fn  dure 
is  willful  or  an  attempt  is  made  to  defeat  or  evade  the  tax,  the  penalty  is 
$10,000  or  imprisonment  for  not  more  than  one  year,  or  both,  together 
with  cost  of  prosecution. 

Page  8 of  Form  11 20 A 


Income  Tax 

Supplementary  Page  46, 


1-14-20. 


TREASURY  DEPARTMENT. 

Xhteknal  Revenue  Bureau 
Form  1124. 

INCOME  AND  PROFITS  TAXES. 

Bond  under  sections  214  (a)  (12)  and  234  (a)  (14)  of  the  Revenue  Act  of  1918. 


KNOW  ALL  MEN  BY  THESE  PRESENTS  that as 

principal,  and  , as  surety,  are  held  and  firmly 

bound  unto  the  United  States  of  America  in  the  sum  of  — dollars, 

lawful  money  of  the  United  States,  for  the  payment  whereof  we  bind  ourselves,  our  heirs,  executors, 
administrators,  successors  and  assigns,  jointly  and  severally,  firmly  by  these  presents. 

Whereas,  at  the  time  of  filing  his  return  of  income  for  the  taxable  year  1918  the  above-bounden 
principal  has  filed  or  is  about  to  file  a claim  in  abatement  based  on  the  fact  that  he  has  sustained  a 
substantial  loss  resulting  from  a material  reduction  (not  due  to  temporary  fluctuation)  o^  the  value 
of  his  inventory  for  such  taxable  year  or  from  the  actual  payment  after  the  close  of  such  taxable  year 
of  rebates  in  pursuance  of  contracts  entered  into  during  such  year  upon  sales  made  during  such  year; 
and 

Whereas,  sections  214  (a)  (12)  and  234  (a)  (14)  of  the  Revenue  Act  of  1918  provide  that  in  the 
case  of  such  a claim  payment  of  the  amount  of  the  tax  covered  thereby  shall  not  be  required  until  the 
claim  is  decided,  but  that  the  taxpayer  shall  accompany  his  claim  with  a bond  in  double  the  amount 
of  the  tax  covered  by  the  claim,  with  sureties  satisfactory  to  the  Commissioner,  conditioned  for  the 
payment  of  any  part  of  such  tax  foimd  to  be  due,  with  interest,  and  it  appears  that  the  amount  of  this 
bond  is  double  that  of  the  tax  covered  by  such  claim  in  abatement: 

Now,  THEREFORE,  the  condition  of  the  foregoing  obligation  is  such  that  if  the  principal  shall  on 
notice  and  demand  by  the  collector  duly  pay  any  part  of  such  tax  found  by  the  Commissioner  to  be 
due,  with  interest  at  the  ratO  of  twelve  per  cent  per  annum  from  the  time  such  tax  would  have  been 
due  had  no  such  claim  been  filed,  and  shall  otherwise  well  and  truly  perform  and  observe  all  the  pro- 
visions of  law  and  the  regulations,  then  this  obligation  is  to  be  void,  but  otherwise  to  remain  in  full 
force  and  virtue. 

Witness  our  hands  and  seals  this day  of , 1919. 

...  [L.  S.l 


Signed,  sealed  and  delivered  in  the  presence  of— 


Bond  approved  this ....  day  of 1919 


Commissioner  of  Internal  Revenue. 


— ..... [l.  s.) 

Pnnmpal. 

[l.  s.] 

Surety. 


Income  Tax 

Supplementary  Page  47. 


r-i 


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00 

a§» 


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II 

1 1 


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1 1 

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II 

S A 


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:g 


(■^ 


Income  Tax 

Supplementary  Page  48. 


no  vcrk  sheel  fini 


DELIVER  OR  SEND 
THIS  RETURN 
WITH  PAYMENT 
TO  COLLECTOR  OF 
INTERNAL 
REVENUE  ON  OR 
BEFORE 
MARCH  15, 1920 

PAY  TOUR  TAX  IN  FHU 
WHEN  YOU  niE 
TOUR  RETURN,  THEREBY 
REDUONG  THE  COST  OF 
COLLSaiONAND 
AVOIDING  POSSIBLE 
ANNOYANCE  TO  YOU 


Page  1 of  Return 

Form  1040A.— TJNITia)  STATES  INTERNAL  REVENtTE  SERVICE 

INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 
For  Calendar  Year  1919 


PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 


(Name) 

(Street  and  number  or  rural  route) 

(Post  offlce  and  State) 


Do  not  wiite  in  this  spaw 


FIRST  PAYMENT 


Stamp) 


CASH  CHECK  M. 


Examined  by 


1.  Did  you 

make  a re- 
turn for  1918? 

3.  To  what  collector’s 
office  was  it  sent?  _ 


2.  If  BO,  what  address 
did  you  give  on 
..  that  return?  


(Give  district  or  city  and  state.) 
f.  Ifnot,  wereyou  on  that  date  6.  How  many  dependent  persons  under 

the  head  of  a family  as  de-  18  (or  mentaUy  or  physically  defec- 

finedininstructLonaunder  " ' 


4.  Were  you  married  and  living 
with  wife  (or  husband)  Dec.  31,  1919? 


“Personal  Exemption?’  ^ __ 

8.  Did  you  pay  dunng  the  ^endar  year  to  any  individual  rent,  wagcs.'saliiea 
or  other  fixed  or  determinable  income  amounting  to  $1,000  or  over?  ... 


tivc)  were  recoivii^  fceir  chief  sup- 
port from  you  on  Dec.  31,  1919? 


7.  Write  “R”  if  this  return 
shows  income  received, 
or  “A”  if  it  shows 
income  accrued 


9.  Did  your  vrife  (or  husband)  or 

minor  child  make  a separate  return? 

* vAixjD  o-AixA  Avjo-  cLiiu.  luv  u rtsLura  oi  xnionnauon. ; 

' (If  5e,  giy*  name  and  address  shown  theroon.) 

10.  Did  you,  your  wife  (or  husband) 
or  minor  children  receive  any  in- 
tereet  on  U.  S.  Liberty  Bon^  or 
any  other  income  not  reported 
ebewhere  in  this  return  or  in  a 
separate  return? . 

(If  so,  give  sources  and  amounts. ) 

, — 

11.  Enter  name  and  address  of  each 
organization  to  which  you  made 
contributions  claimed  as  deduc- 
tions, and  amount  paid  to  each. 

10  •.  . . 

oage  2 of  return  (see  instractiona):  If  property  was  i 
aat  date  was  determined. 


3,  claimsd  as  deductions  in  Schedules  A,  E and  I 
1013,  attach  statement  explaining  how  value  as 


1.  Befer 

terlaj  of  wlucb  constructed.) 

8.  Date 
ac- 
quired. 

i.  Cost  or  market 
value  March  1, 
19)3,  if  acquired 
prior  thereto. 

6.  Repairs 
ordinary  and 
incidental. 

W ear  and  tear  (depredation)  and  depletion 
charged  off— 

9.  Losses  not  compensated  for  by 
insurance.  Causoandbow 
amount  was  arrived  at. 

6. 

Rate. 

7.  Amount  pre- 
vious years. 

8.  Amount  tills 
year. 

$ 

j 

$ 

— 

Attach  a detailed  statement  of  repairs  showing  nature  and  amount  of  each  item  of  expenditure. 


Da  not  write  hs.'O 

M.  Nel  mccne  ihcwa  on  page  2,  Item  J 

$ 

Oc  not  write  here 

P»  Tsx  duo  (4  ^ OQ  sm^ocl  cf  Iicm  0^ 

1 

i 

N.  Lest  pevaal  cxemptioB  (see  Inslraclioa  VII) 

O.  BcJancs  fiacame  faiahle  at  4 9^ ) 

Less  of  2^  on  AsioufiS  cf  Ii&iq  F 

$ .■ 

IL  Ba?.3BCf!  of 

^ 1 

NOTE.— If  tL3  DEiount  on  Udo  0 exceeds  J 1,000,  the  excess  is  taxable  at 
Olid  your  return  should  be  ruade  on  Form  1040. 

j 

3.  Amoiint  of  iax  paid  on  stbn-Jssion  of  rctam 

1 1 

1 swear  (or  affirm)  that  tins  return,  to  the  be.st  of  my  knowledge  and  belief,  is  a true  and  complete  statement  of  all  taxable  (rains 
profits,  and  incoino  loceived  by  or  accrued  to  mo  (or  the  person  for  -Khoin  this  return  is  made)  during  the  year  1919,  and  that  all 
deductions  ea  lured  or  claiiaod  herein  ai-o  allowable  under  the  law.  “ 


(If  return  Is  luaje  by  agent,  t):o  reusou  tborefor  must  Lo  stataC  onVnia  Una.) " 
Birom  to  and  subscribed  before  me  this Jay  cf 1920. 


oi  (oticcr  auistobtering  oetb.) 


(T:t!o.) 


(Siguatiiro  of  iiiulvliluil  or  agent. ) 
(Address  of  iadividual  or  uge- 1.) 


[Page  1 of  f'crni  1040A.1 


income  Ta.x 

Supplementary  Page  49. 


DETACH  RETURN  HERE  AND  SEND  IT  TO  COLLECTOR  OF  INTERNAL  REVENUI 


P*jl«  2 EeSara 


INDIVIDUAL  RETURN  0?  TAXABLE  INCOME 


/^cladiof  incstne  ot  wife  (or  liasban  j)  anil  JepenJent  niiiier\ 
\ children^  onleas  reported  in  separate  r 


INCOME  FROM  BUSINESS  OR  PROFESSION. 

1 

3 — — 

— 

COST  OF  GOODS  SOLD: 

% 

OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as 
“ Labor”  under  “Cost  of  Goods  Sold”. 

13.  Rent  on  business  property  la  which 
tB  Ypriy**r  - 

t 

6 Mc!ctolr3!bonghrfcr'slio"''"" 

14.  Interest  on  business  Indebtedness  to 
Others-———-- — — 

. IS.  Taxes  on  business  and  business  property 
^ 19.  Repairs,  wear  and  tear,  and  property 
losses 

8.  rius  inventories  at  beginning  of  year. 

Q Totat.  _ _ 

X 

17.  Bad  debts  arising  from  sales  or  profes- 
sional services  — — — — — — 

10  Less  inventories  at  end  of  y^ar , 

18.  Other  expenses  (attach  classified  state- 
ment)  

11  Net  Cost  or  OooDS  Sold 

19.  Total  (Items  13  to  18  Inclusive) 

8 L- 

20.  Net  Cost  Plus  Total  Deductioks  (Item  11  phis  Item  10). 

21.  Net  Income  vrom  Business  on  Protession  (Item  3 minus  Item  201 

B.  INCOME  FROM  SALARIES,  WAGES.  COMMISSIONS,  BONUSES,  DIRECTOR’S  FEES  AND  PENSIONS. 

1.  By  whom  received. 

2.  Occupation. 

3.  Name  and  address  of  employer. 

4.  Amount 

received. 

$ 

Salary  to  self  and  dep! 

indent  minor  children  In 

eluded  in  any  deduction  In  Schedule  A ... 

Total  Income  eeom  Salaetes,  etc. 


C.  INCOME  FROM  PARTNERS'HIPS,  PE.RSONAl  SERVICE  CORPORATIONS.  AND  FIDUCIARIES  REPORTING  ON  A CALENDAR  YEAR  BASIS 
(not  including  amounts  reported  under  F and  K). 

D.  PROFIT  FR(}MrSALE  OF  LAND.  B’OlLDlNGS.  STOCKS.  BONDS  AND  OTHER  PROPERTY,  AND  FROM  LIQUIDATING  DIVIDENDS. 

L Kind  oi 
property. 

2.  Name  of  purchaser  or  broker,  j 

3.  Sale  pri  c or 

liquidating 
dividend  11. 

4.  Date 
acquired. 

5.  Cost  or  market  value 

Mar.  1, 1913,  if  acquired 
prior  thereto. 

6.  Cost  of  subse- 

quent iraprovo- 
ments,  if  any. 

7.  Depreciation 

subsequently 

sustained. 

1 

1 

Net  PnonT  (total  of  cols.  3 and  7 minus  total 
of  cols.  5 and  6) 

*... 

1 

$— 

1 

1.  Kind  of  property. 

2.  Name  and  address  of  tenant,  lessee,  cto. 

0.  Ainonut  (cash 

! or  onuivalcTit) 

, and  property  losses. 

5.  Other  expenses. 

Net  Tneome  ebom  Rent.s  and  Rotat.ttes  (total  ofcol.  3 minus  total  of  cols.  4 and  5). 

$ 

It 

1 's. .....I 

1 

fi  F.  JNTEsIsT  ON  CORPORATION  BONDS  CONTAINING  TAX-FP.EE  COVENANT,  ON  WlilCfeA  TAX  OF  2%  WAS  PAID  BY  DEBTOR  CORPORATION  I 

I Mni'lniin"  su"h  interest  ref cived  firong'n  ni'-tnership?.  ni-rsnntl  se^^^cp.  corDorations  and  fidnoiarie^reportinTon  ealRTidar  year  basis').  1^- 


G.  OTHElTlNCOME^Tn^  including  dividend.-,,  which  should  reported  in  Item  K).  Amount  received 


Amount  paid  for  you  by  debtor  corporation  on  tai-lrce  covenant  bonds  (Item  Q,  page  1). 


H,  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES. 





1.  Interest  paid  on 

3.  Losses  by  Ore,  storm,  or  cas- 
ualty oot  claimed  above. 

i 

2.  Taxes  paid 

5.  Bad  debts  and  other  deductions, 
llany(attachdetail&dstatemont 

TOTAt.-- 


Ji L 


I rc- 


J.  Total  net  income  on  which  norma!  tax  is  to  ho  caSerfated  (H  raniw  1)  (Enter  03  Item  M,  page  1)  — 

K.  Cash  or  Slock  Dividends  from  corporations  which  are  lasaWe  hy  Sre  L'niled  Suies  upon  any  portion  of  their  net  incomes  (including  dividends 

ceived  through  partnerehipe,  personal  service  corporations,  and  fiduciaries  reporting  on  a calendar  year  basis) . |„ 

L Total  net  income  (if  this  amount  is  over  $5,000,  mate  your  return  on  Form  1040) 1 

2—9397 


$ 


[Page  2 of  Form  1040A. 


Income  Tax 

Supplementary  Page  50. 


KEEP  THIS  WORK  SHEET  AND  INSTRUCTION 


DETACH 

THE  RETURN  (CON- 
TAINING AFFIDAVIT) 
AND 

DELIVER  OR  SEND  IT 
WITH  PAYMENT 
TO  COLLECTOR  OF 
INTERNAL  REVENUE 
ON  OR  BEFORE 
MARCH  15. 1920 


PAY  YOUR  TAX  IN  FULL 
WHEN  YOU  FILE 
YOUR  RETURN,  THEREBY 
REDUCING  THE  COST  OF 
COLLECTION  AND 
AVOIDING  POSSIBLE 
ANNOYANCE  TO  YOU 

1.  Did  you 
make  a re- 
turn for  1918? . 


Pag©  1 of  Work  Slieet 

Form  l(HOA— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

WORK  SHEET  FOR  INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $5,000 
For  Calendar  Year  1919 

.PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 

^Name) 


(Street  and  number  or  rural  route) 
(Post  office  and  State) 


IF  YOU  NEED 
ASSISTANCE 
GO  TO  A 

DEPITTY  COLLECTOR 
OR  TO  THE 
COLLECTOR’S  OFFICE 
BUT  FIRST 

READ  INSTRUCTIONS 
AND 

HLL  OUT  THIS  SHEET 
(FACE  AND  BACK) 

IN  PENCIL 

AS  WELL  AS  YOU  CAN 


2.  If  80,  what  address 
did  you  give  on 
_ that  return?  


8.  To  what  collector’s 

office  was  it  sent? 


4.  Were  you  married  and  living 

with  wife  (or  husband)  Dec.  31,  1919? 

(Give  district  or  city  and  State.) 

6.  If  not,  were  you  on  that  date  6.  How  many  dependent  persons  under 

the  head  of  a family  as  de-  18  (or  mentally  or  physically  defec- 

fined  in  instructions  under  tive)  were  receiving  their  chief  sup- 

“Personal  Exemption?”  port  from  you  on  Dec.  31,  1919? 

8.  Did  yoR  pay  durmg  the  calendar  year  to  any  individual  rent,  wages,  salaries 

or  other  fixed  or  determinable  income  amounting  to  $1,000  or  over?  


7.  Write  “R”  if  this  return 
shows  income  received, 
or  “A”  if  it  shows 
income  accrued  


9.  Did  your  wife  (or  husband)  or 

minor  child  make  a separate  return?  

(II 30,  give  name  and  address  shown  thereon.) 

10.  Did  you,  your  wife  (or  husband) 
or  minor  children  receive  any  in- 
terest on  U.  S.  Liberty  Bonds  or 
any  o&er  income  not  reported 
elsewhere  in  this  return  or  in  a 

p^parafA  TAfiim? 

(II  so,  give  sources  and  amounts. ) 

11.  Enter  name  and  address  of  each 
organization  to  which  you  made 
contributions  claimed  as  deduc- 
tions, and  amount  paid  to  each. 

12.  Enter  in  this  table  details  concerning  repairs,  wear  and  tear,  and  property  losses,  claimed  as  deductions  in  Schedules  A,  E and  I 
on  page  2 of  return  (see  instructions):  If  property  was  acquired  prior  to  Slarch  1,  1913,  attach  statement  explaining  how  value  as 


1.  Beler 
to  “A,” 
“E”  or 
“L” 

2.  Kind  ol  property. 

(It  buildings,  state  also  ma- 
terial ol  which  constructed.) 

3.  Date 
ac- 
quired. 

4.  Cost  or  market 
value  March  1, 
19)3.  if  acquired 
prior  thereto. 

5.  Repairs 
ordinary  and 
Incidental. 

W ear  and  tear  (depreciation)  and  depletion 
charged  off— 

9.  Losses  not  compensated  for  by 
insurance.  Causeandhow 
amount  was  arrived  at. 

6. 

Rate. 

7.  Amount  pre- 
vious years. 

8.  Amount  this 
year. 

$ 

) 1 

$ 

1 

— 

Attach  a detailed  statement  of  repairs  showing  nature  and  amount  of  each  item  of  expenditure. 

CALCULATION  OF  TAX 


M.  Ncl  IDCOIDC  sfcowi  OD  p2££  2t  IlOO  J . j 

..  1 

!. 

P.  Tax  dsc  (4^  on  aaonnt  of  Item  0) ..  ...  

$ 

^ T«tt  p«r«Ana1  M^mpPirtii  Trrttrnrtinn  VTT^  1 

1 1 

Q.  Lesi  nonnal  lax  of  2 on  amonni  of  Hem  F 

R.  Balance  of  tax  doe  _ ..  ..  - 

A Italanr*  /'ifirMn*  at 

1.  ..1 

|. 

$ 

NOTE.— If  tUe  amount  on  line  0 exceeds  $4,000,  the  cxcess.ls  tai.able  k1 
and  your  return  should  be  made  on  Form  1040. 

S.  Ambnnl  of  tax  paid  on  snbmission  of  rehim 

1$ 

— 

TAXPAYER’S  RECORD  OF  PAYMENTS 


PAYMENT. 

AMOUNT. 

DA^TE.  1 CHECK  OR  M.  0.  No. 

BANK  OR  OFFICE  OF  ISSUE. 

First  

$ 

1 

RpnnnrT 

§ 

j 

Tbird  ^ _ 

i 

Fourth 

$. 

1 

[Page  3 of  Form  1040A.1 


Income  Tax 

Supplementary  Page  51. 


h*e  2 rf  Work  Sktti  WORK  SHEET  OF  INDIVIDUAL  RETURN  OF  TAXABLE  INCOME 


(iocludinf  meom*  of  wile  (< 

minor  chadfon,  onlaM  rot>ortod  in  ooMyoU 


A.  INCOME  FROM  BUSINESS  OR  PROFESSION. 


1.  Kind  oftrusiness- 


2.  Business  addrsos.. 


Xofcd  sales  and  income  from  business  or  professional  serrices . 


COST  OF  GOODS  SOLD:  j 

A T.ftVnnr  _ „ 

. 1 

OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as 

“Labor”  under  “Cost  of  Goods  Sold”. 

13.  Rent  on  business  property  in  which 

taxpayer  has  no  equity 

J 

1 

i 

1 

1 

H.  Interest  on  business  indebtedness  to 

1 

1 

15.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  and  property 

i.  Plos  Inventories  at  bcghmlng  of  year  J 

1 

17.  Bad  debts  arising  from  sales  or  protes- 
Eional  services 

1 . 

1 

18.  Other  expenses  (attach  classified  state- 

It.  Net  Cost  o»  Goods  Bold... 

1 

1 

19.  Total  (Items  12  to  18  inclusive) !$ 

1 

20.  Net  Cost  Plus  Total  Deductions  (Item  11  plus  Item  10). 

21.  Net  Income  eeom  Business  or  Peotession  (Item  3 minus  Item  201 $ 


B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  DIRECT  OR’S  FEES  AND  PENSIONS. 


1.  By  whom  received. 


3.  Name  and  address  of  employer. 


Salary  to  self  and  dependent  minor  children  included  in  any  deduction  in  Schedule  A . 


3.  Losses  bv  fire,  storm,  or  cos- 1 
ualty  not  claimed  above-ii- 


— . 4.  Contributions. 


if  any  (attach  detailed  statement)!^ 
Total — 


C.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  FIDUCIARIES  REPORFiNG  ON  A CALEND.4R  YEAR  BASIS 

(not  including  amounts  reported  under  F and  K).  • 

D PROFIT  FROM  SALE  OF  LAND.  BUILDINGS.  STOCKS.  BONDS  AND  OTHER  PROPERTY,  AND  FROM  LIQUIDATING  DIVIDENDS. 

1 TT-  A t \ 1 3.  Sale  price  or  i „ 

rroiimy  1 2.  Name  of  purchaser  or  broker,  j | acquired. 

5.  Co.'ct  or  market  value 

Mar.  1, 1913.  if  acquired 
prior  tnorrto. 

b.  t.ost  of  subse- 

quent Improvo- 
ments,  ii  any. 

7.  Depreciation 
subsequently 
sustained. 

1 s - 

. ...i 

, 1 

, 1 

1 

1 1 

1 

i 

1 

1 1 ..... 

1 

1 .. 

1 

Net  Profit  (total  of  cols.  3 and  7 minus  total  | 

1 1 

1 ...! 

!v  1 

1 

8 ......1...-. 

t 

E.  INCOME  FROM  RENTS  AND  ROYALTIES 

1.  Kind  of  property. 

2.  Name  and  address  of  tenant,  lessee,  etc.  | 

6.  Amount  (casu 

or  eouivalent) 

4.  Repairs. wear. t«*r. 
and  property  losses. 

5.  Other  expenses. 

! 

J 1 

$ - 

i 

1 r”" 

1 

1 .J 

....1 

Net  Income  from  Bents  A'm  noVAi.-nrs  (total  ofool.  3 minus  total  ofcols.  4 and  5). 

1 

<3 I...... 

F.  INTEREST  ON  CORPORATION  BONDS  CONTAINING  T.AX-FP.EE  COVEN, A.NT,  ON  WHICH  A TAX  OF  1%  WAS  PAID  BY  DEBTOR  CORPORATION!  1 

G.  OTHER  INCOME  (not  including  dividends, 

. which  should  he  reported  in 

, Item  K). 

1 ,\mountreceived. 

bonds  (Item  Q i 

>ego  1) 

L 1 

AiQOUiiv  paia  lor  you  oy  ucotoi  cui puiuLiuii  uu  vv«t.uuAA;, 

1 1 

H.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES. - — - 

I.  GENERAL  DEDUCTIONS  NOT  INCLUDED  ABOVE, 

J.  Total  net  income  on  which  norma!  tax  is  to  bo  calculated  (H  minus  1)  i^Enter  c.3  Item  .1,  page  1)  — |$  — - 

K.  Cash  or  Stock  Dividends  from  corporations  which  are  taxable  by  the  United  States  upon  any  portion  of  their  net  incomes  (luciiulit.g  divtuouus  rc-| 

ceived  through  pjirtnership.s,  personal  service  corporations,  and  liduciarius  reporting  on  a calennar  year  oasis;  - : : 

I,  Totn!  net  income  (if  this  amount  is  over  ?.5,000,  malre  ycur  retmn  on  Form  1040) 


[Page  4 of  Form  1040 A.] 


Income  Tax 

Supplementary  Page  .52. 


tig»  1 «riDsInidiiuu 


GENERAL  rNSTRUCTIONS 

INDIVIDUAL  RETURN 


L PEBSONS  REQUIRED  TO  MAKE  A RETURN  OF  NET  INCOME. 

L lUtora  of  net  Income  must  1)0  filed  toy  every  Citizen  of  the  United  States, 
whetber  residing  at  home  or 'abroad,  and  every  person  residing  in  the  United 
States,  thoogh  not  a citizen  thereol, .whose  net  income  lor  the  taxable  year  1919 


(a)  *1,000  If  single  or  if  married  and  not  living  with  wife  (or  husband). 
(b>.  *2,0(»  if  married  and  living  with  wiie  (or  husband). 

2.  Under  any  of  these  circumstances  a return  must  be  made  even  though  the 
amount  of  net  income  is  not  sutheient  to  incur  tax  liability.  Note  especially 
ixrsonal  credits  for  exemption  and  dependents  under  Instruction  VII  on  this  page. 

3.  II  the  combined  income  of  husband,  wife,  and  dependent  minor  children 
equaled  or  exceeded  $2,000,  all  such  income  must  be  repotted  either  .ona  Joint 
return  or  on  separate  returns  of  husband  and  wile.  If  single  and  the  income, 
including  that  of  dependent  minors,  if  any,  equaled  or  exceeded  81,009,  one 
return  most  be  filed.  However,  a minor  having  a net  income  of  $1,000  or  $2,0C0, 
according  to  the  marital  status,  most  file  a return,  as  such  person  is  not  oon< 
Eidered  a dependent. 

4.  Ihthe  case  Of  husband  and  wife  whose  combined  net  income  exceeds  $5,000, 
Form  1040A  should  not  be  used  but  separate  returns  must  be  made  on  Form 
lOtO,  showi^  the  respective  amounts  of  inemna. 

6.  Income  of  a minor  or  Incompetent,  if  derived  from  a separate  estate  under 
control  of  a guardian,  trustee  or  other  fiduciary,  must  bo  reported  by  his  gnai- 
dlan  or  othM  legal  representative. 

II.  WHEN  To  USE  FORM  1040  INSTEAD  OF  THIS  FORM. 
You  must  make  your  return  on  Form  1040— 

(a)  If  yoar  net  income  is  over  $5,000. 

(b)  It  the  net  income  reported  in  this  return  exceeds  $4,000  and  the  entire 
family  exemptim  has  been  claimed  In  a separate  return  made  by  wife  (or 


(c)  If  the  combined  net  income  of  husband  and  wife  exceeds  $5,000. 

(d)  If  you  are  reporting  on  the  basis  of  a fiscal  year  ending  on  the  last  day 
of  any  month  Other  than  December. 

(o)  If  this  form  does  not  provide  for  all  the  facts  you  have  to  report  (as,  for 
example,  if  you  receive  income  from  a partnership,  personal  service  corpora- 
tion or  fiduciary  with  a fiscal  year  falling  i>artly  in  191S  and  partly  in  1919). 

III.  PERIOD  TO  BE  COVERED  BY  RETURN. 

L Yon  iuil5t  report  your  net  income  lor  the  calendar  year  1919,  except 
under  the  conditions  stated  in  paragraph  2,  when  Form  1040  must  be  used. . 

2.  You  were  required  to  file  your  return  for  1918  on  the  basis  of  your  annual 
accounting  period.  Having  established  an  accounting  period  for  1918  this 
period  must  be  adhered  to  In  1919,  unless  permission  was  received  from  tho 
CommJssiqnM'  to  make  a change.  A person  ha^'ing  no  fiscal  year  must  file  a 
retumon  the  basis  ol  a calendar  year. 

IV.  ACCRUED  OR  RECEIVED  INCOME. 

1.  If  yon-keep  books  showing  Income  accrued  and  expenses  incurred  during 
the  year,  make  your  return  from  your  books,  but  do  not  f^l  to  Include  all  your 
incoma  even  ii  it  is  not  entered  in  your  books. 

2.  I f you  do  not  keep  books  showing  income  accrued  and  expenses  incurred, 
report  income  received  and  expenses  paid. 

3.  If  you  report  Income  accrued,  you  must  Include  all  Income  that  accrued 
fn  1919  even  though  not  actually  received. 

4.  If  you  report  income  received,  you  must  include  all  Income  constructively 
n»e»lv«rt,  tiirh  m lia.nlf  intjre^t  Credited. tUyOUI  aCOlUnt. 

V.  ITEMS  EXEMPT  FROM  TAX. 

The  following  Kerns  are  exempt  from  Federal  income  tax: 

1.  P^y,  not  exceeding  $3,500,  lor  active  services  in  the  military  or  naval 
forces  ol  the  United  States,  received  during  the  taxable  year  prior  to  tho  termi- 
nation of  the  present  war  as  fixed  by  proclamation  of  tho  President. 

2.  Gilts  (not  made  as  a consideration  for  service  rendered)  and  money  and 
propertitacquited  under-a  wiiloc-by  inheritance  (but  tho  income  derived  Irom 
money  dr  prd^rty  received  by  gift,  will  or  inheritance  is  taxable  and  must 
be  reported). 

3.  Interest  on  bonds  and  other  obligations  of  the  United  States  issued  before 
September  1,  1917,  and  on  such  bonds  and  other  obligations  issued  since  that 
date,  *D  the  extent  provided  by  acts  authorizing  the  Issue  thereof. 

4.  Interest  on  bonds  and  other  obligations  ol  United  States  possessions  (Phlh’p- 
plnes,  J’orto  Rico,  etc.). 

6.  loiercst  on  bonds  and  other  obligations  of  States,  territories,  political  sub- 
dlvisiCDS  thereof  (such  as  cities,  counties  and  townships),  and  thu  District  of 
Columbia. 

6.  Interest  On  Federal  Farm  Loan  bonds. 

7.  Dividenda  upon  stock  of  Federal  Reserve  Banks.  However,  dividends 
paid  by  member  banks  aro  treated  as  dividends  of  ordinary  corporations. 

8.  Interest  on  bonds  Issued  by  tho  War  Finance  Corporation,  only  if  and  to 
the  extent  provided  In  the  act  authorizing  the  issue  thereof. 

9.  Pltoceeds  of  life  insurance  policies  paid  upon  the  death  of  the  insured 
to  individaal  beneOcIeries  or  the  estate  of  the  Insured. 

10.  received  by  the  Insured  under  lUo  insurance,  endowment,  and 
annuity  coDttacts,  provided  racb  payments  do  not  exceed  tho  premiums  paid 


la.  The  amount  by  which  the  tote!  payments  that  have  been  received  exceed ' 
tho  total  premiums  paid  In  is  income  and  must  be  reported  In  Schedule,  Q.. 

11.  Amounts  received  from  accident  and  health  insurance  and  tinder  vvork* , 
men’s  compensation  acts  plus  tho  amount  of  any  damages  received  by  suit  or 
agreement  on  account  of  injuries  or  sickness. 

12.  Compensation  paid  by  a State  or  political  subdivision  thereof  to  Its  ofiBcsrs  , 
or  employees. 

yi.  FARMER’S  INCOME  SCHEDULE. 

If  you  aro  a farmer,  or  a farm  owner  renting  your  farm  out  on  shares,  obtain  from 
the  coUectorand  fill  out  Form  1040F,  " Schedule  of  Farm  Inconie  and  Expenses,’’ 
and  attach,lt  to  this  return.  Translerthe  net  farm  Income  to  lino  21  of  Sehcdula 
A of  the  return.  Report  income  from  salaries,  rents,  interest,  sales  of  property, 
etc.,  in  Schedules  B to  Q of  the  return.  ~ 

VII.  CREDITS  FOR  PERSONAL  EXEMPTION  AND  DEPENDENTS. 

1.  If  you  were  married  and  living  with  your  wife  (or  husband)  or  were  head 
of  a family  December  31, 1919,  you  may  subtract  from  your  net  inernne,  before  cal- 
culating your  tax,  an  exemption  of  $2,000  plus  1200  for  each  pemon  under 
18  (or  mentally  or  physically  defective)  who  was  receiving  his  chief  support 
from  you  oajhat  date.  II  husband  aiwi  wife  make  separate  returns,  tlfiscxemp- 
tion  may  be  claimed  by  either  (but  not  by  both)  or  may  ho  divided  betwem 
them. 

2.  If  you  were  not  married  or  did  hot  live,  with  wifo  (or  husband)’  and  were  I 
not  head  ol  a family  Dacombor  31, 1019,  you  aro  entitled  toa  pcrsonalcxemption  of 
$1,000  plus  $200  for  each  dependent  person  under  18  (or  mentally  or  physifcally 
defective)  who  Was  receiving  his  chief  support  from  you  oh  that  date. 

3.  If,  by  reason  of  a change  in  your  accounting  period,  you  mako'a  return  for 

a part  of  a year,  your  personal  exemption  Shall  be  as  many  twelfths  of  the 
amount  that  would  bo  allowed  for  a full  year  as  there  are  months  in  the  jieriod 
covered  by  the  return.  " ’ , . - . ; - 

4.  The  personal  exemption  must  be  reported  on  line  N,  page  1,  of  the  re- 
turn, and  must  be  supported  by  answers  to  questions  4,  5 and  6, 

6.  A “head  of  family”  is  a person  who  Is  tho  chief  support  of  one  or  more 
persons  living  In  his  (or  her)  household.,  who  are  closely  related  to  him  (or  her)  by 
blood,  marriage,  or  adoption. 

Vm.  AFFIDAVIT. 

1.  Tbo  affidavit  must  be  executed  by  the  person  whoso  Income  Is  reported 
unless  ho  is  a mino.r  or  Incompctcnt.or  unless  he,  is  ilj,  a,bseot  ’ftojn  t.he,c.ountry, 
or  otherwise  incapacitated,-  in  which  case  the  legal  representativ’e  oragentmay 
.«xocute  the  affidavit.  However,  a minor  making  his  own  return  may  execute 
th6  affidavit. 

2.  The  oath  will  be  administered  without  charge  by  any  collector,'  cfcputy. 
collector  or  intemai-revenuo  agent,  or  (if  you  are  in  the  military  or  paya^eryica 
of  the  United  States)  by  any  military  or  naval  officer  who-is  authorized  to  ad- 
minister oaths  for  purposes  of  military  or  naval  Justice  and  administration.  If 
an  internal-revenue  officer  Is  not  available,-  the  return  should  be  sworn  to  before 
a notary  public,  justico  of  tho  peace,  or  other  person  authorized  to  administer 

IX.  WHEN  AND  WHERE  THE  RETURN  MUST  BE  FILED. 

Send  your  return  to  the  collector  of  internal  revenue  for  the  d.igtrict  Jn  which 
you  live  or  have  your  place  of  business  so  that  it  will  reach  him  on  or  beforo 
March  15,  1920.  If  the  address  of  the  collector  is  not  printed  on  the  return  and 
you  do  not  Icnow  it,  ask  at  the  post  office  or  bank. 

X.  WHEN  AND  TO  WHOM  THE  TAX  MUST  BE  PAID. 

1.  Thofaxshould  be  paid,  if  possible,  by  sendingor  bringing-withtheretura 
a check  or  money  ortier  drawn  to  the  order  of  “Colloctor  of  Internal  Revenue 
at  [insert  name  of  city  and  State].’* 

2.  Do  not  sendcash  through  tho  mail,  nor  pay  itln  person,  exfceptat  tho  office 
of  the  collector  or  a rogulariy  established  internal-revenue  stamp  office. 

3.  At  least  one-fourlh  of  the  tax  is  due  at  the  same  time  this  return  is  duo. 

4.  An  additional  amount  sufficient  to  bring  tho  total  payments  up  to  eae. 
half  of  the  tax  is  due  on  or  before  June  15,  1920. 

5.  An  additional  amount  sufficient  to  bring  the  total  .payments  up  to  ihree- 
fonrths  of  tho  ta.x  is  due  on  or  before  September  15,  1920. 

6.  The  entire  remainder  of  tho  tax  is  duo  on  or  before  December  15,  1920. 

7.  The  total  tax  may  be  paid  at  tho  timo  of  filing  tho  return,  or  if  not  so  paid, 
cno  installment  may  bo  paid  and  the  balance  may  bo  paid  in  instailmonls,  or 
in  full,  oil  or  prior  to  any  subsequent  Installment  date  referred  to  above. 

Failure  to  pay  any  installment  on  the  date  fixed  by  law  makes  the  taxpayer 
llalile  for  the  payment  of  tho  balance  of  tho  ta.x  due,  upon  notice  and  demand 
by  the  cplicctor,  . 

XI.  PENALTIES. 

For  Making  Falsa  or  Fraudulent  Return. 

Not  exceeding  $10,000  or  not  exceeding  one  year’s  imprisonment,  or  both,  in 
tho  discretion  of  the  court,  and.  In  addition,  60  per  cent  of  tho  tax  evaded. 

For  Failing  to  Make  Return  on  Time. 

Not  more  than  $1,000,  and,  in  addition,  25  per  cimt  of  tho  amount  of  tax  due. 
For  Failing  to  Pay  Tax  When  Due,  or  Understatement  of  Tax  Through 
Negligence. 

Five  per  cent  of  the  tax  due  but  unpaid,  plus  intere.st  at  tno  rate  oil  per 
cent  per  mouth  during  the  period  in  which  it  ri-maius  uup'.iid. 


[Page  5 of  Form  1040A.j 


Income  Tax 

Supplementary  Page  53, 


P»ie2«fin5trnciicns  INSTRUCTIONS  FOR  FILLING  IN  INDIVIDUAL  INCOME  TAX  RETURN 


A.  INCOME  FROM  BUSH 

Report  here  Income  from— 

(a)  Sale  of  merchandise,  or  of  products  of  raanufacturine,  construction, 
mining,  and  agriciilture.  (For  farm  income  see  Instruction  VI  on  the  reverse 
side  of  this  sheet.) 

(b)  Business  sendee,  sneh  as  transportation,  storage,  larindering,  hotel 
and  restaurant  service,  livery  and  garage  service,  etc.,  if  you  own  the  busi- 
ness. If  you  are  engaged  In  the  business  as  an  empioyee,  report  youx  salary 
or  wages  m Schedule  B. 

(c)  A profession,  such  as  medicine,  law,  or  dentistry,  if  you  practice  it 
on  your  own  account.  If  you  are  employed  on  a salary,  report  your  salary 

In  Schedule  B. 

In  general,  report  In  Schedule  A any  Income  in  the  earning  of  which 

Incur  expenses  for  labor,  rent,  etc.  Do  not  report  here  partnersUp  profiU 
or  profits  of  personal  ser^ce  corporations,  which  should  be  entered  under  C, 
or  dividends  from  other  corporations,  which  should  be  entered  imder  K. 

If  you  are  a farmer  (or  a farm  owner  renting  your  farm  to  another  person 
on  shares),  enter  on  line  21  your  net  income  from  farming^,  as  shown  by  your 
“Schedule  of  Farm  Income  and  Expenses,”  Form  1040F. 

If  you  keep  books  showing  income  accrued,  report  such  income  Instead  of 
cash  received,  and  report  expenses  incurred  mstcad  of  expenses  paid. 

Income  received  from  sale  of  lands,  buildings,  equipment,  stocks,  Iwnds, 
and  other  property  notdealtinasa  business,  and  from  Uquidatmg  dividends, 
should  bo  reports  under  D. 

• Kind  of  business.— Enter  “grocery,”  "retail  clothing,”  "drug  store," 
"laundry,”  “doctor,"  “lawyer,”  etc. 

Tota!  sales  and  income  from  business  or  ptefession.— Report  the  tot^ 
amount  derived  from  sales,  less  any  discounts  or  allowances  from  the  sale 
price. 

•lESS  OR  PROFESSION. 

other  business  deductions Do  not  include  cost  of  business  equipment 

or  furniture,  expenditures  for  replacements,  or  for  permanent  improvements 
to  property,  or  living  and  family  expenses. 

Selailes.— Enter  as  item  12,all  salaries  and  wages  not  reported  as‘'LaboT” 
undjr  “Cost  of  Goods  Sold."  Salary  or  wages  for  your  own  services  or  the 
service*  of  your  dependent  minor  ctfildrenlf  deducted  must  be  reported  as 
income  in  Schedule  B. 

Rent.— Enter  as  item  13,  rent  on  business  property  In  which  taxpayer 
has  no  equity.  Do  not  include  rent  for  dwelling  you  occupy  for  residential 
purposes. 

Interest.— Enter  as  Item  14,  Interest  on  business  Indebtedness  to  othera. 

Do  not  include  interest  on  ycur  capital  investment  in  or  advances  to  the 
business. 

Taxes.- Enter  as  item  1,5,  taxes  on  business  property  or  for  carrying  on 
business.  Do  not  include  taxes  ussessed  egalnst  local  benefits  of  a kind 
tending  to  increase  the  value  of  the  property  assessed,  as  fcr  paving,  sewers, 
etc.,  nor  Federal  income  taxes. 

Repairs,  wear  end  tear,  and  property  losses.— Enter  as  item  16,  (a)  ordinary 
repairs  required  to  keep  property  in  usable  condition,  (b)  reasonable  ^low- 
ance  for  exhaustion,  wear  and  tear  of  property  used  in  the  trade  or  business, 
including  a reasonable  allowance  lor  obsolescence,  and  (c)  losses  of  business 
property  by  fire,  storm,  theft,  etc.,  not  compensated  for  by  msurance  or 
otherwise,  and  for  which  no  claim  for  insurance  is  pending.  Explam  these 
deductions  in  table,  page  1 of  the  return.  Item  12. 

Bad  debts.— Enter  as  Item  17,  only  debts  arising  from  sales  or  professional 
services  that  have  been  reported  as  Income,  which  have  been  definitely 
ascertained  to  be  worthless  and  have  been  charged  off  within  the  year. 

Net  loss.— If  the  net  cost  of  goods  sold  plus  other  business  deductions  is  in 
excess  of  the  total  amount  of  sales  and  Income  from  business  or  profe  sicnal 
services,  report  the  difference  as  a loss  by  using  red  ink  or  a mmus  sign. 

B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIO 

If  salary,  wages,  or  other  compensation  received  from  outside  sources  by 
you,  your  wife  (or  husband),  or  dependent  minor  child  was  at  the  rate  of 
tl,0(X)  or  more  per  annum,  report  on  separate  lines,  together  with  the  occu- 
pation or  position  and  employer’s  name  and  address.  'The  total  of  all  other 

NS,  BONUSES,  DIRECTOR’S  FEES,  AND  PENSIONS. 

income  from  salaries,  wages,  commissions,  etc.,  should  be  reported  on  » 

^*?)o  not  report  pay,  not  exceeding  $3,500,  for  active  service  in  the  miUttuT 

ornavalforces  of  the  United  States  received  during  thetaxable year  prior  tothe 

termination  of  the  present  war  as  fixed  by  proclamation  of  the  President. 

C.  INCOME  FROM  PARTNERSHIPS,  PERSONAL 

If  the  partnership,  personal  service  corporation  cr  fiduciary  from  which 
you  received  Income,  keeps  its  books  on  a fiscal  year  basLS,  make  your 

return  on  Form  1040  instead  of  this  form.  . xv.  £•*.  » *1. 

Report  here  your  share  (whether  received  or  not)  in  the  prciits  or  the 
partnership  or  personal  service  corporation  or  in  the  income  of  ^tate  or  trust. 

Do  not  include  the  part  of  such  share  that  consisted  of  dividends  on  stock 
of  corporations  (to  be  included  in  Item  K),  interest  on  ohUgations  of  the 
United  States  (see  question  10),  or  interest  on  corporation  bonds  containing 

SERVICE  CORPORATIONS,  AND  FIDUCIARIES. 

a tax-free  covenant,  upon  wtiich  a tax  of  2 per  cent  was  paid  (or  ^11  be 
paid)  by  the  debtor  corporation  (to  be  included  in  liom  F).  No  withhold- 
ing of  income  tax  at  the  source  with  respect  to  interest  upon  tax-free 
covenant  bonds  owned  by  partnerships  and  personal  service  corporations 

was  required  prior  to  February  25,  1919.  ^ 

Report  in  Schedule  B salary  received  from  partnership  or  personal  service 
corporation. 

D.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS,  BONDS, 

Kind  of  property.— Describe  the  property  as  definitely  a?  you  can  in  a word 
or  as  *‘»rm/^  *^house/'  *^lot/*  ‘‘stocks/*  “bonds. 

Sale  price  or  liquidating  dividends,— State  the  actual  consideration  or 
price,  or.  In  case  of  an  exchange,  the  fair  market  value  of  the  property 
received.  . . , , , 

Cost.— Enter  the  original  oost  Of  the  property  or,  if  it  was  acquired  before 
March  1 , 1013,  its  lair  market  Value  on  that  date.  Attach  statement  explain- 

AND  OTHER  PROPERTY,  AND  FROM  LIQUIDATING  DIVIDENDS. 

ing  how  value  of  March  1,  1913,  was  determined.  Expenses  incidental  to 
the  purchase  may  be  included  m the  cost  if  never  claimed  in  Income  tax 
returns  as  deductions  from  income.  Enter  in  column  7 the  amount  of  wear 
and  tear  (denreciatio^)  or  depletion  sustained  since  March  1, 1913  (or  smee 
date  of  acquisition  if  subsequent  to  March  1, 1913). 

Losses.— If  the  total  of  columns  5 and  6 is  in  excess  of  the  total  of  columns 

3 and  7,  report  the  difference  as  a loss  by  using  red  ink  or  a minus  sign. 

E.  INCOME  FROM  REl 

Kind  of  property.— Describe  briefly,  os  In  D. 

Rent.— If  a tenant  rented  your  property  on  a crop  share  basts,  report  the 
amount  of  the  rent  as  income  for  the  year  in  which  you  disposed  of  such 
crops  (unless  your  return  shows  Income  accrued).  In  case  of  rent  paid  m 
other  property,  the  fair  market  value  thereof  as  of  date  of  leceipt  should 
be  reported  as  income  ol  the  year  of  receipt. 

NTS  AND  ROYALTIES. 

Wear,  tear,  repairs,  end  property  losses. — See  Instructions  for  Schedule  A, 
above.  Explain  in  Item  12,  page  1 of  the  return. 

Other  expenses.— Report  taxes  on  rented  or  leased  property  and  interest 
on  indebtedness  incurred  or  continued  to  purchase  or  car^  it.  Do  not 
include  taxes  assessed  against  local  benefits  of  a kind  tending  to  Increase 
the  value  of  the  property  assessed. 

F.  INTEREST  ON  CORPORATION  BONDS  CONTAIIONG  TAX-FREE  COVE 

Thlsitem  should  include  all  Interestf received  directly  or  through  partner- 
ships personal  service  corporations,  and  flduciares  on  bonds  of  corporations 
organ! or  doing  business  in  the  United  States,  contaimug  a ela^e  by  which 
the  debtor  corporation  agrees  to  pay  the  interest  without  any  deduction  for 
taxes,  provided  exemption  from  withholding  was  not  claimed  by  the  oymer 
ofthe  bonds.  If  exemption  was  claimed  (by  filing  ccrtiucate  Form  1001)  the 

NANT,  ON  WHICH  TAX  OF  2/.WAS  PAID  BY  DEBTOR  CORPORATION. 

interest  received  must  be  reported  in  O.  The  amount  of  tax  paid  by  the 
debtor  corporation  is  trcatecl  as  a credit  against  the  tax  due  (s^  Item  CL 
na^e  1 of  the  return),  but  such  amount  paid  at  thesource  should  be  reported 
as  income  in  Schedule  0.  If  the  nartnershlp,  personal  service  corporation 
or  fiduciary  from  which  you  received  income,  keeps  its  books  on  a fiscal 
year  basis,  make  your  return  on  F orm  1340  instead  o f this  form. 

G.  OTHER  INCOME  (NOT 

Report  In  this  schedule  Interqpt^rooeived  on  bank:  deposits,  notes,  mort- 
gages, etc.,  the  amount  paid  for  you  by  debtor  corporation  on  tax-free 
covenant  bonds  (Item  Q,  page  1),  and  aU  other  income  not  reported  In 
Schedules  A to  F,  except— 

INCLUDING  DIVIDENDS). 

(a)  Dividends  received  from  corporations  which  M taxable  by  the 
United  States  on  any  portion  of  their  net  incomes  (see  Item  K). 

(b)  Income  exempt  from  Federal  income  Ux,  as  stotad  m Instruction  V 
on  the  reverse  side  of  this  sheet. 

State  separately  income  from  each  source. 

1.  GENERAL 

Interest.- Report  here  interest  paid  on  personal  indebtedness  as  di^ 
tlneuiihed  from  business  indebtedness  (which  should  be  reported  under  A 
or  E above).  Do  nqt  include  interest  on  indebtedness  incupcd  for  the 
norchase  ol  bonds  end  other  obligations,  the  interest  on  which  is  exempt 
from  tax,  except  interest  on  indebtedness  incurred  to  purchase  obligauons 
ofthe  UnltW  States  Issued  after  September  24,  1917.  T,«fe 

Xtiea.~Report  here  personal  taxes  paid  and  ell  taxes  on  property  not 
med  In  business  or  profession,  not  Including  those  assessed  against  local 
benefits  of  a kind  tending  to  Increase  the  value  of  the  property  assessed. 
Do  not  include  Federal  income  taxes,  nor  estate  or  mheriCe^^  taxee. 

LoMea.— Report  here  losaie  of  property  not  connooted  with  your  trade, 
buainess.  or  profession,  sustatnea  during  the  year  from  fire,  storm,  ship- 
other  casualty,  or  from  th^t,  ^ich  were  not  compen^ted  for  by 
tomJice  or  otherwise,  and  for  which  no  claim  for  insurance  Is  pending. 

DEDUCTIONS. 

Do  not  Include  losses  from  transactions  not  entered  Into  for  iiroflt.  Losses 
claimed  should  be  explained  In  Item  12,  page  1 of  the  return. 

Contributions.— Reoort  hers  only  contributions  mado  witbin  the  yearu> 
corporations  organist  and  operated  exclusively  for  religious,  charluW^ 
scientific,  or  educational  purposes,  or  for  the  prev^tton  of  ^eUy  to  clul^n 
or  animals,  or  to  the  ipklsd  fund  tor  vocattonal  rehabilitation  The  t^ 
amount  of  contributions  to  bo  entered  hero  must  not  oxoeed  15  per  coat  of 
the  net  income  computed  without  the  benefit  of  this  deduction. 

Bad  debts  and  other  dedocaocs.— Bad  debts  arising  out  of  loans  should 
bo  reported  here,  and  other  proper  dodoctlons  not  cUira^  elsewhei^ 
Attach  a detailed  statamoDt  of  all  such  deductions.  Deduo^M 
by  traveling  salesmen  to  cover  expenditures  for  meals  and  lodging  should 
be  fully  explained  in  an  attached  statement  setting  forth  the  condiUons 
of  employment. 

2— 

[Page  6 of  Form  1040A.] 


Income  Tax 

Supplementary  Page  54. 


IF  RETURN  IS  FOR 
calendar  YEAR  1919 
RLE  IT  WITH  THE 
COLLECTOR  OF  INTERNAL 
\ REV’ENUE  FOR  YOUR 
DISTRICT  ON  OR  BEFORE 
MARCH  15,  1920 


IF  FOR  A PERIOD  OTHER 
THAN  A CALENDAR 
YEAR  THE  RETURN 
SHOULD  BE  FILED  ON  OR 
BEFORE  THE  15TH  DAY 
OF  THE  THIRD  MONTH 
FOLLOWING  THE  CLOSE 
OF  SUCH  PERIOD 


Page  1 of  Return 

Form  1040— TTNITED  STATES  INTERNAL  REVENUE  SERVICE 

INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  MORE  THAN  $5,000,  OR  FOR  SEPARATE  RETURNS  OF  HUSBAND  AND 
WIFE  LN  CASE  THEIR  COMBINED  NET  INCOME  EXCEEDS  $5, COO,  FOR  CALENDAR  YEAR  1919 


Or  for  period  begun 


19. 


amid  ended , 19. 


If  tk  retsn  is 
Bidt  fof  a pciiod 
atW  lhaa  a cal- 
cadas  year,  the 
dales  af  the  b«- 
fiioBj  and  ead- 
iif  af  Itie  period 
cavered  usl  be 
plaia.'j  stated  in 
Ibe  space  pia- 
sided  abase. 


PRINT  NAME  AND  ADDRESS  PLAINLY  BELOV' 


(Street  and  number  or  ramt  route) 


(Post  office  and  State) 


(blSH 

CHECK 

M.O. 

CERT, 
of  IND. 

' (DO  NOT  WRITE  IN  THIS  SPACZ) 

Exanslnd  by 


Audiled  by 

Fi^T  payment' 


Cashier’s  Stamp 


1 Did  you  make  a 2.  If  so,  what  address  did  3.  To  what  (Collector’s  office  was  it  sent? 

’ return  for  1918? you  give  on  that  return? (Give  district  or  city  and  State.)  

4 Did  you  receive  any  adjustments  during  the  taxable  period  on  account  of  Gov-  5.  Were  you  married  and  living  with  wife  (or  husband) 

emment  contracts  through  the  operations  of  a clauns  board  or  otherwise? on  the  last  day  of  your  taxable  year? 

6 If  not,  were  you  on  that  date  head  of  a family  as  defined  7.  How  many  dependent  persons  under  18  (or  mentally  or  physically  defective) 

' in  instructions  under  “Personal  Exemption”? were  receiving  their  chief  support  from  you  on  the  last  day  of  your  taxable  year? 

8.  Write  “R”  if  this  return  shows  income  9.  Did  your  wife  (or  husband)  or  (If  so,  give  name  fcnd  address 

received  or  ” if  it  shows  income  accrued minor  child  make  a separate  return? entered  at  head  of  that  return.) 

10.  Did  you  pay  during  the  year  to  any  individual  rent,  wages,  salaries,  or  other  fixed  or  determinable  income  amounting  to  $1,000  or  over?.,.. 


Class  or  ezccxmia. 

PRINCTFAI,. 

Interest. 

j Class  o?  Secututies.  | 

1 Prc-cipax. 

Interest. 

Salaby,  etc.  (cm  30UBCE). 

.Amount. 

Liberty  Lo*a  S>/i%  Bsii4o  omainieitod. . 
Other  obllntions  of  tix  U.  8.  before  Sept. 

1, 1917,  &&J  obLi^U#&3  of  U.  &•  poaMtaiona  .. 



Oblivions  of  Stages  and  Territories. 
c&l  enbdjTisioDg  thereof,  and  tbe  District  I 
ofColombia 1 

Vlctorr  Liberty  Loea  So(eo 

Federal  Farm  Loan  Bonds | 

12.  Stock  dividends  received  during  the  taxable  period  which  were  declared 
and  paid  Iwtween  January  1 and  November  1, 1918,  both  dates  inclusive,  or 
authorized  or  <leclaied,  and  entered  on  the  books  of  the  corporation  within 
thoec  dates  and  received  during  such  taxable  period  and  before  March  27, 
1919,  shall  be  allocated  as  follows: 


1.  ACCUMttLATED  IN— 

2.  1918-19. 

3.  1917.  1 

1 4.  1016. 

5.  1913-15. 

(a)  Received  directly  

J 

J 

$ - 

$ 

(6)  Received  indirectly 

lucludeioK  (a),  page  2. 

1 Eour-M  20,  below. 

(c)  Totai.s 

$ .* 

J 6, 1 

$ 

Is 

13.  Enter  in  the  table  below  Interest  on  Liberty  Bonds  and  other  obligations  of  the  United  btatea  issued  since  September  1,  1917,  and  V'ar  Finance  Corporation  Bonds  received  by 

(or  accrued  to)  you  during  the  year,  and  maximum  amount  of  such  obligations  (par  value)  held  at  any  one  time  from  which  such  interest  was  derived  (see  instnictions,  page  2 under  Kfb)): 


1.  Cuss  or  OsuoanoKa 


(а)  First  Liberty  Loan  converted  into  Second  Liberty  Loan 

and  Second  Libertv  Loan  imconverted 

(б)  First  and  Second  Liberty  Ixians  converted  into  Third 

Liberty  Loan  and  Third  Liberty  Loan- 

-(c)  First  Liberty  Loan  converted  into  Fourth  Liberty  Loan. 

(d)  Fourth  liberty  Loan 

(e)  CHherobligationseiceptclaiBf/)  issued  since  Sept.  1,1917. 

(J)  Victory  Liberty  Loan  ‘k\%  Notes 

(g)  War  Finance  Corporation  Bonds. 


iNDirmnAL  HoLDnroa 


Share  of  Holdings  of  Partnerships, 

Personal  Service  Corporations, 

AND  FiDUCURIES. 


5.  Maximum  amount 


30,000 

30,000 


$5,000 


None. 

5.000.  (See  Note  C ) 


till  held.  State  here  amouut  of  bonds 

titow'the  amount'of  notes  ofYbe  Victory  Lil^rty  Loan  originally  subscribe  for  and  still  held.  State  hero  mo  amount  of  notes  of  the 

vTctory  Liberty’ Loan  3}%aod  or-iglnally  subscribed  for  and  still  held - a- -•-v.-'-t ^ 

from  tbe  15,000  eiemptlop  allowed  on  other  obligations,  and  can  only  be  claimed  against  War  Finance  Corporation  Bonds. 


of  tbc  Fourth  Liberty  Loan  orUrinally  snhscribed  for  and 
Nor*  B.— This  e»emptlc«  (^axinium  J20.000)  Is  limited 
/L.l 

Not*  C.— This 


14.  Euler  in  the  talljLjlow  (whether  received  or  not)  income  from  partnenKips*  personal  service  corporations  and  fiduciaries,  except  stock  dividends  entered  in  Item  12: 


1 N'iJlK  AJTD  ADDRESS  OF  PARTNERSHIP,  PERdONAt  SlRVlCE  CORPORATION  ,OR 
Fidcoary. 

2.  Peeiod  (Enter 
1919  OB  Date  on 
Wbich  Fiscal 
Year  E.nded). 

3.  Cash 
Divtdends. 

4.  Stock 
DmoENDS. 

5.  IN'TF.RE.‘?T  on 
Tax-Free  Uon'D3 
(BY  Fiduciaries 

O.N'LVJ. 

6.  iNTr.imsr  on 

Liberty  iio.vns,  etc., 
L'SUED  Slnce 

Bept.  1,  1017, 

A.VD  W aRFIXA.NCE 
CoRPoavTioN  Bonds. 

7.  Other  Income, 

LvCLUDfXG  Lvtereston 
Tax-Free  Donds  dv 
pARTNERsarrs,  and 
Person.u.  Service 
Corporations. 

$ 

5 

5 

5 

1 

• 

1 

1 

1 

1 

1 1 

1 

1 

(a)  Totftlfl  tRXftbld  Rt  1919  rRt63  (se©  indtructioziB,  pag6  2,  uodor  0)... ......... ,..r- — 

Iaciud«  <oK(*Kp»gc2. 

$ 

loelutlo  to  KCib?.  page  2.  j lucludv  lu  F 2. 

* 1 S- 

s 

Eat«r  u C.  pAge  2. 

$ 

(6)  Toulfl  Unable  at  1918  rates  (see  instructions,  page  2,  under  C) 

X X X X X 

X X X X X 1 

1 X X X X X 

X X X X X 

Enter  27.  bt'low,  and 

s 

: af  Intereat  recelrM  sy  partnerships  or  perpoaaJ  service  corponUlons  on  tax-free  eoTePAPt  bon«ia  open  which  normal  tax  ha^  I 


r will  bo  pil  l at  fionrc<»  inclivltf  l to  Item  U,  column  7.  S — . 


SUMMARY  OF  NET  INCOME  AND  COMPUTATION  OF  TAX. 


Incocna  Subjact  to  Surtax. 


Income  Subject  to  Normal  Tax. 

AT  1919  RATES. 

22.  Net  income  shown  on  page  2,  Item  J. 

23.  Less  personal  exemption 

$- 

24  Bala.n'ce 

$ 

25.  Amount  eubject  to  lax  at  (not 

over  |4,000j 

26.  Balance  subject  to  tax  at  8% 

AT  1918  RATES. 

27.  Amount  of  14(6),  column  7 

$ 

$ 

— 

28.  Balance  of  personal  exemption  not 

used  above  (Item  23  minus  Item  22). 

29.  Balance 

$ 

30.  Amount  subject  to  tax  at  6^  (if 
Hem  24  is  less  than  $4,000,  enter 
difierenco  here) . 

31.  Balance  Hubjoct  to  tax  at  12% 

s 

iputation  of  Tax. 


15.  Item  L,  page  2 (191^19  ratee)— 

$ 

16.  Item  12(c),  cclumn  3 (1917  rates) 

17.  Totax  (Items  15  and  16)—. ... 

$ 

IS.  Item  12(c),  column  4 (1916  rates)-..  .. 

19.  Total  (Items  17  and  IS)  ... 

$ 

20.  Item  12(c),  column  5 (1913-15  ratea)... 

21.  Total  Net  Income  (Items  19 

and  20) 

t. 

Non  '11  ibe  return  b lor  n year  or  as  Hem  36  an  amount 

equal  to  as  many  iweot)  -fou'  Csof  total  of  I'emsS^  and  SSaslbcre 
v.rt  monlb:  of  tba  fisc.*]  ytv  r tocludad  In  Ihr  calendar  year  1918. 

Did  you  employ  anyone  t.sp'.'cially  to  prepare  this 

return? If  so,  give  name  and  address 

- - — 

on  amount  of 
on  amount  of 
amount  of 


32.  Normal  tax  at  4'" 

33.  Normal  lax  at 's;: 

Item  2C 

34.  Normal  tax  at  on 

Item  30 , 

35.  Normal  t..x  at  12, 'J  on  amount  of 

Item  31 

30.  Normal  tax  (aiMitional  for  fiscal-year 
return)  see  Note  under  Item  21  .... 

37.  Surtax  at  1919  rates  (see  surtax  table 

on  ])age  1 of  in.structions) 

38.  Surtax  at  prior-year  rates  (see  surtax 

table,  page  1 of  instructions) 


39.  Total  Tax 

■10.  Tax  paid  at  source  ('2'^  of  sum  of 
Item  F,  page  2,  and  Item  1 1(c)) .. 

•ll.  Income,  wGr-[)r<jfit’>,  rin<I  e.xcuss-nroflt.'^  luxes 
p 11(1  during  t ixril)lo  pcrioiJ  to  foreipncoiin* 
lues  or  pObiuLsioijs  of  iho  Ualtod  SUlcs  ... 

■12.  Balanck  okTax  Dob  (Itcni  39 

niiiuis  Items  ‘10  and  -in 

43.  Amount  of  tax  paid  on  submission  of 
rettirn  


I SWEAR  (it  ftffirm)  that  this  return,  including 
of  my  knowltidgc  and  belief,  is  a true  and  complete 


period 


(If  reluTD  b mods  by  seent,  tbe  reason  tberefor  must  bo  suidJ  on  itus 

Sworn  to  and  subscribed  before  me  this day  of 1920. 


of  o2ic<r  odciiiasieruig  osth.^ 


Income  Tax 

Supplementary  Page  55. 


(Si^^turo  of  uidiv.  J'jjI  or  a^csl  ) 


[.Vddress ofmhviJ  ul  c 


[Page  1 of  Form  1040.] 


DETACH  RETURN  HERE  AND  SEND  IT  TO  COLLECTOR  OF  INTERNAL  REVENUE 


Page  2 of  Return 


INDIVIDUAL  RETURN  OF  TAXABLE  INCOME 


A,  INCOME  FROM  BUSINESS  OR  PROFESSION. 


1.  KinH  of  business 

3 Total  sales  and  income  from  business  or  professional  serv-ices.. 
COST  OF  GOODS  SOLD:  I 


2.  Business  address 


Material  and  supplies... 


Merchandise  bousht  for  sale ' 

Other  costa  (submit  schedule  of  principal  Utins  I 
r.t  foot  of  paee  or  on  separate  sheet).  ..  . 

Plus  inventories  at  beginning  of  year  (see  instruc- 
tions, Schedule  A,  page  2) — 


10.  Less  inventories  at  end  of  year I... 

U.  Net  Cost  of  Goods  Sold - 1^.. 

Did  you  claim  an  inventory  loss  for  1918? 

Is  obsolescence  claimed  in  deduction  in  Item  IG’ 


OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as  “Labor” 

under  “Co.st  of  goods  sold” 

13.  Rent  on  business  property  in  whieh  taxpayer  has 

14.  Interest  on  business  indebtedness  to  others 


15.  Taxes  on  business  and  business  property.. 

16.  Repairs,  wear  and  tear,  obsolescence,  depletion,  and 

property  losses  (explain  in  table  below) 


17.  Amortization  of  war  facilities— 

IS.  Bad  debts  arising  from  sales  or  professional  services.. 
19.  Other  expenses  (submit  schedule  of  principal  items 
at  foot  of  page  or  on  separate  sheet) 


20.  Total  (Items  12  to  19,  inclusive) 

21.  Net  Cost,  plus  Total  Deductions  (Item  11  plus  Item  20).. 

22.  Net  Income  prom  Business  or  Profession  (Item  3 minus 




Item  21) 


B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS.  BONUSES,  DIRECTOR’S  FEES  AND  PENSIONS. 


8,  Occupation. 


3.  Name  and  Address  op  Employer. 


Salary  to  self  and  dependent  minor  children  included  in  any  deduction  in  Schedule  A., 


Total  Income  from  Salaries,  etc L 


C INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS  AND  FIDUCIARIES  (Firm  itcp.  u (ri  coiRmn  ?.  pare  t.) 


D.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS,  BONDS  AND  OTHER  PROPERTY,  AND  FROM  LIQUIDATING  DIVIDENDS. 


I Kind  or  Pbo?eety. 

2,  NiilE  AMD  ADDEESS  0/  ruaCEASEB  OE  BeOKER. 

3.  S.ALE  Price  or 
Liquidatinq 
DmDSNDS. 

4.  Date 
Acquired. 

6.  Cost  of  Subse- 
quent Improve- 
ments, IF  A.VT. 

7.  Depbecution 
Subsequently 
Sustained. 

$ 

1 



$ - 

1 

• 

Net  PnoFtr  from  Sales  (total  of  columns  3 and  7 minus  total  of  columns  5 and  6).. 

!. 

1 

k 

E.  INCOME  FROM  RENTS  AND  ROYALTIES. 


1.  ICixT)  or  Property. 

5.  Najie  and  Address  or  Te.nant,  Lessee,  etc. 

3.  Amount. 
(Cash  or  equivalent.) 

4 R.FAtBs  WaA* 

»VI)  I'lKlPIKTT  LotJSrB 

5.  Interest. 

0.  Taxer 

7.  Other 

Expe.nses 
(Eitlaln  Below) 

1 

Net  Inccmc  from  Rents  and  Rovai.ties  (total  of  column  3 minus  total  of 

1 

F.  INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  A TAX  OF  2%  WiVS  PAID  BY  DEBTOR  CORPORATION. 

Received  directly,  $ ; received  through  fiduciaries  (Item  14  (a)  column  5),  $ Total.. 


G.  OTHER  INCOME  (not  including  dividends,  or  interest  on  obligations  of  the  United  States). 


1.  Interest  on  bonds,  mortgages,  and  other  obligations  of  domestic  and  resident  corporations  except  as  reported  in  Item  F ^ 

2.  Interest  on  bonds  of  foreign  countries  and  corporations,  and  dividends  on  stock  ol  foreign  corporations  which  arc  not  taxable  by  the  United  States 

upon  any  portion  of  their  net  incomes — - — 

3.  Interest  on  bank  deposits,  mortgages,  etc - 


4.  Amount  paid  for  you  by  debtor  corporation  on  tax-free  covenant  bonds  . 


H.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES $ 


I.  GENERAL  DEDUCTIONS  NOT  INCLUDED  ABOVE.  (Extapd  toui  deductiops  to  last  column.) 


1.  Interest  paid... 

2.  Taxes  paid. 


3.  Losses  bv  fire,  storm,  etc.  (explain 

in  table  below) 

4.  Contributions  (list  names  and 

amounts  below) 


5.  Bad  debts  and  other  deductions,  .. 
G.  Amounts  paid  to  boueGciaries,  etc.. 


J.  Total  net  income  on  which  normal  tax  is  to  be  calculated  at  1919  rates  (H  minus  I)  enter  as  22,  page  1 (unless  minus  quantity) — 

K(a).  Dividends.cashor  stock,  from  earnings  of  corporations  taucable  by  the  United  States  upon  any  portion  ol  their  net  incomes  includii.g  dividends  on  stock  of 
personal  service  corporations  declared  out  of  profts  earned  prior  to  January  1,  1918): 

1.  Received  directly,  including  2.  Received  Uirough  partnerships,  personal  service  corporations,  aad 

Item  12  (a),  column  2 $ fiduciaries.  (Item  12  (b),  column  2,  plus  Item  14  (a),  columns  3 and  4)....  $.. Total... 

K(b).  Taxable  interest  on  bonds  and  other  obligations  of  the  United  Slates  issued  after  SeptemW  1,  1917,  and  War  Finance  Cerporation  Bonds: 

Received  directly,  $ ; received  through  partnerships,  personal  service  corporations  and  fiduciaries $ Total.. 

K(c).  Other  income  from  partnerships,  personal  service  corporations  and  fiduciaries.  (Item  14  (b),  column  7) .. 


L Total  net  income  subject  to  surtax  at  1918-19  rates.  (If  Item  J shows  a minus  quantity,  deduct  amount  from  total  of  K (a),  K (b)  and  K (c)  before  entering 
on  this  line.  (If  this  amount  shows  a minus  quantity,  see  instrurtions  L.  page  2) 


ENTER  IN  THIS  TABLE  DETAILS  CONCERNING  REPAIRS,  WEAR  AND  TEAR,  PROPERTY  LOSSES,  ETC.,  CUIMED  AS  DEDUCTIONS  IN  SCHEDULES  A E AND  1 ABOVE 


Rev'ES 
E ’•  on 


. Cost 
Market  Valttb 
March  1, 1913, 

IF  AcqUlRED 

Prior  TiiEncTO, 


5.  REFAtna  (NOT 
Offset  by  Clatms 
FOR  Wear  and 
TEAfi  AND  Losses). 


8.  Amount  ima 


9.  Losses  not  Compfnsateo  for  d 

iNSURANCr,  OR  OTFTERWISE. 

Cause  and  Flow  .A.  mount  Was 

ABKrv-LO  AT. 


EXPLANATION  OF  DEDUCTIONS  chimed  in  Schedule  A,  lines  7 and  19,  Schedule  F.,  column  7;  and  Schedule  I.  Items  4.  5 and  0.  (.Mtach  separate  sheet,  if  necessary 


[Page  2 of  Form  1040.] 


Income  Tax 

Supplementary  Page  56. 


RETAIN  THIS  SHEET  AND  INSTRUCTION  SHEET  AVAILABLE  FOR  INSPECTION  BY  REVENUE  OFFICER 


DETACH  THE  RETURN 
(CONTAINING  AFFIDAVIT) 
AND  DELIVER  OR  SEND 
IT  WITH  PAYMENT  TO 
COLLECTOR  OF  INTERNAL 
REV'ENUE  ON  OR  BEFORE 
THE  15TH  DAY  OF  THE 
THIRD  MONTH  AFTER 
THE  CLOSE  OF  THE 
TAXABLE  PERIOD. 

KEEP  THIS 
WORK  SHEET 
AND  THE 
INSTRUCTION 
SHEET 


Pag6  1 of  Work  Sheet 

Form  1040— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

WORK  SHEET  FOR  INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  MORE  THAN  $5,060,  OR  FOR  SEPARATE  RETURN  OF  HUSBAND  AND 
WIFE  IN  CASE  THEIR  COMBINED  NET  INCOME  EXCEEDS  $5,000,  FOR  CALENDAR  YEAR  191$ 

Or  for  period  begun , 19 , and  ended , 19 

H the  rehuT)  i$ 


yeir 
the  (utc4cf  the 
be^Tin^  «D() 
ending  of  the 
period  covered 
mmt  be  pUiniy 
sUted  in  the 
space  provided 
above. 


PRINT  NAME  AND  ADDRESS  PLAINLY  BELOW 


(Name) 

(Street  and  number  or  rural  route) 
(Post  office  and  State) 


CASH 

CKEa 

M.0. 

CERT. 

sflNO. 

. 

IF  YOU  NEED 
ASSISTANCE 
CO  TO  A 

DEPUTY  COLLECTOR 
OR  TO  THE 
COLLECTOR’S  OFFICE 
BUT,F1RST 

READ  INStRUCTlONS 
AND 

FILL  OUT  THIS  SHEET 
(FACE  AND  BACK) 
IN  PENCIL 

ASWELL  AS  YOU  CAN 


1.  Did  you  make  a 2.  If  eo,  what  address  did 

return  for  1918? you  givo  on  that  return? 

4.  Did  you  receive  any  adjustments  during  the  taxable  period  on  account  of  Gov- 
ernment contracts  through  the  operations  of  a claims  board  or  otherwise? 
6.  If  not,  were  you  on  that  date  head  of  a family  as  defined 

in  instructions  under  "Porsocal  Exemption”? 

8.  Write  "R”  if  this  return  shows  income 

received  or  " A ” if  it  shows  income  accrued 

10.  Did  you  pay  during  the  year  to  any  indi\'idual  re 

11.  Enttf  below  all  nontaxabis  income  received  bv 


3.  To  what  Collector’s  office  was  it  sent? 

- (Give  district  or  city  and  State.) - 

5.  Were  you  married  and  living  with  wife  (or  husl^d) 

on  the  last  day  of  your  taxable  year? .' 

7.  How  many  dependent  persons  under  18  (or  mentally  or  physically  defective) 

. were  receiving  their  chief  support  from  you  ou  the  W day  of  your  taxable  year? 

9.  Did  your  wife  (or  husband)  or  (If  eo,  give  name  and  address  ~ 

minor  child  make  a eeparate  return? entered  at  head  of  that  return) 

wages,  salaries,  or  other  fixed  or  detertninable  income  amounting  to  $1,000  or  over? f it  «».  teciire  from  the  Collector  Porma  i6% 

r accrued  to)  vou  during  the  period  from  the  followins  sources:  ~ 1^'“*  * tetuni  of  mformnloo. 


CX.AB3  or  SSCUEITIES.  | PEIKOPAL. 

IWrXSEST.  1 

) CiAS9  or  Securities. 

PRINCTPAL-.  1 

1 Interest.  1 

1 Salary,  etc.  (Oive  Socece),  1 Amount. 

Firrt  liberty  31%  Bonds,  nneonTerted.  ..!  S 

, 1 

' ObUcEtions  of  BUtes  and  Territories  I'tl 

1 

Otberobiigtlkns  of  Ue  If.  8.  issued  before  8opt.  I 

1. 1917, and  obliirUicaB  of  1'.  8.  posseafiionH  < 

1 

I aO^bdirisians  tbereof,  and  the  D^rict 
.fColoBibia 

, 1 

1 

1 

victory  liberty  Loan  Sii%  Holes 1 

i 

' Federal  Farm  Loan  Bonds 

1 

12.  Stock  cUvidends  received  during  the  taxable  period  which  were  declared 
and  paid  between  Januarv  1 and  November  1,  1918,  both  dates  inclusivo, 
or  authorized  or  declared,  and  entered  on  the  books  of  the  coipiration 
within  thoec  dates  and  received  during  such  taxable  period  and 
before  March  27,  1919,  shall  be  allocated  as  follows: 


AccirMn.ATip  i 


(n)  Received  directly.... 
(6)  Received  indirectly  . 


i£L 


13.  Enter  in  table  below  Intereit  on  Liberty  Bond,  and  other  obligations  of  the  United  States  issued  since  September  1,  1917,  and.War  Finance  Corporation  Bonds  received  by 
(or  accrued  to)  you  during  the  year,  and  maximum  amount  of  such  obligations  (par  value)  held  at  any  one  time  from  which  such  interest  was  derived  (see  infitru<£oiiB,  page  2,  K(b) ): 


I.  Class  of  Obucatio.vs 


(а)  First  Liberty  Loan  converted  into  Second  Liberty  Loan 

and  Second  Liberty  Loan  unconverted 

(б)  First  and  Second  Liberty  Loans  convert^  into  Third 

Liberty  Loan  and  Third  Liberty  Loan 


(c)  First  Liberty  Loan  converted  into  Fourth  Liberty  Loan. 
(<f)  Fourth  Liberty  Loan 

(f)  Otherobligationscxcept class (/)iasuedBinceSept.  1, 1917. 

(/)  Victory  Liberty  I>oan  4i%  Notes  

(g)  War  Finance  Corporation  Bonds 


IKMVIDOAL  HOLDINOS. 


Share  of  Holwhos  of  Partnerships, 
Personal  Sesvke  CoEFoaiTioNs, 
AND  FIDDCUBIES. 


None. 

5,000.  fSee  Note  C.) 


Not*  ; 

of  Um  Fourth  Ltbertv  1 

Nos*  B,— Tills  otFicrtlon  (msxfuium  *20,000)  is' limited  to  three  limas  the  amoniit  o(  i 

_ _yWor)r  Llbertv  Loan  3iCi  and  41%  oriFlnaily  subscribed  for  RDd  still  held  

Not*  C.— Thill  eiempiion  b saparate  t-oro  the  t5,000  exemption  allowed  on  other  obligations,  and  can  o^y  bo  claimed' aga^t  War  Finmice  Corporation  Bonds. 

14.  Enter  in  the  table  below  (whether  received  or  not)  income  from  partncFships,  per^mal  service  corporation,  and  fiduciarie*,  except  .took  dividend*  entered  in  Item  12; 


2.  Pebiod  (Enter 
ims  OR  Date  on 
Which  Fiscal 
Yeah  Enoed). 


(a)  Totals  taxable  at  1919  rates  (see  instructions,  page  2,  under  C) 

(b)  Totals  taxable  at  1918  rates  fseo  instructions,  page  2,  under  C) 

(c)  Bate  Mneimt  ef  int.reet  pieelTed  hy  [lartnenibipa  or  personal  serrles  torporatkmi  no  tai-f 


X X X X X 


5.  Interest  on 
Tax.Feee  Bonps 
(BT  FIODCIAEIXS 
Only). 


ft-  Inteee.st  on 
Libertt  Bonps,  e: 
Issued  Sinc* 


7.  Other  Incomi, 
Inclddino  Interest  on 
Tax-Free  Bonds 
BT  PAETNEESHIPe  AND 
Personal  Service 
COEPOEATIONS. 


eorenEEt  bonds  upon  whUb  normal  tax  has  been  or  wtU  I 


SUMMARY  OF  NET  INCOME  AND  COMPUTATION  OF  TAX. 


» Included  In  Item  14,  colama  T.  $,. 


Income  Subject  to  Surtax. 


15.  Item  L,  page  2 (1918-19  rates) 

$ 

16.  Item  12(f),  column  3 (1917  rates) 

17  Total  (Items  15  and  10) 

£ 

18.  Item  12(c),  column  4(1916  rates)- 

19.  Total  (Items  17  and  IS) 

* 

20.  Item  12(c),  fclumn  .5(1913-15  rates)... 

21.  Total  Net  Incoue  (Items  19 

and  20) 

$ 

Nor*.— If  the  retirni  is  r.nder-vl  for  a Tscal  y*«r  enter 

•tjuEl  teas  .-nanT  twenty  Piurthi  otioial  ol  Items  32  and 
wir.  months  of  the  Bjcal 


Item  3San  amount 
s 32  and  33  u there 
the  calendar  year  ISIS. 


Did  you  employ  anyone  especially  to  prepare  this 
return? _.If  lo,  give  name  and  address 


1 Income  Subject  to  Norm&l  Tax. 

AT  191»  RATES. 

22.  Net  incomo  shown  on  page  2,  Item  J. 

23.  Less  txtrsonal  exemption 

$.— 

24  Baxajjce 

25.  Amount  subject  to  tax  at  4%  (not 
over  $4,000) 

26.  Balance  eubiect  to  tax  at  . 

$ 

AT  ISIS  RATTS. 

27.  Amount  of  14(5),  column  7 

$ 

28.  Balance  of  personal  exemption  not 

used  above  (Item  23  minim  Item  22). 

29.  Balance 

30.  Amount  subject  to  tax  at  6%  (if 
Item  24  is  less  than  $4,000,  enter 
difference  hcroL.  . 

31.  Balance  subjert  to  tax  at  12% 

f 

Computation  of  Tax. 


32.  Normal  fax  at  4%  on  amount  of 

Item  25 

33.  Normal  tax  at  S%  on  amount  of 

Item  26 

34.  Normal  tax  at  on  amount  of 

Item  30 

35.  Normal  tax  at  12%  on  amount  of 

Item  31 

30.  Normal  tax  (additional  for  fiscal-year 
return)  see  note  under  Item  21 

37.  Surtax  at  1919  rates  (see  surtax  table 

on  page  I cif  instructions) 

38.  Surtax  at  prior-year  rates  (see  surtax 

table,  page  1 of  instructions) 


39.  Total  Tax 

40.  Tax  paid  at  source  (2%  of  sum  of 

Item  F,  page  2,  and  Item  14(f)).... 

41.  Income,  wnr-proflts.  and  rxccss-pronis  lilies 

nmd  duriOE  taxablo  period  to  forelpi  coiin- 
tns.  or  pQ3.se3sioas  of  the  Uailed  Btau-s.. 

42.  Balance  OF  Tax  Due  (Iti>m39 

minus  Items  40  ami  41) 

43.  Amount  of  tax  paid  on  submission  of 

return 


amount 

1 Date. 

Chec*  o*  M.  0.  No. 

Bane  o*  Office  or  liiur. 

Fu»t 

Second  

Third  

1 

1.  

Fourth  





Income  Tax 

Supplementary  Page  57. 


[Page  3 of  Form  1040.] 


Page  2 of  Work  Sheet 


WORK  SHEET  OF  INDIVIDUAL  RETURN  OF  TAXABLE  INCOME 


A.  INCOME  FROM  BUSINESS  OR  PROFESSION. 


1.  Kiacl  of  business  -•  lousiness  address 

3.  Total  sales  and  inrome  from  business  or  professional  sera-icc-s - 

COST  OF  GOODS  SOLD: 

4.  Labor — ? - 

o.  Material  and  supplies - 


n.  Merrhandise  bought  for  sale 

7.  Other  tests  /submit  schedule  of  principal  it£ 

at  foot  of  page  or  on  separate  sheet)...  . '.. 

8.  Plus  inventories  at  beginning  of  >ear  (see  instruc- 

tious,  Schedule  A,  page  2) 

9.  Tot.cl * ' 

10.  Less  intenloiies  at  end  of  year 

11.  Net  Cost  or  Goons  Solo !? 

Did  you  claim  an  inventory  loss  for  191S? 

Is  obsolescence  claimed  in  deduction  in  Item  1C? 


OTHER  BUSINESS  DEDUCTIONS:  I 

12.  Salaries  and  wages  not  reported  as  “Labor” 

under  “Cost  of  goods  sold” - 3- 

13.  Rent  on  business  property  in  which  ta.xpayer  has  i. 

no  equity - 


14.  Interest  on  business  indebtedness  to  others. 


15.  Taxes  on  business  and  business  property 

IG.  Repairs,  wearandte.tr,  obsolescence,  depletion,  and 
property  losses  (explain  in  table  below) 


17  Amortization  ol  war  facilities 

IS.  Pad  debts  ari.'ing  from  sales  or  professional  se.’-yices-.l 

19.  Other  expenses  (submitsi  nodule  of  principal  items  I 

at  foot  of  page  or  on  separate  sheet).. 


1. 


20.  Total  (Items  12  to  19,  inclusive) |S- 

21.  Net  Cost,  plus  Total  Deductions  (Item  11  plus  Item  20).. 

99  Kvt  Tvcomp  rnn\f  T!iTsis-Eas  OR  Proees.sion' (Item  3 minus  Item  21'. 


B INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  DIRECTOR’S  FEES  AND  PENSIONS. 

1.  By  Vvijou  PvECErNED.  1 2.  Occupation. 

(Give  Dime  ) 1 

3.  Name  and  Addiiess  or  Emploteb 

Keceive’d. 

1 

1 

J,  • - OUJI. 

1 

Salary  lo  soil  ana  aepenaeni  nimor  cniiuren  lucmucu  iu  au/  ucuuvi,a« 

Total  1\comr  from  Salaries,  etc • 

n PROFIT  FROM  SALE  OF  LAND.  BUILDINGS.  STOCKS.  BONDS  AND  OTHER  PROPERTY,  AND  FROM  UQUIDATING  DWIDENDS. 

1.  IClND  OF  PnOrEIlTY. 

2.  Name  a.sd  .\ddses3  op  Puechaseb  ob  BEOKEa 

3.  Salk  Price  ob  ' 
Liquidatino 

DrviDEKtia. 

4.  Date  ^ 
Acquired. 

5.  Cost  ob  Maaxbt 

Mabcb  1.  1013. 
a ACQOIBSO 

6.  Cost  or  Subse-  i 

QUENT  Improve* 
MENTS,  EP  ANY. 

7.  Depreciatio.n 

Subsequently 

SUST-UNED. 

$ 

4 

t - 

$ 

1 

J 

1 

....... 

i 

$ 

. . 1 i 

i 

1...  ‘ 

F.  INCOME  FROM  RENTS  AND  ROYALTIES. 

1 Ul.'.D  OF  PEOPESTT. 

2.  NiME  A.VD  ADDEE33  OP  TENA-NT,  LESSCE,  etc. 

8.  Amoitnt. 

( Cash  or  eqoiToLent . ) 

CBNBB.  DUT.BTIO.'t 

5.  Interest. 

6.  TAXEa 

Expenses 
(Explain  Belo^) 

« 

f 

1 

J 



Net  1 NCOME  fi 
rolmnn**  4. 

ROM  Re.vts  and  Royalties  (total  of  column  3 minus  total  of 
5,  fi  and  7)  ( — 

i - 

5. 

? 

? 

$ 

,r>r>AD  A Til 

r\M 

O.  OTHER  INCOME  (not  includinsr  dividends,  or  interest  oti  obligatiorxs  of  the  United  States).  1 

Received. 

1 

s 

^ ^ ^ 

1.  Interest  on  bonds,  mnrt^a^es,  and  other  obligations  of  domestic  and  resident  corporations  except  a.s  reported  in  Item  F — - — ".V" Vt  ^rVi  . 

2.  Interest  on  bonds  of  foreign  countries  and  corporations,  and  dividends  onstock  ol  foreigncorporationawhichare  not  taxable  by  the  United  | 

1 

I.:::: 

upon  any  portion  of  their  net  incomes  — ■■  , i..... . ..  — — — — • j 

1 1 

3.  Interest  on  bank  deposits,  mortgages,  etc.  . — ~ — , 

1 

4.  Amount  paid  for  you  by  debtor  corporation  on  tax-free  covenant  bonds  — — — — — - 

i.... 

H.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES. 


$ 

3.  Losses  bv  fire,  storm,  etc.  (explain 
iu  table  below) 

J 

2.  Taxes  paid. 1 

4.  Contributions  (list  names,  and 
amounts  below) 

5.  Bad  debts  and  other  deductions,  -- 

6.  Amounta  paid  to  benoficianeB.  etc.'.. 


$ 

J.  Total  net  income  on  which  normal  tax  is  to  be  calculated  at  1919  rales  (H  minus  I)  enter  aa  22,  page  1 (unices  minus  quantity)........  

K (a).  Dividends,  cash  or  slock, from  earnings  of  corporations  taxable  by  the  United  Slates  upon  any  portion  of  their  net  incomes  inclua  mg  dmdends  on  stock  of 
personal  service  corporations  decl^d  out  of  profits  earned  prior  to  January  1,  1918): 

1.  Received  directly,  incliiding  2.  Received  through  partnerships,  personal  service  corporations,  and 

Item  12  (a),  column  2j. $ fiduciaries.  (Item  12  (b),  column  2,  plus  Item  14  (a)  columns  3 and  4)....  Total- 

K(b).  Taxable  interest  on  bondi  and  odier  t-bligations  of  the  United  States  issued  after  September  1,  1917,  and  War  Fmance  Co.rporation  Bonds: 

Received  directly,  ; received  through  partnerships,  personal  service  corporations  and  fiduciaries $ Total. 

K(c).  Other  income  from  partnerships,  personal  service  corporations  and  fiduciaries.  (Item  14  (b),  column  7) 

L Total  net  income  subject  to  surtax  at  1918-19  rates.  (If  Item  J shows  a minus  quantity,  deduct  amount  from  total  of  K (a),  K (b)  and  K (c)  before  entering  j 
on  this  line.  (It  this/amount  ehowa  a minue  quantity,  see  instructions  L,  page  2).  - - - 


ENTER  IN  THIS  TABLE  DETAILS  CONCERNING  REPAIRS,  WEAR  AND  TEAR,  PROPERTY  LOSSES,  ETC,  CLAIMED  AS  DEPyCTlO.NS  IN  SCHEDULES  A.  E AND  1 ABOVE 


4.  Cost  ob 
Uajibzt  Valus 
Kaech  1, 1913, 


OrrsxT  BT 
FOB  WKAR  AKD 

Tia&ahd  Los&u). 


9,  Lo.isrs  NOT  Coi!pr>s.\T£i>  i 
1N9XTIANCE  OE  OtnERWlSl 
a-vd  How  amoc.m  ’ 

AGLBIVEJD  AT. 


EXPLANATION  OF  DEDUCTIONS  claimed  in  Schedule  A.  linc-i  7 and  19;  Schedule  E,  column  7;  and  Schedule  I.  Items  4,  5 and  G.  (AtUch  separate  sheet,  if  nece9airy)_ 


Income  Tax 

Supplementary  Page  58. 


[Page  4 of  Form  1040,1 


PafeltflitirKiNM 


I.  PERSONS  REQUIRED  TO  MAKE  A RETURN  OF  INCOME. 

1.  Return  of  net  income  must  be  filed  by  every  citizen  of  the  United  States  whether 
tending  at  home  or  abroad^  and  every  person  residing  in  the  United  States,  though  not  a 
dtixen  thereof,  whose  net  income  for  the  taxable  year  1919  amounted  to- 
tal $1,000  if  single  or  if  married  and  not  Ui-ing  with  wife  (or  husband). 

(4)  $2,000  if  married  and  living  with  wife  (or  husband). 

2.  Under  any  of  these  circumstances  a return  must  be  made  even  though  the  amount 
of  net  income  is  not  sufficient  to  incur  tax  liability.  Note  especially  credits  for  personal 
exemption  and  dependents  under  Instruction  VI  on  this  page. 

3.  If  the  combined  income  of  husband,  wife  and  dependent  minor  children  equaled  or 
exceeded  $2,000,  all  such  income  must  be  reported  either  on  a joint  return  or  on  separate 
returns  of  husband  and  wife.  If  single  and  the  income,  including  that  of  dependent 
minors,  if  any,  equaled  or  exceeded  $1,000,  one  return  must  be  filed.  However  a minor 
having  a net  income  of  $1,000  or  $2,000,  according  to  the  marital  status,  must  file  a re- 
turn. as  such  person  is  not  considered  a dependent. 

t.  In  the  case  of  husband  and  wife  whose  cqmbined  net  income  exceeds  $5,000, 
separate  returns  must  be  mode  on  Form  1040,  showing  the  respective  amounts  of  income.' 

6.  Income  of  a minor  or  incompetent,  if  derived  from  a separate  estate  under  controi 
of  a guardian,  trustee  or  other  fiduciary,  must  bo  reported  by  his  guardian  or  other  legal 
representative. 

If.  PERIOD  TO  BE  COVERED  BY  RETURN. 

1.  You  were  required  to  file  your  return  for  1918  on  the  basis  of  your  annual  accounting 
period.  Having  established  an  accounting  period  for  1918  this  period  must  bo  adhered 
to  in  1919,  unless  permission  was  received  from  the  Commissioner  to  mako  a change.  A 
person  having  no  fiscal  year  must  file  a return  on  the  basis  of  a calendar  year. 

2.  The  dates  on  which  the  period  covered  by  the  return  begins  and  ends,  if  other 
than  a calendar  year,  must  be  plainly  stated  at  the  head  of  the  return,  and  answers  to 
questions  5,  6 and  7 must  be  given  accordingly. 

III.  ACCRUED  OR  RECEIVED  INCOME. 

1.  If  you  keep  books  showing  income  accrued  and  expenses  incurred  during  the  year, 
make  your  return  from  your  books,  but  do  not  fail  to  include  all  your  income,  even  if  it 
is  not  entered  in  your  books. 

2.  If  you  do  not  keep  books  showing  income  accrued  and  expenses  incurred,  report 
income  received  and  expenses  paid. 

3.  If  you  report  income  accrued,  you  must  include  all  income  that  accrued  in  the 
taxable  year  even  though  not  actually  received. 

4.  If  you  report  income  received,  you  must  include  all  income  constructively  received 
inch  as  bank  interest  credited  to  your  account. 

IV.  ITEMS  EXEMPT  FROM  TAX. 

The  following  items  are  exempt  from  Federal  income  tax.  However,  nontaxable 
income  of  the  classes  deecribed  in  paragraphs  1,  3,  4, 5 and  6 below  should  be  reported  in 
Item  11,  page  1 of  the  return. 

1.  Pay  not  exceeding  $3,500,  for  active  services  in  the  military  or  naval  forcea  of  the 
United  States  received  during  the  taxable  year  prior  to  the  termination  of  the  present 
war  as  fixed  by  proclamation  of  the  Preaident. 

2.  Gifts  (not  made  as  a consideration  for  service  rendered)  and  money  and  property 
acquired  under  a will  or  by  inheritance  (but  the  income  derived  from  money  or  property 
received  by  gift,  will  or  inheritance  is  taxable,  and  must  be  reported). 

3.  Interest  on  bonds  and  other  obhgations  of  the  United  States  issued  before  Septem- 
ber 1,  1917,  and  on  such  bonds  and  other  obligations  issued  since  that  date,  to  the  extent 
provided  by  the  acta  authorizing  the  issue  thereof.  See  Item  13,  page  1 of  return,  and 
instructions,  page  2,  under  K(b). 

t.  Interest  on  bonds  and  other  obligations  of  United  States  possessions  (Philippines, 
Porto  Rico,  etc.).  v . 

6.  Interest  on  bonds  and  other  obligations  of  States,  Territories,  political  subdiiisiono 
thereof  (such  as  cities,  counties  and  townships),  and  the  District  of  doiumbia. 

6.  Interest  on  Federal  Farm  Loan  bonds. 

7.  Dividends  upon  stock  of  Federal  Reserve  Banks.  However,  dividends  paid  by 
member  banks  are  treated  as  dividends  of  ordinary  corporations. 

8.  Interest  on  bonds  issued  by  the  War  Finance  Corporation,  only  if  and  to  the  extent 
provided  in  the  acts  authorizing  tne  issue  thereof. 

9.  Proceeds  of  life  insurance  policies  paid  upon  the  death  of  the  insured  to  individual 

beneficiariee  or  the  estate  of  the  insured.  * 

10.  Amounts  received  by  the  inmircd  under  life  insurance,  endowment,  and  annuity 
Contn<$8,  provided  such  payments  do  not  exceed  the  premiums  paid  in.  Tho  amount 
by  which  tne  total  payments  that  have  been  received  exceed  tho  total  premiums  paid  in 
is  income,  and  must  reportodm  Schedule  G. 

11.  Amounts  received  from  accident  and  health  insurance  and  under  workmen's  com- 
pensation acts  plus  the  amount  of  any  damages  received  by  suit  or  agreement  on  account 
of  injuries  or  sickness. 

12.  Compensation  paid  by  a State  or  political  subdivision  thereof  to  its  officers  or 
employees. 


GENERAL  INSTRUCTIONS-INDIVIDUAL  RETURN 

V.  FARMER’S  INCOME  SCHEDULE 


If  you  aro  a farmer  or  a farm  owner  rcuting  your  farm  out  on  shares,  obtain  from  tho 
collector  and  fill  out  Form  1040F  “Schedule  of  Farm  Income  and  Expenses,”  and  attach 
it  to  tliis  return.  Transfer  the  net  farm  income  to  lino  22  of  Schedule  A of  tlio  return 
Report  income  from  eafariea,  rents,  interest,  sales  of  property,  etc.,  in  Schedules  D to'ti 
of  the  return. 

VI.  CREDITS  FOR  PERSONAL  EXEMPTION  .\ND  DEPENDENTS. 

1.  If  you  were  married  and  living  ivith  your  wife  (or  husband)  or  were  t.ead  of  .a  family 

on  the  last  day  of  your  taxable  penod,  voii  may  sul>lract  from  your  net  income  before 
calcubtiag  yournormal  tax,  an  exemption  of $2,000  plue$200for  each  portion  under  18 for 
mentally  or  physically  defective)  who  was  receiving  his  chief  euppert  from  you  on  that 
date.  If  husband  and  wife  make  separalo  r.etums,  this  exemption  may  'oe  cKimcd  by 
either  (but  not  by  both)  or  may  bo  divided  between  them.  ^ 

2.  If  you  were  not  married  or  did  not  live  with  wife  (rr  husband)  and  ware  not  head 
of  a family  on  tho  last  day  of  your  taxable  period,  you  are  entitled  to  a personal  oxemptioii 
of  $1,000  plus  $200  for  each  dependent  person  under  IS  (or  lUenUlly  or  ph  vsically'defeciiv  e) 
who  was  receKing  his  chief  support  from  you  on  that  date. 

3.  If  by  reason  of  a change  in  your  accounting  i>eri.\'l  you  main;  a return  f:;r  a.’part  of 
a vear,  your  personal  exemption  shall  be  asmanv  twelfths  of  the  amount  that  Would  be 
allowed  for  a full  year  as  tncre  are  months  in  the  period  covered  bv  the  return. 

4.  The  personal  exemption  must  bo  reported  on  line  23,  page  1 of  the  rctuni,  and  muat 
be  supported  by  answers  to  questions  5,  G and  7. 

5.  A “head  of  family"  ts  a peison  who  is  the  chief  support  of  one  or  more  persons 

living  in  his  (or  her)  boueeboid,  who  arc  closely  related  to  hun  (or  her)  bwblood,  nStrnage 
or  adoption.  (As  to  credit  for  taxes  claimed  in  Item  41,  see  Articles  381-334 
Resolutions  45.)  ’ 

Vn.  AFFIDAVIT. 

1.  The  affidavit  must  bo  executed  by  tho  person  whoso  income  is  renortod  unless  he 
is  a minor  or  incompetent,  or  unless  ho  is  ill,  alsenl  from  the  couutrv,  or  otherwise  inca- 
pacitated, in  which  case  the  legal  representative  or  agent  may  execute  the  affidavit. 
However,  a minor  making  his  own  return  may  execute  the  alt-davit. 

_ 2.  The  oath  will  be  administered  without  ebaree  by  any  collector,  deputy  collector 
or  intenial-revenue  agent,  or  (if  j ou  are  iu  tho  niiiitan,-  or  t.-ival  sm-v-ice  of  the  United 
States)  by  any  military  Dr  naval  officer  who  is  authorized  to  mii-ituUler  eatha  for  purposes 
of  military  or  naval  justice  and  administration.  If  an  in tcrnal-rr  venue  o'.bccr  is  not  avail- 
able tho  return  should  be  sworn  to  befote  a notary  public,  justice  oi  the  neace,  cr  other 
peiBoa  authorized  to  administer  oaths. 

vni.  WHEN  AND  WHERE  THE  RETURN  MUST  BE  FILEt^ 

1.  If  tho  return  is  for  the  calendar  year  19 19,  file  it  with  the  collector  c'fLuterr.  i!  rsvep'te 
for  tho  district  in  which  you  live  or  have  your  prieripa!  place  of  btt.fino.ts,  on  m l i ii,-re 
March  15,  1920.  If  lor  a period  other  than  a calendar  yc.tr,  the  return  e'noulj  i e hi  -d 
on  or  before  the  loth  d.vy  of  the  third  month  following  the  cl  ,o  of  f.  -'n  '>  ■rif.-l. 

2.  In  case  the  taxpayer  has  no  legal  retidonce  or  place  of  Ini'n'ntss  in  Ih-i  In.tcd  States 
the  return  should  be  forwarded  to  the  Collector  of  rntenaal  Rev,  i.ue,  Bal'iTn-..-o,  bid.  ’ 

3.  If  the  address  of  the  collector  is  not  printed  on  the  retuiu  and  -v-oti  do  net  kni  ■ it 

ask  at  the  poet  office  cr  bank.  “ ’’ 

• IX.  WHEN  AND  TO  WHOM  THE  TAX  MUST  FF.  PMD. 

1.  The  tax  should  bo  paid,  if  poasibb’,  by  sending  or  l-ringing  -it'u  L’m  return  a cr-.c  t 
or  money  order  dratyn  to  the  order  of  “Coliectc.r  of  Intcr.-.ari!, venue  ai  luAcrt  i.tD.'o  of 
city  and  State].” 

2.  Do  not  send  cash  through  the  mail,  nor  p.ay  it  in  person,  e.%'  oi-t  at  Uic  office  cf  the 
collector  or  a regularly  establishf-d  intem.a!  revenue  stamp  offiicc. 

3.  Tho  tax  may  be  p.tid  in  four  equal  instaUments  as  foKo-.vs: 

The  first  installment  shall  bo  paid  at  the  time  fixed  by  law  for  Plti-q  the  return 
and  the  second  installment  sball  be  paid  on  tho  15th  d.iy  of  the  tiiiid  m .•.iih,  the  thi.-d 
instalUneut  on  the  15th  day  cf  the  ai.xta  menth,  and  the  fciirth  ir.stnnn.cntun  the  ifuh  day 
of  the  ninth  month,  after  the-  time  fixed  by  Law  for  filing  the  ictam. 

4.  The  tots!  tax  nmy  bo  paid  at  the  time  of  nling  the  r .-turDvOr  if  iiot  so  •n:  1,  one 
installment  may  be  p-aid  a.nd  the  balance  may  be  .paid  in  innal!,nents,  et  in  .iu'!  oi-  -ir 
prior  to  any  subsequent  iDsU.llmcnt  date  loferred  to  above-  !•' ..laro  to  >.  .y  -.oy  ■.j.-  .ii. 
ment  on  the  date  fixed  by  Ln-  makes  the  taxoiver  liable  for  Uie  payti.c-nt  ci  ihe  'n.il  - .-.ce 
of  tax  due  upon  notice  and  dem  md  by  Ihe  Hector. 

X.  PEHALFiES. 

For  Ivinking  raise  or  Fiaudciicnt  Retu'w.. 

Not  exceeding  $i0,jUe  or  not  exceetitug  one  yc..r's  imprta,'ii.-noi>t,  or  both,  iu  tho 
discretion  of  the  couit,  Cund,  in  adJitiou,  50  per  cent  ui  tlio  ta.-.  evadod. 

For  Failing  to  Make  Return  on  Time. 

Not  more  than  IIJXX),  and,  in  addition,  25  per  cent  of  tho  amount  of  t;'T‘d-uo. 

For  Failing  to  ?ny  Tax  wHe-n  Due,  or  Under-trte.-r.cnt  of  Tn-  Thrn-n-K  "tejligon.-e. 

Kve  per  cent  of  the  tax  due  'cut  unpaid,  plus  intercut,  i.t  th-  ; •■"o'  1 '*pc-i-"c"ct 

per  month  during  the  peii-od  in  which  it  romvins  unpaid. 


Net  Losses.— If  for  any  taxable  year  bemnnlng  after  October  31,  1918,  and  ending  prior  to  January  1,  1920,  it  appea.-s  cjron  the  prod-jcti.  n 
Commiaioner  that  any  taxpayer  has  sustained  a net  lose,  the  amount  of  such  net  loss  shall  under  regulations  p-cscribed  b-'  the  C-r-  -n'mioi  r iwth 
be  deducted  from  the  net  income  of  tho  taxpayer  for  the  preceding  taxable  year;  and  the  taxes  imooeed  by  tliio  title  and  by  'litlo  111  I r ■•■ich  *'i 
redetermined  accordingly.  Any  amount  found  to  be  due  to  the  taxpayer  upon  the  basis  of  such  redetermination  el.ail  be  crcrlitcd  or  rc-f  -.iuicd  u-  f li- 
the provisions  of  section  252.  If  such  net  loss  is  in  excess  of  the  net  income  for  rach  preceding  taxable  yeai.  tho  8''i0urit  < f eucn  excem  ffi  li'  u" 
the  Commiasioner  with  the  approval  of  tho  Secretary  be  allowed  as  a deduction  in  computing  the  net  income  for  ito  succeeding  taxable  yc.ir.  (See  Artie 


TABLES  AND  INSTRUCTIONS  FOR  CALCUL.ATMN  SURTAX 


SURTAX  RATES  FOR  1S18-19. 


e.ooo 

8,000 

10,000 


84!ooo 

v.,ieo 

ts.om 


surtax  rates  for  imt. 


ToUl  surtax 
amouot. 


Total  surtax 
amouiit. 


14,81(1 


21,910 

22.510 
23,610 
W.610 

77.510 
137,  MO 
2C.T,  MO 
&f£,6i0 


SURTAX  RATES  FOR 


Anioiinl  of 
oicii  r4U>. 


CALCULVITOM  OF  b-i  ..'AX  AT  19iS-!-3  RjtTES. 

To  corajHitc  ths  amoiint  of  surtax  on  any  auiouiti  of  aoi  fneote*:  Iti  csccj-  of  J5.00(V- 

Pii  jI;  Kuici  In  coIanAa  A thu  largest  sum  wnlcl*  Is  less  tliiiu  lUe  un-oiAut  cf  tbo  tolal  net  Income  sutjcct  to 
2,  or  Item  II,  jj-igo  l of  the  return). 

tind  In  eolumn  C the  coiTCsoondipR  amo-mt  Cf  total  hutat. 

Thmi;  T / (he  amount  of  surtax  founu  asahoro  tsdd  tr 
A and  multiply  tho  remainder  by  the  role  ahuwn  on  the  t 


rates  (Iter:.  . .^<3 


iric*i  t<s  provided  Ln 


1.  ITCH.  1 

cV  fV  1 -S.^pago  i 

1.  Lai^^et  Biini  in  column  A wiiich  in  tliim  tVj  ftmount  of  tLo  total  net 

income 

5-2,  C.>X  00 

190.  00 

2.  Total  Gurtax  thorcoa  aliown  in  column  C 

3.  Kemaiuder  of  net  income  after  siihtnii-tir.e  Item  l,  nb.-iv.v 

i,  800.  00 

$ 

4.  8artM^^thl3  rtnutalerat  rite  Bhowa  laMlomn  S tu  Use  tiil.s  15*;  frc-in  ^hlcliitsn  1 

90.00 

5.  Total  nurl-xx  duo  (sum  of  Tfomo  2 end  41 1 

250.  OO 

$ 

1 

Item  5,  column  3,  abould  ho  entered  la  Item  37, 


CALCULATION  OVRTAX  AV  PRIOR-YL.ill  R/.TKS. 

To  catcidato  surtax  ol  IM?  ralea — 

1 Ixdt  1 Knicr  on  ih«’  fit.n  Uno  ofccJc mn  1,  lie'o-!?,  the  amount  of  Item  I.t,  ■'  ’ of  fh'’  ri  turn. 

lumn  2 cUJ.  r (u)  the  next  la/gcir  ajaount  aliowi*  lit  < ...  -Ai*  A ..f  tLi-  i;i7  RUJtnr  tal  ’e 


4Tanti  lino  of  coin 


(6)  the  un.ta- 
ttji'  iffrrTu.l  1 


i Igbth:  I.nU.i  In  Cultiain  3 lljD  dlllerem.  1 t.ivir<n  ihn  amount-.  < :i! 
fliiJ.-  Kr.b  r la  col'inuj  4 tbo  rale  .shown  Lu  cglUii.x*  i3  cf  thu  ..jij 
'‘r..f.tnirc  o/tolu!nn  I. 

r>’8/(h-  T'hU  .'  li.  Column  5 Iho  ritfv'sLi  c.Juni’^Li  1 ■ 

. ' 3,  column  5,  Lhr  ; 


T"  ! 


.i.:i 


I 


Tho  l/ial  of  otumn  S ihonid  I 

Korr  rr  T-  'i  It  Tt'.x  k 

u&Ut4{  Ihu  apofopi  uUo  vu/likx  W’  =- 


• oterod  M iiem  ?.■. 


s of  UcuLi  17  and  IW  f 


) inaan''r  UtscrlW  for  1917  rutos, 


[Page  5 of  Form  1040.] 


Income  Tax 

Supplementary  Page  59. 


p.je  2 of  Inrtructions  INSTRUCTIONS  FOR  FILLING  IN  INDIVIDUAL  INCOME  TAX  RETURN 


K spKe  fnM  Ihii  r«rH  li  M ttUdmd  ftf  iR  eitilo.  l iU  O- 
jitwul  enlne*  tt  t unnlt  ik«!  of  M?*'  *•  •**«  »«(«■  ^ 


A.  INCOME  FROM  BUSH 

Report  here  income  from— 

(o)  Salo  of  merchandise,  or  of  products  of  manufacturing,  construction,  mining,  and 
agriculture.  (For  farm  income  see  Instruction  V on  the  reverse  side  of  tlua  sheet.) 

(b)  Businoes  service,  euch  as  transportation,  storage,  laundering,  hotel  and  res- 
taurant service,  livery  and  garage  service,  etc.,  if  you  owned  the  business.  If  you  were 
engaged  in  tho  business  as  an  employee,  report  your  salary  or  w.ages  in  Schedule  B. 

(c)  A profeaeion,  such  as  medicine,  law,  or  dentistry,  if  you  practiced  it  on  your  own 

e^count.  If  you  were  employed  on  a salary,  report  your  salary  in  Schedule  B. 

In  general,  report  in  Schedule  A any  income  in  the  earning  of  which  you  incurred 
erpenscB  for  labor,  rent,  etc.  Do  not  report  here  partnership  profits  or  profits  of  per- 
sonal service  corporations,  which  should  oe  entered  under  C,  or  dividends  from  other 
corporations,  which  should  be  entered  under  K(a). 

If  you  are  a farmer  (or  a farm  owner  renting  your  farm  to  another  ^raon  on  shares), 
enter  on  line  22  your  net  income  from  farming,  as  shown  by  your  “Schedule  of  Farm 
Income  and  Expenses,”  Form  1040  F.  . . t i. 

If  you  keep  books  showing  income  accrued,  report  such  income  instead  of  cash 
received,  and  report  expenses  incurred  instead  of  expenses  paid. 

Income  received  from  sale  of  lands,  buildings,  equipment,  stocks,  bonds  and  other 
projierty  not  dealt  in  as  a businees,  and  from  liquidating  dividends,  should  be  reported 

Tf  you  have  a complete  profit  and  loss  statement,  showing  all  the  information  called 
for  under  “Cost  of  goons  sola  ” and  “Other  business  deductions,”  attach  it  to  the  return 

and  enter  the  amount  of  net  income  on  line  22,  Schedule  A. 

Kind  of  business.— State  kind  of  goods  dealt  in  or  kind  of  services  rendered,  and 
whether  manufacturer,  jobber,  wholesaler,  retailer,  importer,  broker,  etc. 

Total  sales  and  income  from  business  or  profession. — Report  tho  total  amount 
derived  from  sales  or  from  services,  less  any  discounts  or  allowances  from  the  sale  price 

*^{nTSto^eT^Write  “C”  or  “C  or  M”  on  lines  8 and  10  immediately  before  the 
amount  column,  to  indicate  that  inventories  are  valued  ateilher  co6t,or  costor  market, 
whichever  is  lower.  ’ . , , . t > ■ 

Inventories  at  the  end  of  the  taxable  period  must  be  valued  on  tho  same  basis  as 
those  at  the  end  of  the  preceding  taxable  period,  unless  permission  to  make  a change 
has  been  first  obtained  from  the  Commissioner.  If  claims  for  losses  on  inventories  or 
rebates  on  sales  made  under  Section  214  (a)  12  of  the  Act  have  been  allowed,  the 
openinginventory  mustbe  correspondingly  adjusted.  (See  Articles  266,  and  1581-1685, 
^MtfulatioDs  45). 

other  busineso  deductloas, — Do  not  include  coat  of  business  equipment  or  furni- 
ture, expenditures  for  replacements  or  for  permanent  improvements  to  property,  or 
living  and  family  expenses.  . t j 

Salaries.— Enter  as  Item  12  all  salaries  and  wages  not  reported  as  Labor  under 
“Cost  of  goods  sold.”  Salary  or  wa^  lor  your  own  services  or  the  services  of  your 
dependent  minor  children  if  deducted  must  bo  reported  as  income  in  Schedule  ”U”. 

Rent.— Enter  as  Item  13  rent  on  businees  property  in  which  you  have  no  equity. 

Do  not  include  rent  for  dwelling  you  occupy  for  residential  purposes. 

Interest. — Enter  as  Item  14  interest  on  business  indebtedness  to  others.  Do  not 
include  interest  on  your  capital  investment  in  or  advances  to  tho  business. 

MESS  OR  PROFESSION. 

Taxes. — Enter  as  Item  15  only  taxes  on  buainesa  property,  or  for  carrying  on  business. 

Do  not  include  taxes  assessed  against  local  benefits  of  a kind  tending  to  increase  the 
value  of  the  property  assessed,  as  for  paving,  sewers,  etc.,  nor  Federal  income  taxes. 

Repairs,  wear  and  tear,  obsolescence,  and  property  losses. — Enter  as  Item  16,  (a) 
ordinary  repairs  required  to  keep  projicrty  in  useible  condition,  (6)  reasonable  allowanco 
for  exhaustion,  wear  and  tear  of  property  used  in  the  trade  or  buieneos,  jncludmg  a 
reasonable  allowance  for  obsoleacence,  and  (c)  losses  of  business  property  by  fire,  storm, 
or  other  ca.sualty,  or  theft,  not  compensated  for  by  insurance  or  otherwise  and  not  made 
good  by  repairs  claimed  as  deductions.  Explain  these  deductions  in  table  at  foot  of 
page  2 of  return.  . . j 

Losses  duo  to  causes  enumerated  under  (c)  with  respect  to  projterty  not  urea 
in  your  business,  euch  as  your  dwelling  or  personal  property,  should  bo  reportoa  in 
Schedule  1.  l i « 

The  amount  claimed  for  wear  and  tear  (depreciation),  including  obroleacence, 
should  not  exceed  tho  original  cost  of  the  property  (or  its  value  March  1,  1013,  if  acquired 
before  Ih.at  date)  divided  by  its  estimated  life  in  years.  If  obsolescence  is  claimed, 
state  in  table  at  toot  of  page  2 why  useful  life  is  less  than  actual  life.  vtTicu  the  amount 
of  depreciation  and  obsuiesoence  allowed  equals  the  coet  of  tho  property  (or  its  value 

March  1,  1913),  no  further  claim  should  be  made. 

Do  not  claim  any  deduction  for  depreciation  in  the  value  of  a building  oecupiod 
by  you  aa  a dwelling,  or  of  other  property  held  for  personal  use.  Do  not  claim 
any  deduction  for  depreciation  of  real  estate  (exclusive  of  improvementa  thereon), 
nor  for  depreciation  of  stocks,  bonds,  and  other  securities.  ^ 

Depreciation  of  patents,  copyrights,  etc.,  and  depletion  of  mines,  etc.  If  you 
claim  a deduction  on  account  of  depreciation  in  ^e  value  of  patents,  copyright^ 
franchises  and  other  legal  privileges,  or  on  account  of  depletion  of  mines  or  oil  and 
gas  wells,  see  Regulations  45.  . , / .....  . i • ..j  .v. 

Amortization  of  war  facilities.- If  amortization  of  war  facilities  is  claimed,  the 
taxpayer  is  required  to  submit  with  this  return  tho  information  and  schedules  called 
for  in  Articles  181  to  18S  of  Regulations  45.  , 

Bad  debts.— Enter  aa  Item  18  only  debtsarising  from  sales  or  prqfeasional services 
which  you  have  ascertained  to  be  worthless  and  have  charged  off  during  the  year. 

A bad  debt  offsetting  income  accrued  since  March  1,  1913,  will  not  be  allowed  as  a 
deduction  unless  the  antount  was  reflected  in  the  income  reported  for  the  year  iri  which 
the  debt  was  created.  In  the  case  of  debte  existing  prior  to  March  1, 1913,  only  their  value 
on  that  date  may  be  deducted  upon  subsequently  ascertaining  them  to  be  worthlew. 

State  under  “Explanation  of  deductions.”  at  the  loot  of  the  p^e,  how  the  debts 
wero  ascertained  to  be  worthless.  Insolvency  of  the  debtor,  inability  to  collect  by 
legal  proceedings,  or  imability  of  debtor  to  pay  as  ascertained  by  a mercantile  agency, 

would  be  a sufficient  indication  of  worthlessness. 

A debt  previously  charged  oS  as  bad  must  be  returned  aa  income  for  the  year  m 

Bad  debts  arising  out  of  personal  loans  should  bo  reported  in  Schedule  I. 

Net  loss.— If  the  net  cost  of  goods  sold  plus  other  business  deductions  is  In  excess 
of  the  total  amount  of  sales  and  income  from  businoes  or  professional  services,  report 
the  difference  as  a loss  by  using  red  ink  or  a minus  sign. 

B.  INCOME  FROM  SALARIES,  COMMISSIONS,  1 

If  salary,  wages,  or  other  compensation  received  by  yourself  or  dependent  minor 
children  frem  outside  sourcea  was  at  the  rate  of  *1,000  or  more  per  annum,  report  on 
separate  linee,  together  with  the  occupe.tion  or  position  and  emplqyer’s  name  and 
sddr^.  The  total  of  alFother  income  trom  salaries,  .wages,  commissions,  etc.,  should 

BONUSES,  DIRECTOR'S  FEES  AND  PENSIONS. 

Do  not  report  here  pay,  not  exceeding  *3,500,  for  active  service  in  the  military  or 
naval  forces  of  the  United  States  received  during  the  taxable  year  prior  to  tho 
termination  of  the  present  war  as  fixed  by  proclamation  of  the  President. 

C,  INCOME  FROM  PARTNERSHIPS,  PERSONAL 

Report  your  share  (whether  received  or  not)  in  the  profits  of  the  partnerehip  or 
personal  service  corporation  or  in  the  income  of  the  estate  or  trust.  Do  not  include 
the  part  of  euch  share  that  consisted  of  dividends  on  stock  of  corporations  (to  be  in- 
cluded in  Item  K(a)),  interest  on  ebUgations  of  the  United  States  (ece  table  13,  page 

1 of  the  return  and  instrucrione  under  K(b),  below),  or  interest  on  corporation  bonds 
containing  a Ux-free  covenant  received  through  fiduciaries,  upou  which  a tex  of  2 per 
cent  was  paid  (or  will  be  paid)  by  the  debtor  corporation  (to  be  included  in  Item  h) 

No  witholding  of  income  tax  at  the  eource  with  respect  to  interest  upon  tax-free 
covenant  bonds  owned  by  partnerships  and  personal  service  corporations  was  required 
prior  to  February  25,  1819.  . 

Reportin  Schedule  B salary  received  from  partnershipor^rsonal  service  corporation. 

AcTOrtionment  of  peutaership  incomo  between  years.— If  you  derived  income  from 
a partn^hip  or  personal  service  corporation  whose  fiscal  year  diSered  from  the  calendar 

SERVICE  CORPORATIONS,  AND  FIDUCIARIES.  . ..  . . , 

year  assign  to  1918  aa  many  twelfths  of  your  share  of  such  income  (except  dividends 
ind  Liberty  Bond  interest  received  through  the  partnership  or  personal  service  cor^ra- 
tion)  ns  the  number  of  months  of  the  fiscal  year  that  fell  in  the  calendar  year  1918. 
Aseien  to  1919  the  remainder  of  your  ehare  of  euch  income,  except  stock  dividends  and 
Liberty  Bond  interest,  which  should  bo  apportioned  as  provided  in  instrucUona  under 

of  income  to  be  distributed  to  the  beneficiaries  periodically,  wheAer 
or  not  at  regular  intervals,  each  beneficiary  must  include  in  his  return  his  distributive 
ehare  of  the  net  income,  even  though  not  yet  paid  him.  If  tho  taxable  year  on  t^ 
basis  of  which  he  makes  his  return  fails  to  coincide  with  the  annual  accounting  period 
of  the  estate  or  trust,  then  he  should  include  in  his  return  hisdialnburiye  share  for  such 
accounting  period  ending  within  his  taxable  year,  which  income  will  be  taxable  at 

D.T'ROFIT  FROM  THE  SALE  CF  LAND,  BUlLJ>iNGS,  STOCKS,  BONI 

If  the  profita  or  losses  on  tsaloe  made  through  any  one  broker  aggregated  J 1,000  or 
more  report  the  transactiona  on  a separate  line  with  the  name  and  addrciis  of  the  br^er. 

Kind  of  property.— Describe  the  property  aa  definitely  ao  you  can  m a word  or 
two.  as  “farm,”  “house,”  “lot,”  “ctockfi,”  “bonds.”  ..... 

Sale  price  or  Uqaidatin|  diridends.— State  the  actual  consideration  or  pnee,  or,  m 
case  of  an  exchange,  the  fair  market  value  of  the  property  received. 

F.ntftr  the  orlinnal  coet  of  the  property,  or,  if  it  was  acquired  before  March 

)S  AND  OTHER  PROPERTY,  AND  FROM  LIQUIDATING  DIVIDENDS.  ^ 

1,  1913,  its  fair  market  value  on  that  date.  Attach  statement  explaining  how  va  ue  of 
March  1 1913,  was  determined.  Expenses  incidental  to  the  purely  niay  be  included 
in  the  cost  if  never  claimed  in  income  tax  returns  as  deductions  frpm  inconie.  Enter 
in  column  7 the  amount  of  wear  and  tear,  obsolescence,  or  depletion  susteined  since  . 
March  1.  1913  (or  since  date  of  acquisition,  if  subsequent  to  ““oh  1,  19131. 

Losses. If  the  total  of  columns  5 and  6 is  in  eicete  of  the  total  of  columns  3 and 

E.  INCOME  FROM  RE 

Kind  of  property.— Describe  briefly,  as  in  D. 

Rent.- If  you  recefved  property  or  crops  in  lieu  of  cash  rent,  report  the  income 
as  though  the  rent  had  been  paid  in  cash.  CTOps  received  as  rent  on  a crop  share 
basis  should  be  reported  as  income  far  year  ia  which  disposed  of  (unless  your  return 

MIS  ^ obsolescence,  depletion,  and  prop^  losses.— See  instruc- 

tions for  Schedule  A,  above.  Explain  in  table  at  foot  of  page  2 of  the  return. 

Other  expenses.— Report  taxes  on  rented  or  leased  property  and  interest  on  indebt- 
edness incurred  or  continued  to  purchase  or  carry  it.  Do  not  include  taxes  assessed . 

F.  ’interest  on  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVI 

This  item  should  include  all  interert  received  directly  or  through  - ^ , 

. fiduciaries  on  bonds  of  corporations  organized  or  doing 

business  in  the  United  States,  containing  a clause  by  which  the  debtor  corporation 
asrreee  to  pay  the  interest  without  any  deduction  for  taxce,  provided  exemption  trom 
not  rlalmpd  hv  the  owneT  of  tho  bonds.  If  exemption  was  claimed, 

ENANT,  ON  WHICH  TAX  OF  2%  WAS  PAID  BY  DEBTOR  CORPOWTION. 

(by  filing  a yeUow  certificate,  Form  1001),  the  interest  received  must  be  reported  in  O. 

The  amount  of  Ui  pmd  by  the  debtor  corporation  is  treated  as  a credit  against  the  tax 
due.  (See  Item  40,  page  1 of  the  return),  but  such  amount  paid  at  the  source  should  bo 

r OTHFR  INCOME  fNOT  INCLUDING  DIVIDENDS,  OR  INTEREST  ON  OBLIGATIONS  OF  THE  UNITt-D  STATES). 

fhia’SufafnteKi  de'io^U: ttes,‘3gages,  et'e,  and  all  other  taxable  income  for  which  no  place  is  provided  elsewhere  on  thi^return. 

1.  GENERAL 

Interest.- Report  hero  interest  paid  on  personal  indebtedness  as  distingniBhed 
from  business  indebtedness  (which  should  bo  reported  under  A or  E above).  Do  not 
include  interest  on  indebtedness  incurred  for  the  purchase  of  bonds  and  other  obli- 
gations, the  interest  on  which  is  exempt  from  tax,  except  interest  on  indebtedness 
incurred  to  purchase  or  carry  obligations  of  the  United  States  issued  after  September 

Taxes. — Report  here  personal  taxes  paid,  and  all  taxes  on  property  not  i^ed  in 
busineas  or  profession,  not  including  those  assessed  against  local  benefits  of  a kind  tend- 
ing to  increase  the  value  of  the  property.  Do  not  include  Federal  income  tuxes,  nor 
estate  or  inheritance  taxes.  ...  . j u • 

' Losses.— Report  here  lo8.«es  of  property  not  connected  with  your  trade,  business, 
or  profession,  sustained  during  the  year  from  fire,  storm,  shipwreck,  or  other  casualty, 
or  from  theft,  which  were  not  compensated  for  by  insurance  or  otherwire.  Do  not 
include  losses  from  transactions  not  entered  into  for  profit.  Losses  clanned  should  be 
explained  in  table  at  foot  of  page  2.  < 

Contributions.— Report  here  only  contributions  made  withm  the  year  to  coipora- 

and  oTv.mfi>d  excliisivelv  for  religious,  charitable,  scientific  or  educa.- 

DEDUCTIONS.  ' 

tional  purposes,  or  for  the  prevention  of  cruelty  to  children  or  animals,  and  contributioi^ 
to  the  snec^und  for  vocational  rehabilitation.  Tho  total  amount  of  coutributioiie  to  be 
entereif  here  mustnotexceed  15  per  cent  of  the  net  income  computed  withoutthc  benefit 
of  this  deduction.  Therefore,  iUtem  4,  Schedule  I,  exceeds  15  per  cent  of  the  sum  of 
It^m  21,  page  1,  plus  Item  4,  then  Item  4 must  be  reduced  to  15  per  cent  of  such  sum 

and  vour  total  net  income  must  be  recalculated  accordingly.  _ *1.,^ 

Lntcr  under  “Explanation  of  deductions,”  at  the  foot  of  page  2 of  the  returo,  the 
name  and  address  of  each  corporation  to  which  you  made  contributions  claimed  as 
deductions,  and  the  amount  paid  to  each.  , . . , , i i j v. 

Bad  debts  end  other  Eductions.— Bad  debts  arising  out  of  loans  d he 

reported  here,  and  other  proper  deductions  not  claimed  elsewhere.  Attach  detailed 
statement  of  aU  such  deductions.  Deductions  claimed  by  traveling  salesmen  to  cover 
meals  and  lodging  should  be  fully  explained  in  an  attached  statenient  setting  forth 
conditions  of  emmoyment.  . 

Amounts  paid  to  beneflciaries.— If  this  return  is  filed  for  an  estate  in  the  process 
of  administration,  there  may  be  deducted  tho  amount  of  any  income  properly  paid  or 

Enter  as  Item  K(a)  all  cash  or  stock  dividends  received  during  the  Tgl''L 

rni  dividanda  n.dd  hv  ^^rsonal  servicc  coroomtions  out  of  earnings  accumulated  sut-  | year  which  are  included  m Item  12,  columns  3,  4,  and  5,  pagej. 

K (b).  INTEREST  ON  OBLIGATIONS  OF  THE  UF 

Interestupon  First  Liberty  Loan,  3)^  petcentbondsand  Victory  Liberty  LoanSj.^  per 
ccntconvertible  gold  notes  iscxempt  from  normal  income  taxes  and  graduated  additional 
income  taxes,  commonly  known  as  eurt^es.  Interoet  upon  all  other  issues  of  Fjhcr  / 
Loan  Bonds  as  well  as  interest  upon  certificates  of  indebtedness  and  War  Savinirs  CcrtUi 
cates  ts  exempt  from  normal  income  tax  regardless  of  the  amount  of  the  principal  and 
ia  fmm  {rnAxxAtf^d  additional  income  taxes,  rommonlv  known  as  surtaxes,  on.y 

MITED  STATES  ISSUED  SINCE  SEPTEMBER  1,  1917. 

to  the  extent  provided  for  in  the  act  authorizing  the  i^ue  and 

holdings  exce^  the  exempoons  epecifiod  in  Item  13  page  1,  secure  Form  1125  from 
Collector  and  compute  taxable  interest.  Interest  on  War  Finance  ho'ids 

is  exempt  trom  all  normal  income  tax  and  is  exempt  from  eurtox  only  wuh  tes^yt 
a princimt  not  exceeding  *5,000.  This  exemption  is  in  addition  to  the  exemptions 

Kfc)  OTHER  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPpRATIONS,  AND  FIDUCIARI^. 

Report  hero  all  other  income  received  from  partnerphips,  personal  service  corpor-  | partnerships  and  scrvico  corporations  on  y.  w ic  e o 

L.  PARTS  OF  INCOME  SUB.JECT  TO  RATES  FOR  DIFFERENT  YEARS. 

In  determining  the  income,  any  deductions,  exemptions,  or  credits  of  a kind  not  1 calendar  year;  but  any  balance  thereof  shall  be  applied  against  e income  eu  jec 
piaiEilvand  properly  chargeable  against  the  income  Uxable  at  tho  rates  for  a preceding  | rates  of  tho  next  preceding  year  or  years  until  fully  allowed. 

[P  ige[6  of  Form  1040.1 


Income  Tax 

Supplementary  Page  60, 


IF  RETURN  IS  FOR 
CALENDAR  YEAR  1919 
FILE  IT  WITH  THE 
COLLECTOR  OF  INTERNAL 
REVENUE  FOR  YOUR 
DISTRICT  ON  OR  BEFORE 
MARCH  15,  1920 


IF  FOR  A PERIOD  OTHER 
THAN  A CALENDAR 
YEAR  THE  RETURN 
SHOLTD  BE  FILED  ON  OR 
BEFORE  THE  15TH  DAY 
OF  THE  THIRD  MONTH 
FOLLOV/ING  THE  CLOSE 
OF  SUCH  PERIOD 


Pago  1 

Form  1120— UNITED  STATES  INTERNAL  REVENUE  SERVICE 

CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

- . . f OR  CALENDAR  YEAR  1919 

Or  for  period  begun » 19 » and  ended , 19.. 


cure  from  the 
Collector  ol 
Internal  Rev- 
enue for  your 
dUtrict  Form 
nZOS,  eEecute 
end  file  the 
eeme  as  a pert 
of  this  return. 


(Print  plainly  corporation’s  name  and  principal  place  of  business) 


(Sirset  and  number  or  rural  route) 
(Post  office  and  State) 


CASH 

CHECK 

M.O. 

CERT, 
of  IND. 

(DO  HOT  WRITR  in  TinS  SPACE) 


Eiaaiaed  by 
Audiisd  by 


FIRST  PAYMENT 


Cashier’s  Stamp 


KIND  OF  BUSINESS - THIS  A CONSOLIDATED  RETURN? 

SCHEDULE  A— TAXABLE  NET  INCOME. 


GROSS  INCOME. 

1.  Gross  sales,  less  returns  and  allowances - — vr  v'i VT” 

2.  Less  cost  of  goods  sold,  exclusive  of  expenses,  repairs,  and  othor  items  caUed  for  separately 

below  (from  Schedule  A2V 

3 Gross  income  from  operations  other  than  trading  or  manufacturing,  1^  allo-^ances.............. — 

4.  Interest  on  obligaUons  of  the  United  States  oriU  possessions  and  War  Finance  Corporation  Bonds  not  exempt  (from  Schedule 

5.  Interest  from  other  sources  (from  Schedule  A5) 

6.  Rentals  (see  Schedule  AC) 

7.  Royalties - — — 

8 Share  of  net  income  earned  (during  taxable  period)  by  personal  service  corporations  (whether  received  or  not)— ... .... 

9.  Dividends  on  stock  of  foreign  corporations  (from  Schedule  A9),  $ ; dividends  on  stock  of  domwtic 

corporations  other  than  personal  service  corporations,  $ — : - , AOtai 

10.  Gross  income  from  all  other  sources  except  dividends  (not  including  any  amount  in  respect  to  sales  of  capital  asseis  or 
miscellaneous  investments,  see  Item  22,  below)  (from  Schedule  AlO) 


Total  op  Items  1 to  10.. 


DEDUCTIONS. 

12.  O.-dinarv  and  necessary  expenses  (except  amounts  reported  in  Item  2 above  or  called  for  separately  below,  and  not  in. 

cludin®  cost  or  value  of  capita]  assets  or  miscellaneous  investments  e-old  during  taxable  period,  see  Item  (Irom 
SchedSoA12).  Labor, » , Other  expenses,  $ tdtal 

13.  Ompensation  of  officers  (including  salaries^  commissions,  and  other  compensation  in  vyhatever  form  paid)  (from  Schedule  AI3). 

14.  Repairs  (including  lalwr,  supplies,  etc.)  (from  Schedule  AM);  Labor,  $ ...  Other  expenses,  $ — ' — 

15  Interest  (except  on  indebtedness  incurred  or  continued  to  purchase  or  carry  obligations  or  purities,  other  than  obliga- 
tions of  the  United  States  issued  after  September  24,  1917,  the  interest  on  which  is  wholly  exempt  from  taxation  (soo 


paragraph  9,  page  2,  General  Instructions) . - ,,  , „ 

16.  Taxes  (except  Federal  income,  war.proBts  and  excess-profits  taxes,  taxes  which  are  a credit  under  Section  238,  and  taxes 
1 against  local  benefits  of  a kind  tending  to  increase  the  value  of  the  property  assessed)... 


17.  Debts  ascertained  to  be  worthless  and  charged  off  within  the  taxable  period  (from  Schedule  A17)— 


18.  Exhaustion,  wear  and  tear  (including  obsolescence)  (from  Schedule  — -c;-,— :: T'i'V 

19.  Depletion;  if  claimed  secure  from  the  Collector  Form  D (minerals),  Form  E (coal),  Form  F (miscellaneous  non-metals). 

Form  O (oil  and  gas),  or  Form  T (limber),  fill  in  and  file  with  return 


Total  op  Items  12  to  19 

Ditferel'CE  Betwee.v  Items  11  ahd  1 


22.  Profit  or  lo-ss  on  sales  of  capitol  assets  and  miscellaneous  investments,  including  liquidating  dividends  (from  SchediJo  A22)— 

23.  Losses  sustained  during  the  taxable  period  and  not  compensated  for  by  insuraace  or  otherwise.  (Extend  m fast  column 

adjustment  of  Items  22  and  23.)  (From  Schedule  A23) 

24.  Net  income  for  taxable  period  exclusive  of  deductions  for  dividends  and  amortiiiation  (total  of  or  d ifference  between  Items  21  ai 

25.  Dividends  received  from  domestic  corporations  not  personal  service  corporations,  and  dividends  upon  stock  ot  loreigu 

corporations  taxable  by  the  United  Slates  upon  any  portion  of  their  net  incomes 

• facilities  (from  Schedule  A2C)  (extend  total  of  Items  25  and  26).. 


Amortization^ 


. $ 

. $ 

Net  Income  for  Taxable  Period  (difference  between  Items  24  and  2S,  the  latter  as  extended— to  be  entered  as  Item  5,  Schedule  D) - 


ITEM. 

Akount. 

1.  Capital,  Burplua,  and  undi>'ided  profits  at  bej^daning  o(  tax; 

2.  PluA  adjustments  by  way  of  additions  (from  Schedule  F,  Li 

• dacch3T-nb’bco’-s(fr'>mS-hH'  l»T'  llnoil  » 9) 

? .... 

able  period  as  s own  y c , , , pagb 

3,  Totax*-.-..  — 

4.  T adjustments  by  way  of  deductions  (from  Schedule  Gi 

~7  ~ 



6.  Remainder...— 

6.  Plus  or  minus  changes  in  invested  capital  during  taxable 

^ _ _ 

8.  Lees  deduction  on  account  of  inadmisBible  assets  (from  Sc 
a.  TnvPfitM  cauital  for  taxable  Deriod . (If  return  is  for  a pc 

bed  1 J) 

riod  less  than  a full  year,  sec  paragraph  11,  p.age  2 of  Instructions) 



SCHEDULE  C -EXCESS-PROFITS  CREDIT.  

1.  Eight  per  cent  of  invested  capital  for  taxable  period  (Iten 

2.  Exemption  (83,006)  (except  for  foreign  corporations) 

HfAm  1 Tiliifl  Ttftm  2^.  (If  return  is 

1 

L j 

.1 ! 

1.^ 

p.-  j 

1'  . J ^ 

1 _ 

for  a Tv.rin.1  loAs  than  a full  year,  see  paragraph  11,  page  2 of  Instpictional 

b ! 

1 ..1 1 

SCHEDULE  D— COMPUTATiiON  OF  TAXES.  

1.  Bucxztx. 

ties  3-  ^^“srSi^cr 1 

AaiOUHT 

' OT  TaJT. 

1.... 

Li  I 1 I,  . 1 i j i _.l 

{20/. 

ji- 

1.  Not  over  20^  of  invoeted  capitaL 

i 1 1 1 1 1 1 1 L 

1 

1 

3.  Totals  computed  uudor  Sp.ctlon  3Ql(b) 

S 1 1 1 -1$ 1 1 1 1 1 

1 

1 

i 

4.  Excen-Profita  Tax,  if  compxited  under  Sections  302,  303,  : 

304(c)  or  337  of  Revenue  Act  of  1918 - 

If 

t: 

1 

,1 

Lens;  Interest  oil  obligations  of 
United  States  and  War  Fi- 
nance Corporation  Bonds,  not 
exempt  (Item  4,  Schwliilo  A)  - 
Excess  profits  tax  (Item  3 or  4 
column  0,  .Schedule  D)  or 


taxes  (Item  1C,  Form 
income  from  < iovemment  con- 
tracts)  — ..... 

Exemption,  except  for  foreign 
corporations,  $2,(X)0  unlcus  re- 
turn is  for  less  than  a year  (see 
paragraph  11,  page  2 of  In- 
structioDs)  

BaJancesnbject  to  income  tax  (Item  5, 
and^ 


f 

I Items  6,  7 (or  8), 


If. 

iCOME  TAX. === 





1 

1 

1 1 Tit  of  1ft  'ti  on  in  ^ ....  • 

?.  ... 

1 

1 

i-y  Tftf.al  ia-r  fltrktn  4 nr  8 nhi3  !t;em  ll’l 

$ — 

^ 

1 

1 

13.  Lesa;  Income,  wiir-profite,  and 
exccna-profits  taxiie  paid  or 
j acefued  to  foreign  countries 

or  to  pa'uessioiifl  of  tho  U . B. 

sections  238  and  240(c) 
of  Revenue  Act  of  1918)..——— 

14.  Income  tax  withhold  at 

source  in  ca.'M?  of  a foreign 
corporation  not  engaged  in  a 
trade  or  businoos  within  tho 
U.  b.,  and  not  having  any 
olDco  or  place  of  busiiieia 
therein 

! 

* 

Balanro  of  tax  (Item  12  niinos  Items  13  and  14) 

$ 

— 

[Page  1 of  Form  1 120.] 


Income  'I’ax 

Supplementary  Page  61. 


Page  2. 


SCBEKWX  E.-CAmAL.  SURPLUS,  A-W  BY  »««»“ 

SCWEOULt  6.  ^ JUXIUSTMENTS  ARE  MADE  THERESN. 

«,  tto extent  ttot  It  13  peid  up.  ir  stock  ^ ^ preceitu*  UAtblo  period. 

toouH  reOect  the  amounts  on  tto  a,  end  o!  the  pmccdini;  tarable  period.  It  any 

anuountclalmcd  should  be  entered  under  Item  '•  ““  thmugh  demotions  mad. 

aotr.es  should  beldentifled  and  llnecosssry  treasury  stork,  copies  ottho 

E.O.  If  the  corporation  had  on  handat  any  ^\tq^ent  a, 


Item. 

Amount. 

Capital  slock  paid  upend  actually  ootstsndtnsattncclosc  cl  the  preceding  year 

s-  

Surplus  and  undivided  profits: 

A Paid-In  surplus 

^ RJ3?v'l^^§I^.^oL^Twrac hi,?  nm  de■durt^b^J  W 

(to  berecoaiciled  with  balance-sbevi  item'*)  

9 Otb«r  Items  (to  be  detailed) - 

V.  TOTAU  Of  iTZWa  4,  5,  6,  7,  XKD  

\\  CaDital  and  surplus  at  begloolng  of  taxable  peri.'hl  as  shown  by  books 

SCHEDULE  F.— ADJUSTMENTS  BY  WAY  OF  ADDITIONS. 

FI  Item  addition  to  invested  capital  is cUlme)  in  Item  1,  Schedule  F,  Kibrnlt  a .talem.nl  ehov^ 

,.,.h^ltmd “r^rVly.  (M.h.  year  In  «h,ch  ,t  ™a,  paid  m. 

sblp  to  the  corporation.  Id)  the  octual  cash  value  ot  such  property  at  the  dale  aben  (»id  In.  ( ) ^ 

,«k  or  shares  Sued  therelor  and  the  amount  at  which  such  prop^  y was  enti^d  m 
upon  which  the  actual  cash  value  ol  the  property  was  determined  imd  ibe  date 

nmde.andtplthe  amount  oldepreciaiion  sustained  on  such  propertylromihe  date  olac<iuia.iiontotbebegmnli« 

'’' ‘pa’I^l'K'dlrion  to  invested  capltalls  claimed  in  Item  3.  Schedule  F.  eubnut  a sUtement  showing 

,a,  "'kind  ot  pZny  the  year  m which  it  was  acquhed,  <c,  l.s  cost,  (d)  the  amo^t 

latocd  onsucb  property  from  the  date  et  acquEltum  to  the  beginning  ol  Ihe  taxable  ^7  Su^ 

each  llem  sought  ,0  be  resttved  was  actually  used  or  urable  el  .be  begmnmg  ad^iLTo^s 

.tpenditures.  when  mede,  writwn  oil  In  lieu  ol  decree latmn? ..  . 1 so  explem 

bare  been  made  to  provide  for  (J«prcciitioQ  in  Tiew  of  Ihe  proposed  restordttiou  ' /-»n,r»crKA 

imm  are  cumuletlvo  to  Iho  beginning  ol  Ihe  taxable  period.  For  all  addillons  hereunder  provmonmost  bo 

made  tor  depreciation  to  the  begmnmg  cube  laxablo  period.  ....  . a,  it„  iv.  of 

F3.  It  any  addlUoa  to  invested  capiU'  Is  claimed  in  Item  3,  Schedule  F,  stale  spKihcahy 
dep^latloa  writun  oO  each  yea.  In  the  beoke  ol  the  company  and  the  amount  al.^^as  e diction  in  com- 
pmlng  net  Incoma  Additions  to  this  item  ere  cumulative  to  the  beginning  ol  the  Ux  able  period^ 


1. 

tb^Ior  (Articles  630  and  


SCHEDULE  C—ADJUSTMENTS  BY  WAY  OF  DEDUCTIONS, 
lent,  copyright,  secret  process,  or  (ormula.  good  wiU.  trademark,  trade  brand,  (nmchlse,  or 


Cl.la-.  . . . 

other  similar  Intangible  property,  paid  m lor  stock,  carried  

not  entered  specitically  as  such.  Is  the  Intangible  veins  “77 “1"  “L”,  hf * 

balance  sbeeU  submiiled  witb  Ibis  * to  t.  rtrstnysn  /m  i c» . 


mir.  :3:: 


t outstanding  on  March  3. 1917? 1st  , . 

e excess  ol  35  per  cent  ol  the  par  value  otthe  stock  outstanding  et  the  bcgumine 


cent  oftbe  par  value  ol  the 
entered  on  Ibe  books  at  a 

‘ U ireSIs^'.'fl'y'oi'lhe'im'e'grmg  questions  Is  ■■  yes."  submit  a statement  showing  separately  wuh  respect 
.osu  heLets  acquired  (1)  belora  March  3.  1917.  and  (2)  on  or  alter  that  date,  to)  date 

leluo  at  that  dVte  with  a complete  cxplana.ion  ol  iho  basis  upon  which  such  cash  value  was  determmed. 
(c)  par  value  ol  the' stock  issued  therelor;  (d)  par  value  ol  total  st^k  outstanding  March  3. 191^ 
o!  lotal  stock  outstanding  at  the  beginning  ol  the  taxable  pcriod.t/llhe  value  el  which  such  asse 

*“  ‘ll^ri'The  blt^Tte  wlro”acqulred  beloro  March  3.  1917,  the  amount  by  which  C/lexoce^  (6),  (r).  25  ^ 
cent  oKdl.or  25  ^cent  ot(r),  whichever  Is  lowest,  must  beontcrej  as  item  1.  Schedule  G,  tor  the  taxable  pei  lod. 
lithe  Intangibles  were  acquired  on  or  alter  March  3. 1917, 


e entered 


amount  by  which  iheenlry  in  (Orclatmglo 
such  mtenglblcs'exet^ds  (0)  or  (O  relating  Iherelo,  or  25  per  cent  ol  (r)  whichever  is  lowcrt  must  ^ tnclud^ 
irilem  iSchedule  G tor  ihe  taxable  period:  Provided.  That  11  intangibles  were  acquired  beloro  March  3.  1917, 
.uo  on  or  a««  that  date  deducti™  shall  be  made  so  that  the  amount  included  In  Invested  capital  lor  the 
aggregate  ollntangihlcsshall  not  exceed  25  per  cent  of  the  par  value  olthe  total  stock  outstanding  et  the  beginning 
oltbe  taxable  period.  ^ 

value  as  ollhc  dole  or  dates 


Note.— Ilihestockolihocorporailon'  ^ . 

olthecomputatlon  under  Hern  l.thcparvalucshallbedccmedtobcthelairi 

ollssue.  The  oggregato  value  so  determined  ol  slock  oulstanding  on  March  3.  1917,  or  at  lb, 

-ompuuuon. 

n for  slock,  camod  as  an  asset  by  tbo  corporaUoa? 

s actual  cash  value  when  fecoived?  ... 


ta.xab]e  period,  shall  be  ibe  basis 
G2,  U any  lan;»b«o  property,  pa 
If  so,  b it  entered  on  the  books  at  a value  In  e.Kcess 

excess  of  the  par  value  of  tbo  slock  paid  therefor? ».  • / s 

If  Ibe  answer  to  any  oftbe  foregoing  questions  is"  yes/’ submit  a statement  showing  (o) 

(6)  when  acquired,  (c)  par  value  of  Ibe  slock  paid  ibcrofor,  (<f)  actual  cash  " 


retam  shoeing  tbc  values  at  wbkU  such  property  rewSrived 


of  property, 
property  when  paid  in, 

rra  the  bisis  on  whicVthri  vMuo  wVs  deremiid,  U)  vuluo  at  which  the  property  isentcred  on  the  corporeiion-s 
b«ks  Ld  (g)  omeun,  by  which  such  vaMe  exceeds  the  allowable  value  undo,  Sectitm  325  (a)  (2)  oltbo  Revenue 
Act  ol  1916.  Eoler  this  amount  as  llem  2.  Schedule  G.  lor  the  taxable  period. 

C3.  Was  the  business  rclhcorporated.  rcorganited.  or  consolidated  or  was  its  ownership  changed  or  was  there 

a chSge  in  ownership  ul  preperty  alter  March  3, 19177 11  so.  ansa er  17 

(a)  Did  an  interest  ol  50  per  ant  or  more  In  the  business  or  In  the  propert  y which  changed  oTicrship  remain 

In  the  control  ol  the  same  persons,  corporal  ions,  cssoeiai  10ns,  or  part  nr  rthlps,  or  ol  any  ol  them?  ..... 

(5)  Were  any  ol  the  asSs  entered  on  the  boolis  01  the  corporation  making  this  reinrn  at  a higher  value  than 

™ '(OU^icrprevlous  owner  was  not  a corporation,  attach  a statement  sowing  (1)  the  emt  of  ^ulsltlon  to 
the  previous  owner  olany  asset  souanslerrcd  or  received.  (2)  expcndiluressuhsequcnl  tothat  date  mr  t _ 
or  development  not  deduclod  as  expense  or  otherwise  since  March  1. 1913,  by  such  previous  <7^/  ““  ^ 

«nce  lor  dcprecullon,  depletion,  or  Impairment  since  the  dale  ol  acquisition  by  such  • 

(cl)  Hall  or  substantially  all.  olthe  property  was  acquired  Irom  acorparatlon  durl^theraxahlo  f 
nttach  hereto  balance  sheetsolsuch  predecessor  corporal  Ion  as  althc  beginning  oHhcta.xableperlMMd  m 
dale  immediately  prior  to  the  iransler  olthe  property  to  ibe  corporation  making  ihe  return,  end  also  a b 


sheet  orslalemcat  of  th«  corporation  making 
oartransfMrted  wereectero'i  on  tbd  books.  .. 

For  Ibe  purpose  ordctcrminiaij  io vested  capital  each  asset  so  transferred 
possession  of  ibe  previous  owner,  i f a corporation,  or,  if  not  a corporation.  (6) 

with  proper  adiusttneuts  fox  losses  und  improvements.  , 

C4.  U any  property  (mrludmg  physicM  property,  securities,  and  intangible  property)  paid  lor  with  cash 

orw.ihothcrlmgihlepropertyenlercdonthebooLsoUhecorporalior  at  a value  ine.xcessollhe  Mount  otc.ish 

paid  th-rctor  or  the  actual  emh  value  oltbe  tangible  property  paid  tbcrelor? 11  so.  submit  a 

staument  showing  (e)  kind  ot  propi-rly,  (5)  amount  oirash  paid  therelor,  (c)  actual  cash  i a ue  cloihex  ung.ble 
property  paid  therelor,  (d)  how  that  value  was  determined,  (O  value  at  wlncl.  the 

booksotthocorporation,and(/)excei.oli,)  over  l6)  one).  Thisexccssmust  bevntered  asllem  t.  Schedule  C, 

for  tbc  fd-sablo  period.  ' . 

CTi.  Hw  odequeto  provuijn  te*’n  tniido  in  tbo  QCvo>ants  of 

kind?. , (5)  dcprecialion.' (c)  obsolesa 

numral  dvposits.  limber  supplies,  and  ibe  like?  

If  odequaio  thjrgc  Las  not  Ixvn  mode  for  dopreciulion.  dipk't 
value  ol  the  propirty  b.ii  not  been  miiniauad  by  r,-pla«rai-nis  i 
ujulvd  for  ull  ycirs  in  wbKl 


1 compAOy 


. obsolcseeDC-o,  and  other  losses. 


additional  chart  s thon'Ior  □ 
total  amount  (.fsucbcUargv 


i5.  Schedule  G. 


iloation  of  patents,  copvrights.  secret  process* 
uodcuivka,  trade  brands,  (riincbuies,  or  ovlior 

alaation  oltangible  property  paid  in  lot  stock.. 
Juation  ofo-vsets  acxi aired  In  reoripaniiations.. 


. Appreciation 

. Depreciation,  depict  Ion,  and  other  losses- 


ToT^L  DeoncTtONs. 


SCHEDULE  H.-CHANCES  IN  INY  ESTEO  CATITAL  DURING  TAXABLE  PERIOD 
1.  Changeo  In  Invested  capital  during  Ibe  uxahla  period  otdutar.ly  ansa  In  one  ot  more  ot  tbo  lollowme 
ways: 

*'*tar^sale  ol  capital  stock  lor  trash  or  by  Iho  Issue  ol  capital  stock  lor  tangible  or  olher 

lo)  By  payment  ol  assessments  by  stockholders  or  by  creation  ol  paid  ia  surplus  by  conulbotlon  oi 
slockboWcrs. 

^““("“By  iTquidatloool  part  ol  the  tnplua  by  rellremeol  ol  stock  or  by  purchase  ol  treasury  stock  not 
out  of  current  earmngs. 

fdl  By  papcncnl  of  cash  dividends  out  of  earnings  of  prior  years. 

(r)  By  payment  of  Federal  Income  and  profits  taxes  for  the  pry  loos  years. 

The  cL^cr«.tb  respect  to  taxes  will  occur  in  nearly  every  <ase.  Should  no  changes  U-  noted,  the  rutson 

Should  be  lollow^l  in  making  tb,  a^ro  ad,us,meuls;  each  Item  should  b. 

in  tbL  sJhedull  Assets  (other  than  cash)  paid  in  lor  stock  must  be  valued  in  accordance  with  Section  326  (a)  (2) 
“''TcMl'rap^raUto^k'onbe  eorporaiion  Is  reacquired  but  not  paid  lor  out  ol  current  profits,  the  cost  olsuch 

period  A^distribution  made  during  the  first  <10  days  ol  the  taxable  period  shall  be  deemed  to 
^m  eai^n  s or  profits  accumulated  during  preceding  taxable  period;  but  any  distribution  “7“ 
r/i^rd™  o5  the  taxable  period  shall  be  deemed  to  have  been  made  Irom  Ibe  proflu  lor  that  penod  to  the  exwnl 

‘n:rTr:m:rt"ra,  t:ri^Vpro^^^  taxes  payable  shcold  be  prorared  and  dedneted  as  ol.be 
dates  when  due  and  payable  whetber  reserves  have  been  set  up  on  the  books  or  not.  (see  Article  6*5  ) 

^ 3.  The  daU  called  lor  in  columns  1 to  5 should  ba  given  lor  all  transactions,  except  that  columns  3 and  4 


..’in  column  6 enter  the  number  ol  days  remaining  i 
6.  The  net  changes  not  reported  m Scbcdulo  L.  if  noi 


o uxablo  period  (including  the  date  of  change). 

the  iacteoses  or  decrease®  reflected 


1.  Nature  of  additions 
and  deductions. 

2. 

Date. 

3.  Numficr 
of  slioros 
sold  or  rc* 

, acquired. 

4 If  for 
cash,  state 
price  per 

5.  Amount  of  cash 

uciuaMy  received 
or  paid  out. 

Number 
of  days 
cileciive. 

7.  Adjusted  average, 

/Columa  5 X Column  CV 

''  h«  ' 



1 ”"..1 



1 

r 

1 

1 1";;;:;::: 



* 

! 



SCHEDULE  J.— INADMISSIBLE  ASSETS. 

Has  the  corporation  any  Inadmlsriblo  assets  (1.  e..  stocks,  bonds,  and  otber  obligations,  except ^liona 
““  ute  income  Irom  such  assets  “ 

on  "be  rducrion  S mt^IrMd'crXuoa  ^(a)  (2)  ol  the  Revenue  Act  of  191^  then  a •« 

thecapitaUnvcstedlnsuchassetslsdccmcdanadmlsslblcasscL  lasuchcasesetlonblndetail- 

io)thc  various  kindsotincome  derived  Irom  such  assetsand  the  compuUtioa  olthe  part  oltho  capital 

invested  therein  which  is  deemed  an  admissible  asscL 
For  .7.  purpose  ol.hls 

fi^^^taUi^Uiute  the  meTi!^^ ot  vXc.^dmlssiblo  asscu  shall  bo  valued  as  provided  to  Selena 

M»?nd^.oMbe“uoLloim8andArri^^^^ 

amoS  elects  oleach  kind  bcldduring  any  year  may  ordinarily  *>* 

. k.  .mn„nt  olsuchassctshcld  at  Ibe  beginning  ol  the  taxable  period  and  the  amount  held  at  the  end  ol  the  UxaUe 

™riTtos?crra«the.moMloIadSle  assets  may  bestbedetcrtmncdIrom(Ulhcbalan« 

oUhe  wriSodZ”  Wit^pect  to  lhaltems  to  Schedules  F and  C and  (2)  the  ba^cesb^asal 
J^o°«.d«Uhop.riodco,respoadin6lyadlusUd. 

hastaken  place  to  the  amount  ol  such  assets,  the  average  amount  must  be  dctenmnctl  as  provioea  in  atoci. 
m ol  Regulations  4S.  In  such  case  show  in  detail— 

(M  The  compatatlco  of  such  amount; 

(f)  Amount  ol  inadmissible  assets  bcU  at  beginning  of  the  Uxabic  period; 

(<f)  Amount  of  Inadmissible  assets  beW  at  end  of  taxable  period; 

U)  ^^^(Smissiblo  assets  heid  at  bc:nniiing  of  Uxable  period; 
ig)  Amount  of  admissible  assets  held  ol  the  end  of  ta.wWe^^n^ 

(0  Sum  of  (0  plus  (4); 

O)  Percentage  which  (e)  b of  (»). 

This  pcreenlago  (J)  should  be  applied  to  the  amount  appearing  on  Uno  7,  Seb^*^  B,  to  order  to  ohtato  U* 
doducUon  on  account  ol  inadmissible  assets,  w hlcb  should  I*  entered  on  Uno  t.  Schedule  B. 


t 


< 


t 


t 


[Page  2 of  Form  1120.] 

Income  1 ax 

Supplementary  Page  62. 


Page  3 
JESTIONS. 


kJND  OF  BUSuNESS. 

1.  Ey  means  of  the  kej'  letters  given  below,  identify  the  corpotation’a  main  income- 
producing  activity  with  one  of  the  general  classes,  and  follow  thisby  a special  description 
of  the  business  sufficient  to  give  the  information  called  for  under  each  general  class, 

(A)  .Agriculture  and  related  industries,  including  fishing,  logging,  ice  harvesting,  etc., 
including  the  leasing  of  such  property.  State  the  product  or  products.  (B)  Mining  and 
quamnne,  including  gas  and  oil  wells.  Include  the  leasin®  of  such  property.  State 
tne  product  or  products.  (C)  ilanufacturing.  State  the  product  and  also  the  material 
if  not  implied  by  the  name  of  the  product.  (D)  Construction.  Excavations,  buildmgs, 
bridges,  railroads,  ships,  etc.,  also  equipping  and  installing  same  with  systems,  devices, 
or  machinery,  without  their  manufacture.  State  nature  of  structures  built,  materials 
used,  or  hind  of  installations.  (El)  Transportation — rail,  water,  local,  etc.  State  the 
kind  and  special  product  transported,  if  any.  (E2)  Public  utilities,  gas,  natural,  coal, 
or  water;  electric  light  or  power,  hydro  or  steam  generated;  heating,  steam  or  hot. water; 
telephone;  waterworks  or  power.  (E3)  Storage  vrithout  trading  or  profit  from  sales. 
Elesator,  warehouses,  stocl^ards,  etc.  Stale  product  stored.  (El)  Leasing  transpor- 
tation or  utilities.  State  kind  of  property.  (F)  Trading  in  goods  bought  and  not  pro- 
duced by  the  trading  concern.  State  manner  of  trade,  whether  wholesale,  retail,  or  com- 
mission,'the  product  handled.  Sales  with  storage  with  profit  primarily  from  sales.  (G) 
Service,  domestic,  including  hotels,  restaurants,  etc.;  amusements;  other  professional 
personal,  or  technical  service.  State  the  service.  (H)  Finance,  including  banking, 
reai  estate,  insurance.  (I)  Concerns  not  falling  in  above  classes  (a)  because  of  combining 
several  of  them  with  no  predominant  business,  or  (6)  for  other  reasons. 

2.  (Concerns  whose  business  hivolves  activity  falling  in  two  or  more  of  the  above 
general  classes,  where  the  sami  product  is  concerned,  should  report  business  as  identified 
with  but  one  of  tlie  above  genera!  classes;  for  example,  concerns  in  A or  B which  also 
t.-ansport  and  market  their  own  product  exclusively  or  mainly,  should  still  be  identified 
with  classes  A or  B;  concerns  in  C (manufacturing)  which  own  or  control  their  source  of 
material  supply  in  A or  B and  which  also  transport,  sell,  or  install  their  own  product 
exclusively  or  mainly,  should  be  identified  vvith  manufacturing;  concerns  in  D may 
Control  or  own  Source  of  supply  of  materials  used  exclusively  or  mainly  in  their  construc- 
ts e work;  concerns  in  El  or  E2  may  own  or  control  the  source  of  their  material  or  power; 
coiiceiTis  in  F may  transport  or  store  their  own  merchandise,  but  its  production  would 
ideality  them  with  A,  B,  or  C. 

3.  Answers: 

(а)  General  class  (use  key-letter  designation)—.. 

(б)  Main  income-producing  business  (give  specifically  the  information  called  for 

under  each  key  letter,  also  whether  acting  as  principal*  or  as  agent  on  commis- 


sion; state  if  inactive  or  in  liquidation.!.. 


OTHER  CONCERNS  IN  SAME  BUSINESS. 

4 Enter  on  the  following  lines  the  names  and  addresses  of  five  representative  concerns 
in  your  locality  or  section  of  the  country  engaged  in  the  same  kind  of  business; 


INCORPORATION. 

G.  Under  the  laws  of  what  State  or  country? 

REORCANVZATiCN  AND  .ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS. 

7 Jlac  the  corporation,  or  any  of  its  predecessors,  been  reorganized,  or  has  it,  or  a 
',,-;d('es--,r,  taken  over  a going  business  or  acquired  a mixed  aggregate  of  tangible 
propc-rtv,  patents,  and  copyrights,  and  good  will  and  other  similar  intangible  property, 
i ;*id  idr  such  property  in  whole  or  in  part  with  stock  or  other  securities  since  (be  close 

of  the  i - ceding  taxable  period? , 

&.  If  ao,  furnish  a brief  narrative  history  of  tlie  business  and  submit  a statement 

i acquired); 

ed; 

The  ’/  *al  par  value  of  the  stock  i?.sucd  therefor; 

‘i  Th'  value  at  which  each  class  of  assets  was  carried  on  the  books  of  the  concern 
i;  ..  •:  \.-hich  acquired  (submit  a balance  sheet  of  the  predecessor  concern  as  at  the  date  of 
a; ii.l;ica  or  the  ch  'c  of  Us  la.'t  accounting  period  prior  thereto); 

" (f ; The  '..die  at  which  each  item  was  entered  in  the  books  of  the  corporation  making 
this  re’.'.m,  an  ! full  details  of  any  ad)ustmonts  subsequently  mad^  pertaining  thereto  and 
lb  ' f asis  cn  which  such  revaluation  was  made, 

9.  It  pitents.  copvrights,  tecrel  proc-esses  or  formulm,  good  will,  trade-mark.s,  trade 
br,.nd3,  franchises,  or  oll.ei  intangible  property  wercac<iuired,  state  also  the  basis  on  which 
th-  ir  value  was  determineJ  and  how  they  were  paid  lo.r. 

10.  li  at  the  time  d any  purchase  < r reorganization  as  contemplated  in  question  7,  any 
•, •■■c-rty  v.v.s  cP.'eo-d  on  the  boo-ks  o(  the  reorganized  concern  or  any  vendee  prodeceasor  at 
a lilc  in  v.ccess  oi  that  at  which  it  was  carried  on  the  books  of  the  vendor  concern,  state 
ih-,-  basis  on  whiih  the  lecaluation  was  nuide. 


yS  FFILIATIONS  WITH  OTHER  CORPORATIONS  (TO  EE  ANSWERED  BY 
EVERY  CORPORATION). 

11  T't  you  cwTi  direc-tly  c-r  control  through  closely  affiliated  interests  or  by  a nominee 
cr  nomine:  V over  p.r  cent  cf  tbo  outstanding  voting  capital  slock  of  another  corporation 

or  of  ether  corp  -ralioas? - - - 

i-’.  is  ever  30  jicr  ce.yl  of  your  oulstanJir.g  votnng  capital  stock  owned  by  another  cor- 

pe:at!  p cr  by  two  or  more  corpora tictis  that  are  affiliatod? 


13.  Is  over  fiO  per  cent  of  your  outstanding  voting  capital  stock  as  trail  as  over  50  per 
cent  of  the  outstanding  voting  capital  stock  of  another  corporation  or  of  other  corpora- 
tions owned  or  controlled  by  the  same  individual  or  partnership  or  by  tli®^roe  individuals 

or  partnerships?.  

14.  If  the  answer  th  questions  11,  12,  or  13,  or  any  of  them  is  "yes,  " pr':wiire  from  the 
Collector  of  Internal  Revenue  for  your  district  Aviated  Corporations  Questionnaire, 
Form  819,  which  shall  be  filled  out  and  filed  as  a part  of  this  return. 

VALUATION  OfKiAPITAL  STOCK. 

15.  ISTiat  was  the  fair  value  of  the  total  capital  stock  of  the  corporation  as  determined 

in  the  last  assessment,  if  any,  of  the  capital  stock  tax  $ Date  of  that 

PREDECESSOR  BUSINESS. 

IG.  Did  you  ^le  a return  under  the  same  name  for  the  preceding  taxable  period? 
Answer  “Yes”  or  “No" If  not,  was  your  corporation  in  any-way  an  outgrowth. 


result,  continuation,  or  reorganization  oi  i 


diming  the  taxable  or  preceding  period? 
"yes,  give  name  and  address  of  each  pi 


business  or  businesses  which  was  in  existence 
If  I 


Answer  “Yes”  or  “No' 
predecessor  b'isiness. 


^ BASIS  OF  RETURN. 

17.  Is  this  return  made  on  the  basis  of  actual  receipts  and  disbuisementsT 

If  not,  describe  fully  what  other  basis  or  method  was  used  in  computing  net  iacoine...,— . 


GOVERNMENT  CONTRACTS. 

18.  Have  any  adjustments  been  made  during  the  taxable  period  on  account  of  cqp-^ 

tract  or  contracts  between  the  Government  or  its  agencies  or  in  any  Government  contract 
or  contracts  in  which  you  derived  incomo  directly  or  indirectly,  through  the  operations 
of  a claim  board  or  otherwise?  Answer  “Yes  ” or  ‘ 'No  ” If  so,  state  the  amounts 

' involved  $ , whether  or  not  such  amounts  are  included  in  this  return 

; and,  if  not,  was  an  amended  iot  Ikts,  accounting  for  the 

additional  income,  filed? Submit  aschedule  showing  full  particulars 

of  the  contract,  date  entere-1  .nio,  date  the  work  ceased  nr.d.nr  said  contract  or  contracts, 
and  the  amount  and  nature  of  ibc-  adjustment 

PREPARATION  OF  RETURNS. 

19.  Did  you  employ  anyone  especially  to  prepare  or  advise  in  the  preparation  of  this 

return?  Answer  “Yes”  or  “Ko” li  so,  give  name  and  address 


LIST  OF  ATTACHED  SCHEDULES. 

Enter  below  a list  of  all  scht-dules  accompanynig  this  return,  giving  for  each  i 
title  and  the  schedule  number. 


1.1, -.nr.  hf-cts  shouM  be  prepared  from  the  books  and  should  be  in  agreement  therewrith, 
be  lurtiLliv  ; in  accorilam  e v ilh  paragraph  7 of  page  1 of  Instructions.) 


I'llnz  cajh  lo  LjiL  so-l  t-u  hand,  criUfl- 
.-w  ). 

ontf  (VfoT.--  dodocr'/ip.  reaerve*  (or  loatcs). 
..Me  train  cuitemtn. 

'inis  and  Dalei  rec..lnbl«  (taterlusiacdj 

i; 

itfrUli 
•;  (/rMlui'U. 


t *0')  Q'  (each  Inu*  (a  b% 

. iTalcIpil,  tic  ). 


ASSETS-Conllauad. 
lave^itneoti— continued. 

Slock  of  corporations— 


SCHEDULE  K.— 3AIJVNCE  SHEETS. 

irably  in  parallel  columns),  sho  . - . 

any  differences  eihoulcl  bo  reconcilo<l,  and  if  this  is  a consolidated  return,  balance  sheets  should 

LUBIUTIES. 


Mtacb  hc’^tc  baWnre  sheets  as  of  the  beginning  and  end  of  the  taxable  perii^d  (preferably  in  parallel  columns),  showing  as  nearly  as  practicable  the  details  called  for  beloW.  (Theae 

then  * ‘ ‘ ‘ ....  • 


Deferred  ebar^es  to  future  operattoos  (lobe  dflalied; 

Filed  assets: 
l.iod 

Bulldini^. 

Ma4  biju  r>'. 

7<»ol$  au  f minor  equipment. 

Pvli\ery  eq<iipmcol. 

OiTlcc  fumlliiro. 

OlbiT  Estate  cborneU  r) 

lOTAL. 

•Rficrvo^  for  drpfcflallou  mav  be  dedurtM  from  tho  rcvp<rlirc  a 
All  ^irpfiratinri-  cnC37»*<l  in  .an  intpr^tjlo  and  intriL-falo  fr;(de  (*r  bu-iin'-n  and  rcf«»riin^  In  tho  In 
r luny  ul.init  in  lifij  of  iil>o\  e Torru  ropip-  of  thpir  balance  ^lK•cl.■«  prps(ril>ed  by  sanJ  o 


ASSETS-Contlnued. 

Filed  a8se*t— continued. 

Leas  reserveo  for  deprectatloo  (-ihow  separately 
amount  appUcablo  to  each  Qxed  aoset).* 

Net  Via.irF.. 


Dlacount: 

On  tofid*. 
On  rt«  k. 


Notes  payable: 

To  otflcers  end  stockbolders. 

To  others  (Includini:  bank  loons). 

AccounU  payable: 

Trade. 

Other. 

Accrued  erpenacs  and  reserves.  Ihecharges  creating 
vFhlch  are  allowable  deductions  from  Income  (to 
‘ > delalJed). 


Reteives,  ibo  charges  creatmp  which  i 
a>)lo  deductions  from  Inooiue: 

JUservfts  for  lo&ui  on  notes  and  accounts 
rucclvttble. 

Other  rtsenes  (to  l^e  detailed). 

Capital  atock  outsUndtoa  (i.>  bo  classffled). 

Suiplut  and  uodtslde^roftU* 


TotaI. 


f ItrmU'  d OD  the  Ibbllity  ride  of  Ibu  talonoo  theet. 
I.tlf  ;iiid 

(N*  ami  niiiiiicipal  auihoriti("v.  : 


iv  iiaTjonal.  St  tto,  municip.:!,  vr  f ti  n pubbe 
n»  bfigwuiing  and  «nd  o(  ihr  (uxaMo  period 


•h  h‘^rp'o  an  arnly 
1 I'-nrplu 

Mil  2.  iM  i nrni, 

n.  fflluT  i if«fn  f lo  .•urpli 
-I.  T.  l^l  nf  III  nil  I,  'j,  ai.d  :i. 

i-  i-  a f iiifcoli']al**'l  fp^urn,  ai»j!\ 


SCHEDULE  L.— ANALYSIS  OF  SURPLUS  ACCOUNT. 

(he  rr,rp'irjt ion's  .>:ilrjilus  arrouhl,  bliowirig  Ibo  dotaili  ol  all  wJja'tmcnU  of  surplus  for  Iho  tavat-lo  pvrio-l,  as  nearly  a“  pructicaM 


in  the  f..llowingform: 


ginniii;'  of  trixrcbie  pei 

hown  by  tiool.s  Gtcm  1 


. ll  < 

-liould 


shown  by  bfsiks. 

h>-<lule  M). 

dclailc-d;. 


-he<I  in  af.f'ord.inre  w.itb  p.iragr.qifi  7,  Jiage 


5.  Di-.id.  i,.ls(ht..(.- 
wln-lber  in  .. 
r,  f>  l,.-rd.bil-  b. 
/.  'I'otal  of  Heins  ' 
8.  .‘'iirplns  ;it  ci.  1 
f I nslrni  ti-.ns. 


<b-(  1 msl  and  date  and  amount  Of  each  payment,  i 
^li  or  in  etoi  k.  and  out  of  whii  h year's  eamint^  paid), 
•’.rplni  (lo  be  detailed). 

:ind  (o 

• f ) I .ir  ..f>  b!j  nvii  by  books. 


[Page  3 of  Form  1120.] 


Income  'I’ax 

Supplementary  I’agc  63, 


Pago  4 

SCHEDULE  M.-RECONCILIATION  OF  NET  PROFIT  AS  SHOWN  BY  BOOKS  WITH  TAXABLE  NET  INgOM^i 


1.  Net  profit  for  taxable  period  aeBbown  by  books,  . before  ony  | 

adjiiatmentfl  are  made  therein * 

2.  Unallowable  deductions: 

(a)  Donations,  gratuities,  and  contributions . 

laromo.  war-profl'a,  anl  <!i«»e  pni0ts  tiirs  paid  or  arcmr.lto 

^ ' tha  yates,  ita  presesaioas.  nr  i foreiipi  Mootrj ' 

(c)  Special  improvement  taxes  tending  to  increase  tlie 

value  of  the  property  asooseed - — — 

(d)  Furniture  and  fixtures,  additions,  or  bettemienw 

treated  as  expeneeu  on  tbe  books 

(«)  Replacements  covered  by  depreciation  

rtl  lasnnncft  pmniams  naii  on  thft-lifs  of  any  ot0r,cr  or  rmployos 
f„r  thu  tr'nrlit  of  Iho  roruoralioo  or  DDBinrss  

//.t  InUT.-st  on  in.lPbtediiesa  iiKiirrct  or  continoPii  In  pnrrtuisoor 
carry  ohiiralions  or  oeruritios  (ollior  than  oMijalioos  of  Ibo 
■fuited  StaLs  issno.t  after  Srpt-’niiier  2.1.  I917|,  Ibo  inicrrst 

ni>on  whicli  is  wholly  cioicpl.  from  tatalion - 

(h)  Additions  to  reserves  for  bad  <iebW,  contuigeneios, 
etc.  (to  bo  deUiled) - 

(/) 

(m)  Other  unallowable  deductions(lo  be  detailed) 


(n). 


3.  liistrihiitive  share  of  net  income,  earned  during  perud  by  per- 
sonal servien  corporations  not  received  or  accrued  on  books.. 


Totai.  . 


G.  Nontaxabla  income'  i • 

(n)  Intereatonobligationeo'tbeUnjtedSUieianci  its 

po^eseiona,  wholly  exempt 

(fr)  Interest  on  obligations  of  .Stales,  Territnnos,  and 

political  Subdivisions  thereof - 

(c)  Interest  on  Farm  Loan  Bonds  iarued  under 

Federal  Fa.nn  Loan  Art .. 

trTi  WiidenUs  on  stork  of  dosirstie  cornorstiona  and  froni  fnrrisn 
' t nrixiratioiiB  t'xaols  by  llniira  States  upon  any  portion  oi 


1 Bernice  cjrwrati*)0«  ont  0 
mcooK;  toi  bas  impo 

(J)  Otbej-  iloms  of  nonUxable  income  (to be  deUilrd). 

7 Charges  against  reserves  for  bad  debts,  contingencies,  etc 
(to°bedetailed) 


(e)  - 

w - 

(c)  

W 


Taxable  net  ii 

Total. 


: (Item  27,  ScUeduie  A)- 


SUPPCRTING  SCHEDULES. 

rbe  following  schedules  must  b«  filled  out  in  support  of  Schedule  A,  page  1,  and  firmly  attached  to  this  Return 


cirmTintE  At-  COST  OV  GOODS  SOLD.  EXCLUSIVE  OF  EXPENSES,  REPAIRS.  AND  OTHER 
ITCMSCAULKD  MR  SEPATUTELY.  (fi*cu,e  from  the  Collecto,  ol  Intenial  Revenue  and  file  a.  . pirt 
ol  this  Schedule  Ortlflcaie  o!  Inventory.  Fonn  U26.) 

Merchandise  bwujht  for  sale. . 


rius  Inventories  at  beginning  of  year . 

JOTAL. 

Jycss  Inventories  at  end  of  year— — — 


Cost  of  goods  sold 

jjoT*.— Toventories  must  be 


r basis  Is  used  i 
tbe taxable 
ermissioD  to  r 


lulled  t 
inventori^  < 


liiod  at  (a)  cost  ( 


i^aims'^^lofu^  on  inventories  or  rebates  on  sales  made  under  Serrion  2l|  (o)  12  < 

1918  have  been  allowed,  the  opening  inventory  must  be  concspondmgly  adjusted  (see  Article  2»»b 
♦5). 

Stats  hers  which  ot  the  aboTS-mcntloaed  ba=cs  for  valuing  inventories  is  used  in  thii  retiira. 


SCHEDULE  A3l  GROSS  INCOME  FROM  OPERATIONS  OTHER  THAN  TRADING  OR  MAJIU- 
eactoring. 

Submit  a schedule  shewing  the  nature  and  amount  ot  the  prinejral  items  Included.  See  SehwluleA,  Item  3. 
(For  insurance  companies  see  paragraphs  2 and  3.  page  2,  C»cncral  Instruciions.) 

SCHEDULE  A4:  INTEREST  ON  OBLIGATIONS  OF  UNITED  STATES  OR  ITS  POSSESSIONS  NOT 
EXEMPT. 

Enter  In  Uble  below  the  maximum  amount  of  liberty  Bonds  and  other  obligatlous  of  tho  Umt>>d  'States 
ijcuedslnceSeptemberl,  1917  (par  value),  beld  St 
which  Interest  was  derive  during  tho  taxable  period. 


) time,  and  War  Finanoo  Corporaiioo  Bonds  from 


1.  Class  of  Obligation- 


fa)  Hrst  Mberty  Eoan  converted  Into 
Second  lx>an  and  Second  Uberty 

Loan  unconverted— 

(t>)  First  and  Second  Uberty  LoM^n- 
' verted  into  Third  Loan  and  Third 

Uberty  Loan r.  -r- 

(c)  First  l>ii*erty  Loan  converted  Into 
Fourth  * 


(d)  Fourth  Libertv  Txan..— — — 
(r)  Other  United  States  obligations,  ex- 
c»»pt  class  (/).  issued  abac©  Septem- 


</)  Victory  Uberty  Loan  ii%  Notes.. 
(g)  War  Flnanre  CorporatloD  Bondg^ 


3.  Maximum  Exemption. 


$30,000 

$30‘000 


$20,000 

$33,000 

(^eo 

Note 

B.) 

amount  of,  and  (fr'™  I't f';  of  tho  corporation),  whoso  compcnsal.oii 

U aU  he  rate“o!'sIi  930  or'  more  timmn,  lacL  slimlat  to  thoee  caUed  lor  in  respect  to  olBcers. 

SCHEDULE  ah:  repairs  (includirrg  labor,  auppUea.  overhead,  and  other  item,  properly  chargeable  le 
"svl%.  a schedule  showing  the  -d  ^lunt  oUbe^ri™^^^^  Included  In  Item  H.  Sobeduie  A. 

(Forc!assLficaUonotrcpairsseeparagraph8,pago2,G.nerslInstrueDans.)  „rtTm-.- 

SCHEDULE  A.7:  DEBTS  ASCE.RTAINED  TO  BE  WORTHLESS  AND  CHARGED  OFF  WITHI.t 

SCireD^E*^A^'^EmWCTION,  WEAR  AND  TEAR  (INCLUDINO  OBSOLE^ENCK). 

amo;;n*t»i"ni’hi™trnS^^^ 

liLsl  ructions,  pago  2 ) 

Kind  of  property. 

(Ifbmldincs. 
state  the  material 
of  which  con- 
structed.) 


as  at  March  I, 
19!3.ifacf|uircd 
prior  thereto. 


Probable 
life  after 


Amount  of  depreciation  charged  off- 


Previous  years. 


None. 

I $.^,000  (^ee  not©  C ) 


Not*  a -This  exemption  (maximum  tiS.OOO)  is  Umifed  to  one  and  omyhall  Li^ 

the  F^th  Llberiy  laam  originLly  subscribed  lor  and  stUl  held.  State  here  amoimt  o(  bond-  ol  the  Foui.h  Lib- 

♦rty  l^oan  originally  subscribed  for  and  still  held:  $ 

Kott  B -This  exemption  (maximum  $20,000)  Is  Umited  to  tiiree  limes  the  am^t  n«»tes  f f^®.  ^.^7 
'UbertyTSii  ori^y  3ubSl£d  for  and  sUll  held.  State  here  amount  of  notes  of  the  Victory  Uberty  Loan, 

and  4?^,  originally  subscribed  for  and  stUlheld.  $ 

' Nore  C —This  exemption  Is  separate  from  the  $5,000  exempUcm  aUowed  ou  other  obUgations  and 
Liberty 

fram  all  income 

i;o,intof.heprine.^jm^6xemp^fro^j|raD.a^^^^ 


NOTT -If  obsolescence  isTfaeter  in  determining  yom-  deduction  attach  a statement  showing  the  amo-unt 
claimed  lor  tbe  taxable  period  and  tho  basds  on  which  computed.  , 

'^irc^sroTsIiiro;  rp^etsZ-^^^  period,  teport  the  foUowing  b 


t only 


11?)  u™  tVdllrtS^nd^^te'tkiiwetamr^.“inteie3t^^  War  FinanM  Corpofati 
all  normal  Income  tax  and  is  exempt  froe^oflta  taxes  OTly^th  respect  to  a principal 
Thitt  p^emntion  is  in  addition  to  the  exemeuems  above  referred  to. 


ho  act  authorirlng 

lK>ve.Sftciue  P'ona 

bonds  Ls  exempt  from 

„ _ _ _ exceeding  $5, Of" 

This  exemption  is  in  Edition  to  the  c 

SCHEDULE  A5:  INTEREST  FROM  OTHER  SOURCES.  , , 3..  . 

Submit  a schedule  showing  the  soiirce,  nature,  and  amount 
JUim  Sg  grmi^  in  ono  ng^ra.  The  total  ofth©  schedule  should  bo  entered  as  Item  5.  Schedule  A. 

(1)  Have  you  Included  to  this  item  w toterest  on  preleried  stock? - K so,  how  much? 

*■'72) 'HaiVyou  tociiidcd'ijrt^^  item  any  Federal  tooome  tax  paid  at  source  to  pursuance  o(  tax-free  covenant 
’"“FmtolwlS»'<i'toSdgn”t^^“s»b"rSfascbedtoe-Sb';rtiF(;rn^ 

...hL. I ttSt?  toiuSdSL  or  corporate  obligaticaM),  (c)  amount  of  pniKupal,  and  (d>  amount  oi  interest. 

wmtDULS  AS-  HfCOME  FROM  RENTALS. 

be  reported  as  income  will  iDctado  all  amuabi  as  rent  on  buildtags  or  other  property  owned  or 

controlled  by  the  corporation  making  the  return.  (Schedule  A,  Item  6.) 

RCHEDULK  AS-  DIVIDENDS  ON  STOCK  OF  FOREIGN  CORPORATIONS, 
net  income. 


(1)  Original  cost  of  assets — 
(a)  of  acqiiisitic 


thereto 

Cost  of  suVoquent  iraprovemcr^lfa^- 


(o)  Shown  by  books 

(h)  Aocrued  but  not  on  books - 

Net  cost  (Item  1 or  Item  2,  plus  Item  8,  minus  Item  4). - 

(o)  M^wtdebisets  weresild  ot  amount  of  liqmdatmg  dtsadends  

roccivod — 

(7)  rro9toTlo(B 7--- 

(o)  If  loss,  report  amenmt  of  salvage, 

Lnsiiranu«,ofOlhcrrecovcry,uiiny  $ - 


(5)  Date  loss  chareed  otT.. 


State''ilso"how'liid  by-whom  lafr  mai  ket  iirice  or  value  as  o(  March  1, 

Swbafamo'rt!li-aiy;o(^-he%:riuVal^^^^^  ' 


basis  used  by  you  to  arriving  a 


Report 

In  ca.se  of  cxrhnngo  ol  ir 
cosh  value  of  properly  rcccr 

"Tberint\^i=|odXnr™ 

"D"o';^sSii‘‘24^ra— 

lations  45. 

(rjamount  rcalited;  tft  premium  to  the  return  period  must  bo  reported  either  as  Item 

0 '",’'-“«le  a”  amru^i^  been  reported  as  income  or  ailo.  ed 

Is  S dVducUoS  to  prio';  yenra  (See  Article  oh.  Rejuiations  43.)  


OUUUUfc  »a»  UUUliao  X 

portion  Of  Its  net  incoma.  («)  name  of  c 
held,  and  (d)  amount  of  dividends;  (2)  s 

United  states  upon  any  portion  of  thee  

— ^ ] , . ti.F  gii.ixF  .irr.'km  Mcb  for  liitQseli  dcpoBC6  and  ea^/8  that  this  return, 

We,  the  undermgncd,  pr^«nt  and  treasuror  of  ^>>0  and  belief,  a trio  and  complete  return  made  in  good  faith  pureuant 

including  tho  accompanying  echedules  and  etatements  has  been  examined  by  hmi  aua  is,  to  cue  ur- 

to  the  Revenue  Act  of  1918  and  the  RcgulaUons  issued  thereunder.  _ 


Sworn  to  and-Bubscribod  before  me  this ... 


. day  of . 


[Page  4 of  Form  1120.] 


Income  Tax 

Supplementary  Page  64. 


pace  I of  Iiutnictioiu 


GENERAL  INSTRUCTIONS. 


CORPORATION  RETURN. 


RETURNS. 

- LIABILITY  FOR  FILING. 

1 Corporations  generally.— Every  corporation,  joint-stock  company, 

Association;  and  insurance  company  not  specificaUy  c.xcrapted  by  Section 
'231  of  the  Revenue  Act  of  lb  IS,  and  having  a net  income  for  the  taxable 
period  of  S3,000  or  more,  is  subject  to  the  excess-profits  tax  and  must  me 
a complete  return  on  this  form. 

2 A corporation,  joint-stock  companv,  association,  or  insurance 
company  (not  exempted  by  Section  231).  whether  or  not  haying 
income  must  file  a return  on  this  form,  filling  in  that  part  of  Schedule  L> 
under  the  headings  “Income  tax"  and  all  the  schedules  called  for  on 
pages  1 and  4,  and  answering  all  questions  on  page  3. 

3.  Government  Contracts.— In  addition  thereto,  if  net  income  in 

excess  of  SIO.OOO  was  derived  during  the  taxable  period  from  a Govern- 
ment contract,  Fonn  1 120  S should  be  secured  from  CoUcctor  of  Internal 
Revenue  for  your  district  and  filed  ps  a part  of  this  return.  • 

4.  Foreign  Corporations.- .\  foreign  corporation  subject  to  the  law 
is  required  to  make  return  to  the  collector  in  whoso  district  is  located  its 
principal  office  or  agency  through  which  is  transacted  the  business  m tho 
United  States.  If  it  has  no  office  or  agency  in  the  United  States,  the  re- 
turn should  be  filed  with  tho  Collector  of  Internal  Revenue,  Baltimore, 
Md. 

The  gross  income  to  be  returned  includes  only  the  gross  income  from 
sources  withm  the  United  States,  including  interest  on  bonds,  notes,  or 
other  interest-bearing  obligations  of  residents,  corporate  or  otherwise, 
and  all  amounts  received  representing  profits  on  the  manufacture  and 
disposition  of  goods  within  the  United  States.  (See  Articles  91,  93,  5-30, 
and  025  of  Regulations  45.)  For  deductions  from  gross  income  see 
Article  573. 

5.  A foreign  corporation  should  fill  in  and  submit  all  the  schedules 
called  for  on  pages  I and  4 of  the  return  with  respect  to  its  income  from 
sources  within  the  United  States,  and  should  compute  its  income  t.ax 
(Schedule  D),  claiming,  however,  no  specific  exemption  (Item  9).  Inas- 
much 03  the  profits  tax  in  the  case  of  a foreign  corporation  is  not  based 
on  invtsted  capital,  the  schedules  pertaining  thereto  should  not  bo 
filled  in.  (See  Article  871,  Regulations  45.) 

6.  Partnerships  and  Personal  Service  Corporations.— Partncr-diips 
and  personal  service  corporations  must  make  a return  on  Form  1005. 
(^0  Article  624,  Regulations  45.) 


CONSOLIDATED  RETURNS. 

7.  The  parent  or  principal  reporting  company  of  affiliated  corpora- 
tions ns  defined  in  Section  240  of  tho  Act  and  Articles  631  to  638  of  the 
Regulations,  must  file  a consolidated  return  on  this  form  with  the  col- 
lector of  the  district  in  which  its  principal  office  is  located  and  attach 
thereto  a schedule  showing  the  names  and  addresses  of  all  allUiated  cor-, 
porations  in  the  group,  together  with  the  amount  of  tax  allocated  to 
each  corporation.  (But  sec  paragraph  9).  Each  of  tho  other  affiliated 
corporations  shall  file  in  the  office  of  tho  collector  of  its  district  Form 
1122. 


Consolidated  invested  capital  must  bo  computed  as  at  tho  beginning 
of  tho  taxable  period  of  the  parent  or  principal  reporting  company  and 
consolidated  income  must  be  computed  on  the  basis  of  its  taxable  period. 

All  supplementary  and  supporting  schedules  should  bo  prepared  in 
columnar  form,  one  column  being  provided  for  each  corporation  included 
in  tho  consolidation,  one  column  tor  a total  of  like  items  before  adjust- 
ments are  made,  one  column  for  intercompany  eliminations  and 
adjustments,  and  one  column  for  a total  of  like  items  after  giving  cfTcct 
to  the  eliminations  and  adjustments.  Tho  items  included  in  tho  column 
for  eliminations  and  adjustments  should  bo  symbolized  so  as  to  readily 
identify  contra  items  aflectcd  and  if  necessary,  in  order  to  give  a correct 
understanding  of  these  entries,  suitable  explanations  should  oc  appended. 

8.  If  one  domestic  corporation  owms  95  per  cent  or  more  of  the  out- 
standing voting  stock  of  another,  or  if  95  per  cent  or  more  of  the  out- 
standing voting  stock  of  two  or  more  domestic  corporations  is  owned  by 
tho  same  individual  or  individuals,  partnership  or  partnerships  in  sub- 
stantially tho  same  proportion,  a consolidated  return  must  bo  filed 
by  such  corporations  except  that  tho  limitations  as  to  consolidation  pro- 
vided by  Article  635  must  bo  observed.  If  the  ownership  is  less  than  95 
per  cent  of  the  outstanding  votm"  stock,  but  exceeds  50  per  cent,  tho 
parent  or  principal  corporation  of  any  ^oup  of  affiliated  corporations 
must  furnish  the  information  called  for  in  questions  11  to  14,  page  3. 

9.  In  case  of  all  consolidated  returns  the  Department  pref;  rs  that 
the  total  tax  assessed  against  the  affiliated  companies  bo  allocated  to  tho 
parent  or  principal  reporting  company  and  paid  by  it  to  tho  Collector 
of  Internal  Revenue  with  whom  the  return  is  filed,  instead  of  tho  tax 
being  apportioned  among  tho  affiliated  companies. 


PERIOD  COVERED. 

10.  The  taxable  period  is  the  calendar  year  1919  or  tho  fiscal  period 
ended  in  tho  calendar  year  1920,  and  tho  net  income  shall  be  computed 
upon  tho  bn.si3  of  tho  corporation's  annual  accounting  period  (calendar 
year  or  fiscal  period)  in  accordance  with  tho  method  of  .keenin.g  the- 
books.  The  accounting  jicriod  cslablished  for  191S  must  bo  afllKicd  to 
in  1019,  unless  permis  uoti  was  received  from  tho  Commissioner  to  make 
a change.  . A corporation  having  no  fiscal  year  must  file  its  rcluni  on 
tho  basis  of  a calendar  year. 

11.  If  a corporation  changes  its  accounting  period,  ami  not  merely 
its  ta.\«Lble  year,  to  conform  with  its  existing  accounting  [icriod,  it  shall 
as  soon  as  possible  give  to  the  collector  for  transmission  t ) the  Commis- 
sioner written  police  of  such  cliango  and  of  its  reasons  thciefor.  The 
Commissioner  Will  not  approve  a change  of  the  basis  of  coiuputiiig  net 


income  unless  such  notice  is  given  at'.T,  time  which  is  both. (a)  at  least 
thirty  da\-s  before  the  due  date  of  the  corporation’s  return  on  the  basis 
of  its  existing  taxable  year  and  (6)  at  least  thirty  daj's  before  the  due 
date  of  its  return  on  the  basis  of  the  proposed  taxable  year.  (See  Arti- 
cle 431  of  Regulations  45  and  Section  226  of  the  Revenue  Act  of  1918.)  4 

TIME  AND  PLACE  FOR  FILING. 

12  Tlio  Return  must  be  sent  to  the  Collector  of  Internal  Revenue  for. 
tho  district  in  which  the  corporation’s  principal  office  is  located,  so  as  to 
reach  the  collector's  office  on  or  before  the  fifteenth  day  of  the  third 
month  following  tho  close  of  the  ta.xablc  period,  unless  an  extension  of 
time  has  been  granted. 

13.  In  case  of  neglect  to  file  return  within  the  prescribed  time  tho 
collector  is  authorized  to  grant  an  extension  of  not  more  than  thirty  days, 
■provided  such  neglect  V'as  due  to  absence  or  sickness,  and  provided  an 
application  for  such  extension  is  made  in  writing  prior  to  the  expiration 
ot  the  period  for  which  an  extension  may  be  granted.  In  mentonous 
cases  tho  (ilcmmissioaer  is  authorized  to  grant  a further  extension. 

SIGNATURES  AND  VERIFICATION. 

14.  Tho  return  shall  bo  sworn  to  by  the  president,  vice  president,  or 
other  principal  officer  and  by  the  treasurer  or  assistant  treasurer.  The 
return  of  a foreign  corporation  having  an  agent  in  tho  United  States 
shall  be  sworn  toby  such  agent.  If  receivers,  trustees  in  bankruptcy,  or 
assignees  are  operating  the  property  or  business  of  the  corporation,  such 
receivers,  trustees,  or  assignees  shall  e.xeciite  the  return  for  such  corpora- 
tion, under  oath. 

PAYMENT  OF  TAXES. 

15.  The  tax  should  be  paid  by  sending  or  bringlng'with  Uie  return 
a check  or  money  order  drawn  to  the  order  of  “Collector  of  Internal 
Revenue  at  (insert  name  of  city  and  State).’’ 

16.  Do  not  send  cash  through  the  mail  or  pay  it  in  person  e.xcept  at 
the  office  of  the  collector  or  a regularly  established  intcrnal-revenuo 
stamp  office. 

17.  The  total  tax  may  be  paid  at  the  time  of  filing  tho  return  or  in 
four  equal  installments,  as  follows: 

The  first  installment  shall  be  paid  at  the  time  fixed  by  law  for  filing 
the  return,  and  the  second  installment  sh.all  be  paid  on  the  fifteenth  day 
of  tho  third  month,  the  third  installment  on  tho  fifteenth  day  of  the 
sixth  month,  and  tho  fourth  installment  on  the  fifteenth  day  of  the 
ninth  month  after  tho.  time  fixed  by  law  for  filing  the  return,  ^ ' * ■ 

PENALTIES. 

FOR  MAKING  FALSE  OR  FRAUDULENT  RETURN! 

Not  exceeding  810,000  or  not  exceeding  one  year’s  imprisonment,  or 
both,  in  the  discretion  of  the  court,  and,  in  addition,  50  per  cent  of  tha 
tax  evaded. 

FOR  FAILING  TO  MAKE  RETURN  ON  TIME. 

Not  more  than  81,000,  and,  in  addition,  25  per  cent  of  tho  amount 
of  tax  due. 

FOR  FAILING  TO  PAY  TAX  WHEN  DUE  OR  UNDERSTATEMENT 
OF  TAX,  THROUGH  NEGLIGENCE. 

Five  per  cent  of  the  tax  duo  but  unpaid  plus  interest  at  the  rate  of 
1%  per  month  during  the  period  in  whicn  it  remains  unpaid. 

WORKING  papers; 

Every  corporation  should  preserve,  available  for  inspection  by  a 
revenue  officer,  working  papers  showing — 

1.  Tho  balance  in  each  account  on  tho  corporation’s  boolcs  that  was 

used  in  preparing  Schedule  A. 

2.  Tho  amount  deducted  from  each  such  balance  on  account  of  each 

class  of  nontaxable  income,  unallowable  deductions,  and  other 
adjustments  indicated  in  ^hedulo  M,  with  a reference  to  the 
number  of  the  item  in  Schcdul,e  M in  which  each  amount  so 
deducted  was  included. 

3.  Tho  rcmnindei-  of  each  such  balance,  analyzed  to  show  the  amount 

included  in  eacli  item  of  Schedule  A,  with  a reference  to  tho 
number  of  the  item  in  Schedule  A in  which  each  such  amount 
was  included. 

NET  LOSSES 

If  for  any  taxable  period  beginning  after  October  31, 1918,  and  ending' 
prior  to  January  1,  1920,  it  appears  upon  the  production  of  evidence 
satisfactory  to  the  Commis-sioner  that  any  taxpayer  has  sustained  a net 
loss,  tho  amount  of  such  net  loss  shall  under  regulations  prescribed  by 
tho  Commissioner  with  tho  approval  of  the  Secretary  bo  deducted  from 
tlio  net  income  of  tho  taxpayer  for  tho  precedmg  taxable  period ; and  tho 
taxes  imposed  by  Titles  II  and  HI,  Revenue  Act  of  1918,  for  such  pre- 
ceding taxable  period  shall  be  redetermined  accordinglj'.  Any  amount 
• fouiKi  to  be  duo  to  (ho  taxpayer  upon  the  basis  of  sudi  redetormination 
shall  1)0  credited  or  refunded  to  tho  taxpayer  in  accordance  with  tho 
provisions  of  section  252,  Revciiuo  Act  of  1918.  If  such  net  loss  is  in 
excess  of  tho  net  income  for  such  preceding  taxable  period,  tho  amount 
of  such  c.xcess  shall  imdci’  regulations  prescribed  by  the  Commissioner 
with  the  approval  of  tho  Secretary  be  allowed  as  a deduction  in  computing 
tho  net  income  for  the  succeeding  taxable  period.  (See  Ai  liolcs  1601-1603, 
Regulations  45.) 

REGULATIONS  45 

Copies  of  Regulations  45  may  be  obtained  from  the  Collector  ot 
Internal  Revenue  for  your  district. 


Income  Tax 

Supplementary  Page  65. 


[Page  5 of  Form  1120.] 


Page  2 of  Instructions. 


INSTRUCtlONS  RfcCARDlNG  DETERMINATION  OF  CREDITS,  CoMFUTATION  OF  TAX.  ETC. 


RECtXATIONS  COVERING  CROSS  INCOME  AND  DEDUCTIONS. 

1 RaUroad  corponuious.  banka,  insurance  companies,  and  other  corporations 
to  submit  eiatemenTof  income  and  expenses  to  any  national,  State,  mumcapal  p other 
public  officer  may  submit  instead  of  Schedule  A a statement  of  meeme  and  expenses  m 
fhe  form  in  wWch  submitted  to  such  officer.  In  such  cases  the  taxable  net  mcome 
be  reconciled  by  means  of  Schedule  M with  the  net  pror.t 

e-  pense  stalcmont  submitted,  and  should  be  entered  as  Item  27,  Schedule  A pa^e  1. 

2.  Life  insurance  companies  should  enter  as  Item  3,  Schedule  A the  total 
rcceix  ed  from  policyholders  loss  such  portion  thereof  as  has  been  paid  nark  or  credited  to, 
or  treated  as  an  abltomcnt  of  premiums  of,  such  policyholders  within  the  taxable  year. 

(Sec  Articles  548  and  &'I9  of  Regulations  45.) 

3 Mutual  marine  insurance  comrianios  should  report  as  Item  3,  Schedu-o  A,  the  gross 
premiums  collected  and  received  by  them  less  amounU  paid  fr^  rerneimance. 

4 Insurance  companies  should  state  separately  in  Schedule  A12,  (a)  the  net  addition 
required  by  law  to  be  made  within  the  taxable  year  to  rcse.-x-e  funds  (iucludmg  in  the  ct^e 
of  assessment  insurance  companies  the  actual  deposit  of  sums  ^th  ^1?*" 

cers  pursuant  to  law  as  additions  to  guarantee  or  reserae  funds,  ana  (5)  the  total  of  sums 
otlicr  than  d.i-idends  paid  within  the  year  on  policy  and  annuity  conlracU. 

5 Corporations  issuing  pt-licics  covering  life,  health,  and  accident  insur^ce  combim^ 
in  one  policy  issued  on  the  weekly  premium  payment  plan  continuing  lor  Me  and  notsuh- 
iect  to  Lcedlation  should  report  in  Schedule  A12  such  part  of  the  net  addition  (not  r^uired 
by  law)  made  within  the  taxable  year  to  reserve  funds  as  the  Commissioner  finds  to  he 

required  for  the  protection  of  the  holders  of  such  policies. 

C.  Mutual  marine  insurance  companies  should  report  in  Schedule  A12  amounts  r 'paid 
to  policyholders  on  account  of  premiums  prewiously  paid  by  them  and  interest  paid  upon 
such  amounts  between  the  ascertainment  and  the  payment  thereof.  _ 

7.  Mutual  insurance  companies  (other  than  mutual  life  and  mutual  maruie  insurance 
companies)  that  require  their  members  to  make  premium  deposits  to  provide  lor  losses  and 
expenses,  should  report  in  Schedule  A12  the  amount  of  premium  deposits  returned  to 
their  poUoyholders  and  the  amount  of  premium  deposits  retained  for  the  payment  of  losses, 
expenses,  and  reinsurance  reserves  (unless  deducted  elsewhere  in  Schedule  A). 

8.  IncidenUl  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  Me  of 
property,  are  deductible  as  expenses.  Expenditures  for  new  buildings,  raachmery, 
equipment,  or  for  permanent  improvement  or  bcltermciits  which  incrc.ase  the  vMue  of 
the  property  are  chargeable  to  capital  account.  Expenditures  for  restoring  or  replacing 
property  arc  not  deductible  under  this  or  any  other  item  cl  the  return.  Such  cxpendi- 
lurcs  arc  chargeable  to  capital  account  or  to  depreciation  reserve,  depending  on  the  treah 
menl  of  depreciation  on  the  books  of  the  taxpayer.  (Schedule  A,  Item  14.) 

9 The  amount  of  interest  deductible  under  item  15,  Schedule  A,  is  the  amount  of 
interest  paid  or  accrued  within  the  taxable  year  on  its  indebtedness,  except  on  indebted- 
ness incurred  or  continued  to  purchase  or  carry  obligations  or  securities  (other  than  obli- 
gations of  the  United  States  issued  after  September  24,  1017),  the  interest  upon  which  is 
wholly  exempt  from  Uxation  under  the  Act  as  income  to  the  taxpayer,  or.  lu  the  case  of 
a foreign  corporation,  the  proportion  of  such  interest  which  the  amount  of  its  gross  income 
from  sources  within  the  United  Slates  bears  to  the  amount  of  its  gross  income  from  all 

sources  xvithin  and  without  the  United  Stales.  (Schedule  .L,  Item  15.) 

10  Ejffiaustion,  wear  and  tear  (including  obsolescence).— The  amoimt  deductible  on 
account  of  depreciation  is  an  amount  charged  off  which  fairly  measures  the  lo^  during  the 
year  in  the  value  of  physical  property  by  reason  of  exhaustion,  wear,  tear,  and  obsolescence. 
Such  an  amount  should  be  determined  upon  basis  of  the  cost  or  fair  market  value  as  of 
March  i 1913  if  acquired  prior  thereto,  of  the  property  and  the  probable  number  of  yer^ 
constituting  its  life.  The  capital  sum  to  be  replaced  should  bo  charged  off  over  the 
probable  life  of  the  property  cither  in  equal  annual  installments  or  in  accordance  with  any 
other  recognized  trade  practice,  such  as  an  apportionment  of  tee  capital  sum  over  units  of 
production  Whatever  plan  or  method  of  apportionment  is  adopted  must  be  reasonable 
and  should  be  described  in  the  return.  Slocks,  bonds,  and  like  securities  are  not  subject 
to  exhaustion,  wear  and  tear,  within  the  meaning  of  the  law. 

PROVISIONS  AFFECTING  INVESTED  CAPITAL  AND  CREDITS. 

RETURNS  FOR  PART  OF  A YEAR. 

11  It  this  return  is  for  a period  Mss  than  a full  year,  Item  3.  Schedule  C;  Items  1 and  2 
column  2,  Schedule  D;  and  Item  9,  Schedule  D,  shall  be  reduced  to  as  many  twelfths  of 
the  fi-ure’s  for  a full  year  as  there  are  months  in  Iho  period  for  winch  the  return  is  made. 

If  the  period  for  which  the  first  or  fnal  return  is  made  includes  fractions  of  months, 
•here  slmll  bo  added  to  the  number  of  complete  months  as  many  thirtieths  of  a month 
08  there  are  days  in  the  fractional  parts  of  months. 

CREDIT  FOR  INCOME,  WAR-PROFITS.  AND  EXCESS-PROFITS  TAXES  PAID 
’'or  AtXRUED  DURING  TAXABLE  PERIOD  TO  FOREIGN  COUNTRIES 

OR  POSSESSIONS  OF  THE  UNITED  STATES. 

12.  If  a credit  is  claimed  in  Item  13,  Schedule  D,  a copy  of  Form  1118,  completely 
filled  out  and  sworn  tc  or  affirmed,  must  be  eubraitted  with  this  rcl  urn.  11  credit  is  sought 
for  taxes  already  paid,  the  form  must  have  attached  to  it  the  receipt  lor  <-a.  b such  tax  pay- 
ment. If  c.’xidit  is  sought  for  taxes  accrued,  the  form  roust  have  allarhed  to  it  the  return 
on  which  each  such  accrued  tax  was  based.  (See  Artie  le  Oil  ol  Regulations  45.) 

13.  UTiea  a, credit  is  claimed  for  accrued  ta-xes,  the  CommiKiioncr  may,  as  a concution 
precedent  to  the  allowance  of  this  credit,  require  the  corporation  to  give  a bond  (Fora 
1119'  with  eurctifs  satisfiactory  to  and  to  bo  approved  by  him  in  such  pen.al  euro  as  he 
may  irquiro,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  found 
due  if  iho  taxee  when  paid  differ  from  the  amount  claimed  in  respect  thereof. 

/PROVISIONS  AFFECTING  COMPUTATION  OF  EXCESS-PROFITS  TAX. 

1 1.  Item  3.  Schedule  D,  is  the  excess-profits  tax  unless  the  taxpayer  is  subiect  to  coo 
or  more  of  the  following  provisions:  , , „ • 

(a'  Limitations  on  total  fax.— The  maximum  cxcofe.pn.fiu  tax  impcwd  shall  in  no 
case  be  more  than  20  jior  cent  ol  the  net  incemo  in  excess  of  $.3,000  and  not  in  ext*  as  ol 


$20,000  plus  40  per  cent  of  the  net  income  in  excess  ol  $20,000  (Section  302),  unless  net 
income  amounting  to  more  than  $10,000  was  derived  from  a Government  contract,  when 
the  tax  on  such  income  shall  be  assessed  under  Section  301(c),  in  which  case  the  maximum 
e.xcess  and  war-profits  tax  imposed  upon  this  proportion  ol  the  net  incomeshall  notbemore 
than  30  iier  cent  ol  the  amount  ol  net  income  in  excess  of  $3,000  and  not  in  ^ess  of 
$20,000  plus  SO  per  cent  of  the  amount  of  net  income  in  excess  of  $20,000.  (See  Section  302.) 

(5)  Tax  on  profits  from  sale  of  mineral  deposits. — In  the  case  of  a bona  fide  sale  of 
mines,  oil  or  gas  wells,  or  any  interest  therein,  whore  the  principal  value  of  the  property 
has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work  done  by  the 
taxpiayer,  the  portion  of  the  excess-profits  lax  attributable  to  such  sale  shall  not  exceed 
20  per  cent  of  the  selling  price  of  such  property  or  interest.  (See  .‘Jticloe  971  and  972  of 
Regulations  45,  and  Section  337  of  the  Act.) 

Thejirat  step  is  to  find  the  excess-profiu  tax  computed  without  regard  to  this  provi- 
sion ; the  second  is  to  find  of  the  tax  thus  computed  such  portion  as  the  net  income  from  the 
the  L o beam  to  the  total  net  income.  1 f this  portion  equals  or  does  not  exceed  20  per  cent 
of  th  . celling  prica,  then  no  adjustment  is  permitted.  Should  such  portion  exceed  20  per 
cent  of  the  selling  price,  then,  first,  find  such  portion  ol  the  excess-profits  tax  as  the  net 
income  not  attributable  to  the  sale  beam  to  the  total  net  income;  and  aocondly,  add  to 
this  20  per  cent  ol  the  selling  price  ol  the  mineral  deposits. 

(c)  Tax  on  corporation  engaged  in  mining  of  gold.— If  a corporation  was  engaged  in 
the  mining  of  gold,  its  e,xcess-pvofita  tax  shall  be  that  proportion  of  Item  3,  Schedule  D. 
which  iho  net  income  not  derived  Irom  the  mining  of  gedd  bears  to  the  totol  net  income. 

(Articles  752  and  753,  Regulations  45,  Section  304(c)  oi  the  Act.) 

(d)  Tax  of  corporation  whose  income  is  derived  in  part  horn  “Personal  Service.”— If 
part  of  the  net  income  (notless  tlian  30  per  cent)  is  derived  from  a separate  tradaor  husinoee 
of  the  character  of  “personal  service, “ the  tax  sliall  he  computed  in  accordance  with  the 
proiTsions  of  Articles  741  to  743,  Regulations  45,  Section  303  oi  the  Act. 

15.  Statement  of  basis  of  claims.— If  tho  corporation  claims  tho  benefit  oi  one  or 
more  of  those  provisions,  it  should  attach  to  tho  return  a complete  stotoment  of  the  basis  for 
such  claim  aud  a computation  of  tho  tax  payable  in  the  event  that  such  claim  is  allowed. 
Tho  amount  of  tax  so  computed  should  be  eulcred  in  Schtdule  D,  but,  except  in  cteea 
lalling  under  (a)  atiovc,  the  taxpayer  must  nevertheless  fill  out  all  the  ectedulsB  of  this 
form. 

SPECIAL  CASES. 

16.  Definition  of  special  cases.-Seci  ion  327  of  the  Act  provides  that  in  the  following 

cases  the  tax  shall  be  determined  as  provided  in  Section  328:  , ■ 

(a)  Where  tho  Commissioner  is  unable  to  determine  the  invested  capital  as  provided 
in  Section  326. 

(i)  In  tho  case  of  a loreign  corporation. 

(c)  Where  a niLued  aggregate  of  tongible  property  and  inUngihlo  property  has  been 
paid  in  lot  stock  or  ior  stock  and  bonds  and  the  Commissioner  is  unable  satisfactorily  to 
determine  the  respective  values  of  the  sevoral  classes  of  property  at  tho  time  of  payment, 
or  to  distinguish  the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively. 

(d)  Where,  upon  application  by  the  corporation,  the  Comn^ioncr  finds  and  dodaros 
of  record  that  the  Ux  if  detomiiued  without  benefit  of  this  section  would,  owing  to  abnor- 
mal conditions  affecting  tho  capital  or  income  ol  the  corporation,  work  upon  tho  corpora- 
tion an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and, tho  tax  computed  by  reference  to  the  representetivo 
corporations  specified  in  Section  328.  This  subdivision  shall  not  apply  to  any  caw:  (1)  in 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  bscauso  the  corp^ 
ration  earned  within  the  taxable  year  a high  rate  of  profits  upon  a normal  invert^  capitel, 
nor  (2)  in  which  50  per  centum  or  more  oi  tho  gross  income  of  tho  corporation  for  the  Uxablo 
year  (computed  under  Section  233  of  Title  II)  consists  of  gains,  profits,  commissions,  or 
other  ineome  derived  on  a cost-plus  basis  from  a Government  contract  rt  contracts  made 

between  April  6, 1917,  and  November  11,  1918,  both  dates  inclusive. 

17.  Treatment  of  special  cases.— In  tho  cases  specified  in  Section  327  tho  tax  will  he 

BDOcially  determined  under  tho  provisions  of  Section  328.  A corporation  which  comes 
vSrin  the  provisions  of  subdivision  (<f)  of  Section  327  (paragraph  15  above)  may  make 
application  for  assessment  under  the  provisions  of  Section  328,  which  appliration  eha.1 
bo  attacliod  to  its  return  in  tho  form  of  a statement  eottmg  forth  in  lull:  («)  Tho  reasons 
why  tho  tax  should  be  so  determined;  ((.)  the  facte  upon  which  such  reasons  are  b^; 
(r)  an  exact  description  of  each  trade  or  husincas  or  important  branch  ol  a trade  or  busi- 
ngs carried  on  by  it  ; (<f)  a statement  of  the  invoeted  capital  and  not  mcome  lor  each  year 
since  the  bc^jinning  of  tbc  prewar  jxriod;  and  (r)  a stalcnicnt  showing  the  amount  rf 
cains  proCte.  commissions,  or  other  income  donvr.d  on  a cost-plus  basis  from  Government 
^ukcte  made  after  April  5, 19)7,  and  Ufore  November  12,  1918,  and  /^e  per 

cent  which  such  income  is  of  tho  total  income  of  tho  corporation.  (See  Article  901.) 

18  Returns  in  special  cases.-Gorporatioiis  other  than  foreign  corporations  making 
cUim  for  asse'vuncnt  under  Section  328  of  the  Act  should  answer  all  questions  and  file  all 
schedules  as  bar  as  pos«ihle  and  attach  a etetement  oxplainmg  why  it  is  impracticable  to 
fill  out  tho  entire  return. 

UNDISTRIBUTED  PROFITS  TAXABLE  TO  STOCKHOLDERS. 

19  If  any  corporation,  however  created  or  organized,  is  formed  or  availed  of  for 

the  purpose  of  preventing  the  imposition  of  the  surtax  upon  its  stockholders  or  members 
through^e  medium  ol  permitting  its  gains  or  profits  to  accumulate  inst^  oiUimg 
divided  or  distributed,  such  corporation  shall  not  ho  subject  to  the  ^ 

230  of  the  Revenue  Act  ol  1918,  hut  lie  stockholders  or  members  thoroof  shall  be  subject 
to  taxaiou  under  TilloII  in  ihesamo  manner  as  in  the  case  ol  stockholdors  of  a pore^ 
service  corporation,  except  that  tho  tax  impoacd  by  Title  HI  of  the  Revenue  Art  ofmS 
shall  lie  deducted  tr..m  tbe  net  income  of  tho  corporation  b«l<wo  the  proportionate  share 
ol  each  stockholder  or  member  is  coroputod.  (SecUou  220,  Aitido  351.)  »-«>• 


[Page  6 of  Form  1120.] 


Income  Tax 

Supplementary  Page  66, 


4-27-20, 


Form  li22— Revised 


UNITED  STATES  INTERNAL  REVENUE  SERVICE 


INFORMATION  RETURN  OF  SUBSIDIARY  OR  AFFILIATED  CORPORATION 

-i  03) 

WHOSE  NET  INCOME  AND  INVESTED  CAPITAL  ARE  INCLUDED  IN  RETURN  OF  A PARENT  OR  PRINCIPAL 
REPORTING  CORPORATION  FOR  PURPOSES  OF  INCOME  AND  PROFITS  TAXES 

FOR  CALENDAR  YEAR  1919 


This  Return  must  be 
filed  on  or  before  Marc!i 
IS,  1920,  with  tlie  Collector 
of  Internal  Revenue  for 
the  district  in  which  the 
Subsidiary  or  Afnliatcd 
Corporation  has  its  princi- 
pal office,  if  for  a cafen- 
dar  year;  and  on  or  bcfoic 
the  15th  day  of  the  third 
month  after  the  efese  of 
the  fiscal  p-riod,  if  fur 
a fiscal  period. 


Fiscal  period  begun  . 

Nome 

Buciness  address 

tLuy  or  lowu) 


OR 


(Date  Received) 


.and  ended < 1920 


(street  and  number) 


(State) 


1.  Date  meorporateci Under  laws  of  what  State*?. 

2.  Kind  of  bu3iue.ss 

3. -  Par  value  of  capital  stock  outstanding  at  beginning  of  taxable  year:  (a)  common,  $ 


{b)  preferred,  $ 

4.  Name  of  parent  corporation 1 

5.  Address  of  parent  corporation - 

6.  Internal  revenue  district  in  wbicb  consolidated  return  has  been  filed - 

(Give  district,  or  city  and  State) 

7.  In  case  of  all  consobdated  returns,  the  department  prefers  that  the  total  tax  assessed  against  the  affiliated  group 

be  paid  by  the  parent  or  principal  reporting  company,  instead  of  being  apportioned  among  the  affiliated 
companies. 

If  apportionment  is  made  state  the  amount  of  income  and  profits  tax  for  the  taxable  year  to  be  assessed  against 


the  subsidiary  or  affiliated  company  making  this  return. 


Wo,  the  undersigned,  president  and  treasurer  of  the  above-named  subsidiary  or  affiliated  corporation,  being 
severally  duly  sworn,  each  for  himself  deposes  and  says  that  the  foregoing  return,  including  the  accompanying 
list,  (if  any),  has  been  examined  by  him  and  is  to  the  best  of  his  laiowlcdgc  and  belief  a true  and  complete  return 
of  information  made  in  good  faith  pursuant  to  the  Revenue  Act  of  1918  and  the  regulations  thereunder. 

SwoEN  to  and  subscribed  before  mo  this 


.day  of 19 


PresuierU. 


(Namo  ot  officer) 


»— ecir 


(Title) 


Treasurer. 


Income  Tax 
Supplementary  Page  67. 


Form  1012.-nEmF.o  Jaitwaht,  1920.-UNITED  STATES  INTERNAL  REVENUE  SERVICE 

MONTHLY  RETURN  OF  NORMAL  INCOME  TAX  TO  BE  PAID  AT  SOURCE 

and 


INTEREST  ON  BONDS  AND  OTHER  SIMILAR  OBLIGATIONS  OF  DOMESTIC 
RESIDENT  CORPORATIONS  AND  FOREIGN  CORPOI^TIONS  HAVING 
A PAYING  AGENT  IN  THE  UNITED  STATES 

(To  be  used  by  payias  agent  of  foreign  oorporatlon  only  In  case  the  bonds  conUln  a lax-free^ovenant  clause.) 


FOR 


MONTH  OF 


" (Name  of  debtor  otgaaiaation-. ) 
( Full"  posbofflce  address. ) 


(Name  of  withholding  agent.) 
(Full  post-office  address.) 


Date  received 


THIS  RETURN,  IN  DUPLI- 
CATE. ACCOMPANIED  BY 
CERTinCATES  ON  FORM 
IMO  AND  FORM  1059  MUST 
BE  FILED  WITH  THE  COL- 
LECTOR OF  INTERNAL  REV- 
ENUE  FOR  THE  DISTRICT  IN 
WHICH  THE  WITHHOLDING 
AGENT  IS  LOCATED  ON  OR 
BEFORE  THE  20th  DAY  OF 
THE  MONTH  SUCCEEDING 
THAT  FOR  WHICH  MADE 

It  debtor  organization  makes  its  own  withholding  return,  nTeS^s'iSd  be  made  on  lines  provided  above  for  name  and  address  of  withholding 

return  on  this  form  must  be  made  to  cover  f { the  United  States  (individuals and  fiduciaries)  not  claiminc 

1.  Interest  on  bonds  with  tax-free-covmant  clauses  to  ci toons  and  re^d^  tne  individuals  or  fiduciaries,  to  foreign  partnerships,  and 

' per  centum  is  required  to  be  withheld  and  paid  at  source  xu  such  cases. 

2.  Znfer^f  on  or  in  case  owner  is  unknown,  a normal  Uk  of  8 per  centum  is  required  to  be  withheld 

(b)  ufa^forei^^corporation  having  no  office  or  place  of  business  m 

required  to  be  withheld  and  paid  at  source.  * . j v,  « 

the  debtor  corporation  shall  prepare  of  thfunited  States  (individuals  and  fiducianos)  and 

..  u,*  „n.i  dud.b»gi™. 

•®‘‘‘'^\?,”ffrSSd'”SSo,p.yee,(b,b.»b»d.dd,«^^^^^ 

from  whom  the  coupons  were  r^exved,  (e)  amount  “oavee  ” entering  the  amount  of  interest,  due  date,  and 

A ,b.  ““ 

Tba  iffiHflvit.  should  accomnanv  the  ownership  certificate  to  the  Collector  of  Internal  Key enue 


the  United  States,  a normal  tax  of  10  per  centum  is 


If  bonds'are  o^ed  ioinlly,  seFarat^^^^^^^^  should^be  made  by  or  for  each  joint  owner  . Fid, 

•■owner  AnTs’-Ze  naCKaL.  trust,  or  beneficiary  on  behalf  of-whom  the  exemption  is  claimed 


Fiduciaries  must  enter  on  the  certificates  under 


and  inclosed  herewith: 


Class. 

iKTEKEST  PMD. 

Tax  Withubld. 

(Siguatuie.) 

1 

2(a) 

2(b) 

q 

(Capacity  in  wilicb  acting.) 

s 

$ 

(Address  in  full.) 

— 

Name  of  Patee.  1 

Street  and  Number, 

Post  Office  and  State. 

Amount  Paid.  j 

Tax 

1 

triTHlIEU 

B. 

1 

? 

1 

1 

1 

J 

1 

1 

1 

i 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

CONTINUE  ON  FORM  1012A 

Income  Tax 

Supplementary  Page  68, 


IF  RETURN  IS  FOR 
CALENDAR  YEAR  1913 

file  it  with  the 

COLLECTOR  OF 
INTERNAL  REVENUE  , 
FOR  YOUR  DISTRICT  i 
ON  OR  BEFORE 
MARCH  15,  1520  1 

IF  FOR  A PERIOD  I 
OTHER  THAN  A 
CALENDAR  YEAR,  THE  ' 
RETURN  SHOULD  BE 
FILED  ON  OR  BEFORE 
THE  15TH  DAY  OF 
THE  THIRD  MONTH 
FOLLOWING  THE 
CLOSE  OF  SUCH 
PERIOD 


lH5i  irreiH  IS  IWt  m MSB  » tSSlSSSLlV  xxn  is  not  thee  BSED  foe  estates  W PEOCESS  or  AOMWlSrEATlON 
Page  1 of  Retxirn 

Form  IWl.-UNITED  STATES  IKTERKAL  REVENITE  SERVICE 

FIDUCIARY  RETURN  OF  INCOME 

FOR  CALENDAR  YEAR  1919 


Or  for  period  begun 

If  thm  return  U for  « pwrtod  ether  then  _ — — - - . . - . 

cooredipurt  be  plainly  etetedm  the 


, 19 and  ended 

.lender  y«»r,  th«  d*tM  of  *"**  " 


...  19 


PRINT  NAMES  AND  ADDRESSES  PLAINLY 


Name  and  1 

addreaa  of< 
fiduciary  | 


(D»  Nd  Write  in  thu  S|>acc) 


(D«k«  received.) 


Was  a rit'orn  of  income  tor  1918  filed  on  behalf  of  the  eatate  or  trust  named  above? 


If  eo  to  vrhat  collector's  office  was  it  sent  Cgive  district  or  city  and  State)? 

Ectp’r  holow  all  nontaxable  income  received  by  tor  accrued  tol  the  estate  or  tnist  duringthcEg^ 


vcTed  bv  tbia  return  from  the  following  sourcea: 


. Class  of  SzcLTimEs. 


Class  or  Bectoittes. 


r L«u:  Srtf* 


of  Oolambie... 

Fed^rwl  FArm  Ia&p  Bonds . 


ifir  I-  cUvi  * 'u  ’a  rofcivi-tl  i!urAr.?tho  nrcour.tins  poriod  tthichwere  declared 
and  Mid  lx  1 ween  January  1 and  Kovembxr  ) , 1918  hoih  dates  inclusive, 
cr  or  define  1,  nnd  encored  on  the  books  of  the  corporation 

within  ihcec  datwnnH  rpreivod  during  such  accounting  period,  and  before 
Mar-  h i?,  shall  be  allocated  ns  follows: 


Accumulated  in— 


(а)  Received  directly  ... 

(б)  Eeccived  indirectly 


I tahio  IkIow  interest  t 


rnd-rJ  (!>',):  

1.  ClJUiS  OF  Obuoatk  ns. 

noLDCtcs  or  Tins  Fidvciaxt.  1 

FiDUCIARY’sFlL^REOrnOLDlSOSO.Fl’Ar.T-  1 

VEBSaiPS.  rr.RJ^ONAL  SERNTCF.  COBPORA*  1 
Tioss,  Aa*.o  Other  I-TpuclvRieS,  } 

COLLU-SS  i ANd'S. 

2.  Amount  of 
inlcrfst. 

3.  Maximum  amount  1 

of  obiigationi.  { 

4,  Amount  of 

5.  Maximum  OTnouat 

of  obUcTtioas.  j 

(n)  I'ir-l  I.u  Arty  ec-tivcrt.^d  iuXo  a'^cccaa  liberty  J.oan  ana  ::?ecoiia  isirwrty  i-odu  u 

(b)  Fir^ttRod  Second  Liberty  I/iaas  converted  intoTOrd  Liberty  Loan, and  Third  Liberty] 



$... 

' 1 

$ $ - - 

r 1 

i 

1 

(c)  Fir?t  Liberty  I>oaa  coaverteU  into  jfourin  i^incny  

1 I 

1 

f 

(«*}  Fourth  Liberty  Isiaa  

1 1 

1 

r’li... 1 

(0  Other  oblisations,  except  cla«  (/),  issued  fince  Septem’oer  1, 1917 - — 

1 1 

1 

(f)  Victory  Liberty  Isian  A\fn  Notes — 

i i 

1 

1 

iiiiiii::::::::;:; 

, ih.mhlAVx.Iow  twhether  received  or  not)  income  from  partnerships,  personal  service  corporation,  and  other 

ftduciariea,  eRvept  atock  dividends  c 

intered  in  Item  4: 

1.  ICame  and  Addaesscf  PiETTcrR^n*-.  Ptnw/XAL  Fermce  CoBrrp.ATK>K  ca 

2.  Period  (EvTTtt 

Wtara  PisCAi. 
YxAa  Kkded.) 

3.  Cum 
Dnttxm>s 

4.  Brocs 
PlTlDENIlS. 

5.  TKTXRtSf  rx 
Tax-I-bee  Bonus 
(CY  Other 
riDCCUHIES 
ONLY). 

e.  IVTEREST  OX 

I.iiTERTY  Bonds, 
Etc.,  1.WXD  Since 

COF.I'OKATION 

7.  Otker  Income, 

InCLUDINQ  ICTIIR- 

PM-TVCnSHIRR. 

AND  Personal 

COBFORATTOKS. 

I 

i 

1 

$ 

: 

$ 

$ 

i 

1 ■ 

1 

l&clud«tnJ  (•I.pMvS. 

1 

$ 

Uclaa.loE.pM.a. 

* 

$ 

<n)  TotaU  UxaUc  at  1913  ratea  uiatrucuoiifl,  unuer  D^... 

<!,)  Totals  taxable  at  1918  rates  (see  instmetions,  page  2,  under  B) — - 

X X X X X 

X X X X X 

X X X X X 

X X X X X 

$ 

6tAt«lh«aB*Qal«fmt<'reftr< 


7.  r.nf'H-  in  the  Uhle  hf^low  tt.e  name  and 


DISTRIBUTION  OK  INCOME. 

(SoelnstrucUons  V,  poge  I ) 

arl.'resa  of  each  beneficiary  and  show  the  share  of  each  in  the  income  of  tho  estate  or  trust  (whether  distributed  or  not),  and  hu  share  of  income. 


1.  Name  and  Addit'^s  or  Each  Bihmicart. 

DCOTc.'edcjit  aUeDit.) 

^‘,.^9  whether  loJlrf  Inal  IroofOOUT  F*t'.iras  wwo  flVj  hj 

'.rL--  lLA4*  ua.  ;i  ivbj  lj  .,  if  »• , lu  v»  lut  di  tfifiiiscb  wjs  tilAl. 

2.  ?TE. 
CK.NTACE 

or  BESRr 

3.  IWTRaETT  OM 
'lAxl-'k»,aBoja»a 
P.BrOllTfcDCN 
BtOCR  K. 

4.  C*»H  AND  Stock  { 
Dmcr.NDS 

(From  J (a)  Pack  2). 

5.  SpXT  nrvroBNDS 
C0LLM.NS3,  4 AND  6). 

e.  limBEST  OH 
Ltdkrtt  Bonds, 
BTC.,  Issued  Since 
SErrEMBKR !.  B^17, 

ConrOKATION  BONDE. 

7.  Otffta  isce 

8.  IRCOME,  WlR- 
PBorrra,  and  Exces-v 
PBonni  TxXRa  Paid 

OR  ACCRUSDTO  A 
POS-HA.-iaiONOrTUK 

IT.  8.  OR  TO  A 
FOUUf.HCOLNTRT. 

j 

J 

„ 

J 

8 

s 

y i 







1 j 

1 

1 

i 

t 

1 

r*  ■ 

i ! ‘ 

1 

1 1 

1 1 

L 

1 . J 

1 

1 

r 

j 

1 . ... 





ii.:::' 

r:" 1 

i:::::: 

1 

i; 

'ri..a.lA  

Ir- i ... 

1 , . 

k 

! 

1 1 

.1* 

$ ^ 

Ui 

T SW'TU’  t 
r r coming  ico. 
A-t  of  J9Jd,  W 
in  tlim  in 


irihnurl.la  hsneficiZrintorwt  in  the  net  income  is  detonnined  ou  a Iraris  other  than  a poneLUfce  hasir,  attach  an  explanatory  sUtement. 

FORM  OF  AFFIDAVIT.  . , ^ 

. rt,,  I to  Ihn  best  of  mv  knowledge  and  belief,  coumiiis  a tni«  aud  complete  statement  of  all  taxable  puns,  profiU,  and  nuximo  roemvod  by 

• affirm  • that  tho  for^r  J fiduoarv  as  s^od,  duriug  tlio  year  lor  whir  h the  return  is  made;  tliat  said  heucficianoo  are  entitled,  under  llio  Kevouue 

l^U  »;  tue^em  a true  and  osimplete  list  of  the  nam«  and  addr^iee  of  all  the  henefimanie  enutlod  U, 

.vme.  and  the  atojunt  of  each  such  Ixmotiemr/'a  ihare. 


hwom  to  and  suL 


I helcr*  lae  this 


, day  of  - 


ili^zuituro  ol  Liduii*(y  < 


Page  I of  Form  1041. 


Income  Tax 

Supplementary  Page  69. 


DETACH  RETURN  HERE  AND  SEND  IT  TO  COLLECTOR  OF  INTERNAL  REVENUE  AT 


Page  2 of  Rehim 


FIDUCIARY  RETURN  OF  INCOME 


..  INCOME  FROM  BUSINESS. 


l.  Kind  of  business 

Total  sales  and  income  from  business  . 
COST  OF  GOODS  SOLD; 

5 Material  and  supplies 


2.  Business  address  . 


G.  Mercliandisc'  bought  for  sale.. - — • — 

7 Other  costs  (submit  schedule  of  principal  items 

St  foot  of  page  or  on  separate  sliect). 

g.  riiis  inventories  at  beginning  of  >car  (see  instruc- 
tions, Schedule  A,  page  2)  


9.  Totai. 


10.  Less  inventories  at  end  of  year.. 

11.  Net  Cost  or  Goods  Sold 


Did  you  claim  an  inventory  loss  for  1918? 

Is  obsoleecence  claimed  in  deduction  in  Item  10?_ 


OTHER  BUSINESS  DEDUCTIONS: 

12. ’  Salaries  and  wages  not  repwted  as  Labor  under 

"Cost  of  Goods  Sold” — — -■■■■r'lZ — 

13.  Rent  on  business  property  tn  which  the  estate  or 

trust  has  no  equity 


14.  Interest  on  business  indebtedness  to  others  

15  Taxes  on  business  and  business  property.. ... 

16  Repairs,  wear  and  tear,  obsolescence,  depletion,  and 

property  losses  (explain  in  tabl.0  below) 

17.  Amortization  of  war  facilities - 

18.  Bad  debts  arising  from  Balee-.™..*..-:......— 

19.  Other  eicpenseB  (submitechedule  of  principal  items 

at  foot  of  page  or  on  separate  sheet) 

20.  Total  (Items  12  to  19  inclusive) 

2L  Net  Cost  Plus  Totax  Dedoctions  (Item  11  plus  Hem  : 
22.  Net  iNCOME^^ROM^^tJBlNEflS^^^Itc^^^minusJ^ni  21)..-. 


B.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS  AND  OTHER  HDUCIARIES. 

(From  Item  6 (a),  column  7.  page  I.)  - — 


(From  Item  6 ( 

C.  PROFIT  FROM  SALE 


£T4Nn'Rllll.DlNGS.  STOCKS,'  BON  OTHER  PROPERTY.  AND  FROM  LIQUIDATING  DIVIDE^ 


Kind  or  Propertt. 


2.  Name  and  Address  or  Fttrcdasee  or  Broker. 


Nkt  Pbotit  rnoM  Pales  (total  of  columiM  3 and  7 minus 

n.  INCOME  FROM  RENTS  AND  ROYALTIES 


total  of  columns  5 and  6)  $ 


Cost  of  Subse* 
QUENT  Improve- 


, Kind  or  Propertt. 


2.  Niue  and  Address  or  Tenant,  Lessee,  Etc. 


ME  FROM  Rents  AND  Rotalties  (tctal  of  column  3 nanus  total  of 


7.  Other 
Expenses 
(Explain  Below), 


E.  INTOREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT.  ON  WHICH  A TAX  OF  2%  WAS 

Koceived  directly.  3 - received  .lirough  other  fiduciaries  (Item  6 (al.  column  5),  $ 


OTHER 


income  (not  including  dividends,  or  interest  on  obligations  of  the  Umted  States). 


Interest  on  bonds,  mortgages,  and oWigitiora  of  dom®^^^  nn  o°Sr^gn““r^orTtm  “Jffi^c'not  mabl^b^  the  United  States 


upon  any  portion  of  their  net  incomca  — — — — • - 

Interest  on  bank  depoeite,  mortgages,  etc - - 

Amount  paid  for  you  by  debtor  corporation  on  tax-free  covenant  1 


H.  DEDUCTIONS  NOT  INCLUDED  ABOVE. 


. (explain 

lie  below) 

Contributions  and  amounts  set 
aside  for  U.  S..  etc,  (list  below) 


5.  Bad  debts  and  other  deductions.. 
Total 


Interest  paid $ 

2.  Taxes  pnid - 

r„.. 


Item  4 (a)  column  2 


J (b).  ToUl  amount  of  Intereit  on  bond*  and  other  obligation*  of  the  Umted 

' Reoeiveddirectly.l ; re<»ivedth,oughpartnersMpe,personidservieeeorpomtionB,andotherfiducm^^^  $. 

J (c).  Other  income  from  partnership.,  per«.nJ  .ervice  corporation*,  and  other  fiduciaries  (Item  C (5).  column  7)..... 
K.  Total  net  income.  (If  Item  I shows  minus  quantity,  deduct  amount  from  total  of  T (a).  J (b)  and  .1(0)  


Sutes  issued  after  September  1, 1917,  and  Wir  Finance  Corporation  Bonds: 

Total. 


enter  in  THIS  TABLE  DETAILS  CONCERNING  REPAIRS.  WEAR  AND 


TEAR.  PROPERTY  LOSSES.  ETC-  CLAIMED  AS  DEDUCTIONS  IN  SCHEDULES  A D AND  H ABOVE 


Prior  Thereto. 


5.  REPAraS  (NOT 
Offset  by  Claims 
FOR  Wear  and 
Tear  and  Losses). 


Wear  and  Tear.  Obsolescence,  i 
Depletion  Coaroed  Off. 


8.  Amount  this 


Cause  and  now  Amount  y 


EXPLANATION  OF  DEDUCTIONS  claimed  in  Schedule  A.  tin 


, 7 and  19;  Schedule  D.  column  7;  and  Schedule  H,  Items  4 and  5.  (Attach  separate  shget^ 


Page*2  of  Form  1041. 


Income  Tax 

Supplementary  Page  70, 


RETAIN  THIS  SHEET  AND  INSTRUCTION  SHEET  AVAILABLE  FOR  INSPECTION  BY  REVENUE  OFFICER 


DETACH 

THE  RETURN  (CONTAIN- 
INC  AFFIDAVIT)  AND 
DELIVER  OR  SEND  IT  TO 
COLLECTOR  OF 
INTERNAL  REVENUE  ON 
OR  BEFORE  THE 
ISTH  DAY  OF  THE  THIRD 
MONTH  FOLLOWING 
THE  CLOSE  OF  THE 
ACCOUNTING  PERIOD 


KEEP  THIS 
WORK  SHEET 
AND  THE 
INSTRUCTION 
SHEET 


of  Work  Sheet 

Torm  KMl-tTNITED  STATES  INTERNAL  REVENUE  SERVICE 

WORK  SHEET  FOR  FIDUCIARY  RETURN  OF  INCOME 

FOR  CALENDAR  YEAR  1919 


Or  for  period  begun . 


— 1 19 , and  ended  ..... 


, 19.. 


PRINT  NAMES  AND  ADDRESSES  PLAINLY 


Name  and  I 
addreu  of  | 
fiduciary 


Name  of 
estate  or  trust 


IF  YOU  NEED 
ASSISTANCE 
GO  TO  A 

DEPUTY  COLLECTOR 
OR  TO  THE 
COLLECTOR’S  OFFICE 
BUT  FIRST 
READ  INSTRUCTIONS 
- AND  FILL  OUT 
THIS  SHEET 
(FACE  AND  BACK) 
IN  PENCIL 

AS  WELL  AS  YOU  CAN 


1.  Wm  a return  of  income  for  1918  filed  on  behalf  of  the  eetato  or  trust  named  above?  . 

2.  If  80,  to  what  collector’s  office  was  it  sent  (give  district  or  city  and  State)? 


Class  or  Secubities. 

Pamariz. 

Irrezaoi. 

Class  or  fiEcuBirixs. 

PamarAL. 

SAS  It^LLA  lUU  lUlIUW 

iNTXRIST. 

lujr  sources: 

OiaiB  Iscoire  (Give 
Souaca). 

Amount. 

Pint  Liberty  Loan  3H%  Bond#  nneonTerteL.. 
eihcroblicBtiooeofthe  U.8.  issoed  before  Sept. 
1. 1917.  and  ooLixaiionaof  U.  8.  poisesAioni... 

Tletorr  UbertT  Laan 

$ 

» 

ObU^oot  of  States  and  Terrltorlee,  politi- 
eal  flobdiTisfoB#  thereof,  and  the  District 
of  ColniBbla  

$ 

?.  . . 

, 

'■ 

rai  Farm  Loui  Bonds 

1.  Accumulated  in— 

2.  1918-19.  1 

t 

4.  1918. 

6. 

1913-15. 

*.  stock diVKtends received duringtheaccountingperiod which  weredeclared 
and  paid  between  January  1 and  November  1, 1918,  both  dates  inclusive, 
or  authorized  or  declared,  and  entered  on  tho  boohs  of  the  corporation 

within^ose  datesaijd  received  duringsuch  accountingperiod,  and  before 
March  27, 1919,  ehall  bo  allocated  aa  follows: 

•S.  I^ntppin  ftkKlA  KplAnr  .....  T :t. a..  D 1_  . . 

(o)  Received  directly 

(b)  Received  indirectly 

$ 

s 

(c)  ToT.11,8 

$ 

$ 

- $ 

$ 

5 derived  (sec  instructions,  page  2, 


I O?  OBUOATIOKS. 


converted  into  Second  Liberty  Loan  and  Second  Liberty  Loan  uncon- 

(b)  Pim^an^econd  iJberty  IxJans  convert’^Tnl^  Thh^Li^b’erty  Loa^TncTThirT^ 

(c)  First  Liberty  Loan  converted  into  Fourth  Liberty  Loon 

(<f)  Fourth  Liberty  Loan 


(r)  Other  obligations,  except  class  (f),  iseued  since  September  1,  1917  . 

(/)  Victory  Liberty  Loan  Notes 

M VCsr  Finance  Corporation  Bonds. 


6.  Enterinthctablebclow  (whetherreceivedornot)  income  from 


FiDoruRT's.SB.iBEornoiDiNcsor  r 


partnerships,  personal  service  corporations  and  otW  fidneiaries,  except  atock  dividend,  enteredl 


2.  rZRTOD  (ENTTB 
1910  OB  Date  on 
Which  Fiscal 
Year  E.vded.) 


(a)  Totals  taxable  at  1919  rates  (see  infftr^ttions,  page  2,  under  B)_ 
[fc)  Totals  taxable  at  1918  ratee  (see  instructioiis,  page  2,  under  B)_ 


FlDUClAiUESONLY). 


t •t  iatoTMt  weeited  hj  pjjtnerBhlpE  or  peixonal  BerrJee  eorporatioos  on  Ui^free  t 


6,  Interest  ON  Lib- 


r^EPT.i. 


AX-FREE  IlONDS  B 
’ARTNERSniPS  ANf 

*ersonalKervici 

COEPOBATJONS. 


t bonds  npon  which  Dorm&l  t 


e paid  at  soorcelncloJcd  in  Item  6 (a)  column  7 |., 


distribution  of  income. 

(See  Instructions  V,  pag«  1.) 


FIDUCIARY’S  MEMORANDA. 


Income'Tax 

Supplementary  Page  71, 


Page  3 of  Form  1041* 


WORK  SHtET  OF  FIDUCIARY  RETUkN  OF  INCOMI 


A.  INCOME  FROM  BUSINESS. 

2. 

1 Kind  of  husibess — 



' 

COST  OF  GOODS  SOLD; 

OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  waces  not  reported  as  Labor  ’ under 
“Cost  of  Goods  

1 

1 Labor  

13.  Rent  on  bu-siness  property  in  wluch  the  estate  or 
trust  has  no  equity 





5.  Material  and  supplies. 

6.  Merchandise  liought  for  sate - - 

7.  Other  costs  (submit  schedule  of  principal  items 

' T b • d 1 ■ - pr  p"")’ 

i 

at  foot  of  p.iae  or  on  separate  sheet) ; — 

b.  Plus  inventories  at  beginning  of  year  (see  instrue- 



ic!  Repairs,  wear  and  tear,  obstdcscence,  depiction,  and 

1 

1 

tions,  Schedule  A,  page  2)  

— 

17  Amorlir.ation  of  war  facilities 

1 ! 

9.  Total... 

13.  Bad  debts  arising  from  sales— — — 



10.  Less  inventories  at  end  of  year 

* _ 1 

10.  Other  exp€*ns«  (eubmit  schedule  of  principal  itenifl 
at  foot  of  pace  or  on  separate  sheet) 

11.  Net  Cost  of  Goops  Solo — 

Did  you  claim  an  inventory  loss  for  1018? 

"0  T (1  I"*!  lb'  ctu-'-") 

lz 



oi  -Mr..  rr.uT  Pi  ns  Total  DenncnoKB  (Item  11  plus 

Item  20) 

$ 

la  obsoleeccncc  ciaimea  xn  ucaucuon  in  iiem  — - 

(From  Item  6 frt1.  cohima  7,  page  1.) 


C.  PROFIT  FROM  SALE  OF  LAND,  BUILDINGS,  STOCKS^qN^A^PJ^X^lgRjgO  UQUIDATiNG  DjVtgE^ 

2.  Name  and  Address  o?  PmerusER  on  Bbcker. 


Kind  op  Pbopeety. 


XrT  PnoFiT  rnoM  fi.Ai.F-s  (toti!  of  t oUimns  3 anti  7 : 


t ...it. 


7.  DKPRtOATION 
SUUSFQUFNTLy 
BaSTXiSTD. 


D.  INCOME  FROM  RENTS  AND  ROYALTIES. 


> Address  or  Tenant,  Pi 


i.TiES  (loUl  of  co!ui;:i>  3 uwmia  tc 


7.  O-mF.R 
EiPENsrs 

liEix)w). 


Interest  on  corporationbonds  containing  tax-free  covenant,  on  w!  iic; ! a tax  or  i%  was  paid  by  debtor  corporation 


tbrntiirh  ofb^r  fiihi 


: r.  roliirnn  M 


F.  OTHER  INCOME  (not  including  dividends,  or  inicrest  on  obligations  of  !he  Unl!f.l  States). 


1.  Interest  on  bonds,  mort-rafies,  ant!  other  ol)li),-ations  of  domwtir  and  resident 

2.  Inlerest  on  bonds  of  foroiRn  countries  and  corporations  and  dmdcnJs  on  slock  of  lorcs.i  corporations  inch  arc  not  taxable  b)  tbc  bmleu  aiatca 

upon  any  portion  of  their  not  incomes — 


3.  Interest  on  bank  deposits,  mortRages,  etc 

A.  Amount  paid  for  you  by  debtor  corporation  cn  tax-free  covenant  bonds  . 

5 - 


G.  TOTAI.  NET  INCOrvIE  FROM  ABOVE  SOURCES 


I!.  DEDUCTIONS  NOT  INCLUDED  ABOVE. 


1.  Ililertst  paiil 

2,  Taxes  paid,. 


3.  Isissee  by  fire,  etorm,  etc.  (explain 


I'.v  f re,  etorr 
_ _ ible  liclow)-. 

A.  Contributions  and  aicoi 
aside  for  r.  F , e|c.  flic 


5,  I'.ad  dcdit.s  and  other  deductions ]$ 

TotM  -..  - 


j’  (a).  Dividends,  cash  or  slockrfrom’eandnTs  ’of  ccr^’rTlions  larabie  by  the  United  Slrles  upon  any  portion  of  their  net  inconits  (including  dividends  on  stock  of  persona!  servic 

Corporations  declared  out  of  prof ts  earned  prior  to  January  ],  I'J lb;; 

1 Tteceived  dircrilvincliidir,"  2.  Teceived  llirou;.h  parlnerefiips,  pcrsoual  ecr\'K'C  corporations 

]Um4(n)  column  2 $ and  other  fduciarica  lUem  -1  (P)Column  2,  i,lusltemb(u),column83and4),  $ Totai 

J (b).  Total  amount  of  interest  on  bonds  and  other  obligations  of  the  United  Slates  issued  after  September  1,  1917,  and  War  Finance  Corporation  Bonds: 

Received  directly,  $ ; received  through partncrsbiiis,  poreonal  scrvicecorpomtionE.audoUierSduciaricG,  Totai 

i (c).  Other  income  from  partnerships,  personal  serrice  corporations,  and  other  fidutiuicA  (Item  6 (i),  column  7) 

K.  Total  net  income.  (It  Item  1 sbows  minus  quantity,  deduct  amount  from  total  of  J (at.  J (b)  and  ,T  (ci)  — 


ex, TOO  tx.  TU..  tear,  PROPEHn  i osses,  etc,  aAmD_AS_DlDUCrigNS  in  sc.heduies  a,  d and  H ABOl^ 

MuiM'r  Va?us  o^r?-?sv"lal?Mi  ^ '"^M^yi.l:rs*s'‘'(y>irGn)  Orr,  ' 

O.K.xi,cvraoPtHrv^hntn^.^^xiAoMarcs.tor  aPtm  S.  A.^  mis 


R*rrj 


explanation  of  DEDUCTIONS  claimed  in  Fc-tiediitc  A,  tines  7 and  10;  F,-li.-d ub-_P , colum^ 


Page  4 of  Form  1041. 

Income  Tax 

Supplementary  Page  72. 


Pj|e  1 d huboctm 


GENERAL  INSTRUCTIONS 

FIDUCIARY  RETURN 


I.  RETURNS  BY  FIDUCIARIES. 


1.  Returns  on  Fonn  KMI  for  estates  and  trusts. — Every  fiduciary,  or  one  lit  case  of 
Joint  fiduciaries,  must  make  a return  on  this  form  (Form  KMlf  for  the  estate  or  trust  for 
which  he  acts,  if  the  income  of  such  estate  or  trust  is  distributable  periodically,  or  the  lax 
is  payable  by  the  beneficiaries,  provided  (a)  the  net  income  of  such  estate  or  trust  for  the 
taxable  year  was  $1,000  or  over  or  (i)  any  beneficiary  of  such  estate  or  trust  is  a nonresident 
alien. 

2.  Returns  on  Form  1040  for  estates  and  trusts.— In  the  case  of  (a)  estates  of  decedents 
before  final  settlement  and  of  (6)  trusts,  whether  created  by  will  or  deed,  for  unascertained 
personsorpereonswith  contingent  interests,  or(c)income  hold  for  future  distribution  under 
the  terms  of  the  will  or  trust,  the  income  is  taxed  to  the  fiduciary  as  a single  person,  except 
that  from  the  income  of  a decedent’s  estate  there  may  first  be  deducted  any  amount  prop- 
Jerly  paid  or  credited  to  a beneficiary  Under  these  conditions  a fiduciary  should  make  a 
iretum  for  the  estate  or  trust  on  Form  1040  or  1040A.  (See  section  200  of  the  statute  and 
Articles  1521  and  1522  of  Regulations  45.)  Ab  an  intestate’s  real  estate  does  not  pass  to 
his  administrator,  upon  a sale  by  the  heirs,  whether  before  or  after  the  settlement  of  the 
estate,  each  heir  ie  taxed  indi^dually  on  any  profit  derived.  The  basis  for  computing  the 
gain  or  lose  on  the  sale  of  such  property  is  set  forth  in  Article  1562,  Regulations  45. 

3.  Returns  on  Form  1040  for  beneficiaries.— A return  on  Form  1040  or  1040A  should 
be  rendered  by  the  fiduciary  in  the  case  of  (a)  income  distributable  to  a nonresident  alien, 
regardless  of  amount,  (5)  an  ordinary  guardianship  of  a minor  (unless  such  minor  himself 
makes  a return),  or  committee  for  an  insane  person,  if  the  net  income  for  the  taxable  year 
amounted  to  $2,000  or  over,  if  married  and  liting  with  wife  or  husband  on  the  last  d.ay  of 
the  taxable  year,  or  the  net  income  for  the  taxable  year  amounted  to  $1,000  or  over,  if 
not  married  or  not  living  with  wife  or  husband  on  the  last  day  of  the  taxable  year;  (c)  an 
iMtate"  of  a decedent  before  final  settlement,  and  (d)  if  part  of  the  income  of  a trust  estate 
is  distributed  to  beneficiaries  and  part  ie  retained  for  the  benefit  of  the  trust  eeUte,  a re- 
turn should  be  made  on  Form  1041  for  the  entire  income  of  the  trust  estate  and  on  Form 
1010  for  the  retained  portion  of  the  income.  As  to  any  income  properly  paid  or  credited 
to  a benefifiary,  the  income  is  taxable  directly  to  the  beneficiary 

4.  Return  for  decedent. — If  the  net  income  of  a decedent  from  the  beginning  of  the 
Uxable  year  to  the  date  of  his  death  was  $1,000,  if  unmarried,  or  $2,000,  if  married  and 
living  with  wife  or  husband,  the  executor  or  administrator  shall  make  a return  on  Form 
10-10  or  1040.4  for  such  decedent. 

5.  Returns  for  two  trusts.- If  two  or  more  trusts,  the  income  of  which  is  taxable  to  the 
beneficiaries,  were  created  by  the  same  person  and  are  in  charge  of  the  same  trustee,  the 
Injstee  shall  make  a single  return  on  Form  1041  for  all  such  trusts,  notwithstanding’that 
Uiey  may  arise  from  difierent  instruments.  If,  however,  a trustee  holds  trusts  created 
by  different  persons  for  the  benefit  of  the  same  beneficiary,  he  shall  make  a return  on  Form 
1041  for  each  trust  separately 

6.  For  definition  of  a fiduciary  and  further  instructions  as  to  returns  and  tax  liability 
•ee  Articles  341  to  346,  and  421  to  425,  and  1521  to  1522  inclusive  of  Regulations  45. 

11.  ITEMS  EXEMPT  FROM  TAX. 

The  following  items  are  exempt  from  income  tdk.  nowever,  nontoxable  income  of 
the  classes  described  in  paragraphs  1.  3.  4.  5 and  6 should  be  reported  in  Item  3 page 
1 of  the  return.  ^ ° 

1.  Pay  not  exceeding  $3,500,  for  active  services  in  the  military  or  naval  forces  of  the 
Umted  States,  received  during  the  taxable  year  prior  to  the  termination  of  the  present 
war  as  fixed  by  proclamation  of  the  President. 

2.  Gifts  (not  m^e  as  a consideration  for  service  rendered)  and  money  and  property 
acqmred  under  a will  or  by  inheritance  (but  the  income  derived  from  money  or  property 
received  by  gift,  will,  or  inheritance  is  taxable  and  must  be  reported). 

3.  Interest  on  bonds  and  otlier  obligations  of  the  United  States  issued  before  September 
I,  1917,  and  on  such  bonds  and  other  obligations  issued  since  that  date,  to  the  extent 
provided  by  the  acts  authorizing  the  issue  thereof.  See  page  2 of  Instructions,  Item  J (b). 

4.  Interest  on  bonds  and  other  obligations  of  United  Slates  possessions  (Philionines 

Porto  Rico,  etc.).  ’ 

5.  Interest  on  bonds  and  other  obb'gations of  States,  Territories,  political  subdivisions 
Uiereof  (such  as  cities,  counties,  and  townships),  and  the  District  of  Columbia. 

6.  Income  on  Federal  Farm  Doan  bonds  of  July  17,  1916. 

7.  Dividends  upon  stock  of  Federal  Reserve  Banks.  However,  dividends  paid  by 
member  banks  are  treated  as  dividends  of  ordinary  corporations. 

8.  Interest  on  bonds  issued  by  the  War  Finance  Corporation  only  if  and  to  the  extent 
provided  in  the  acta  authorizing  the  issue  thereof. 

9.  Proceeds  of  life  insurance  policies  paid  upon  the  death  of  the  insured  to  individual 
heneticiaries  or  the  estate  of  the  insured. 

10  Amounts  received  by  the  insured  under  life  insurance,  endowment,  and  annuity 
cpntracu,  provided  such  payments  do  not  exceed  the  premiums  paid  in  Tlie  amount 
by  which  the  total  payments  that  have  been  received  exceed  the  total  premiiuns  paid  in 

is  income  and  niu?t  be  refiorted  in  Schedule  F 

11.  Amounts  received  Irom  accident  and  health  insurance  and  under  workmen’s 
comiKinsauon  acU  plus  the  amount  of  any  damages  received  by  suit  or  agreement  on 
u < ouut  of  injuries  or  sickness. 

12.  Compensation  paid  by  a State  or  political  subdivision  thereol  to  its  officers  or 
employees. 

III.  FARMER'S  INCOME  SCHEDULE. 

If  any  of  the  income  of  the  estate  or  trust  is  derived  from  farming,  a "Schedule  of 
Farm  lucerne  and  Expenses’’  (Form  1040F)  should  bo  filled  out  and  filed  with  this  return 
Tlio  net  farm  income,  u shown  by  the  Schedule,  should  bo  included  in  Item  22  of  Schedule 
A of  this  return. 

IV.  PERIOD  TO  BE  COVERED  BY  RETURN. 

In  general,  the  regulations  governing  Iho  preparation  of  returns  by  fiduciaries  aro 
Us  same  as  th<«  governing  imlividuals,  which  are  as  follows: 

The  return  of  a taxpayer  is  made  and  his  income  computed  for  his  t-ixablo  year,  which 
mc  ius  his  fiscal  year,  or  the  calendar  year  if  he  has  not  eslablishial  a fiscal  year  The 
liitui  ■fi-.-ul  year’’  means  an  accoiinling  period  of  twelve  months  ending  on  the  last  day 
of  any  mcenth  other  than  December.  No  fiiwal  year  will,  however,  be  n . ismued  uni,  , 
bsl..re  Its  ilowj  It  was  definitely  eeUblishcd  as  an  -acec, untiiig  js-rl.a!  by  (he  (kxpayer  an  I 


the  books  of  sueh  taxpayer  were  kept  in  accordance  therewith.  The  taxable  year  1919  is 
the  c^ndar  year  1919  or  any  fiscal  year  ending  during  the  calendar  year  1919.  See  sec- 
tion  200  of  the  statute.  A taxpayer  having  an  existing  accounting  period  which  is  a fiscal 
year  within  the  meaning  of  the  statute  not  only  needs  no  permission  to  make  his  return  on 
the  basis  of  such  a taxable  year,  but  is  required  to  do  so,  regardless  of  the  former  basis  of 
rendenng  returns.  A person  having  no  such  fiscal  year  must  make  return  on  the  basis  of 
the  calendar  year  The  first  return  under  the  present  statute  of  a taxpayer  who  has  here- 
tofore made  return  on  a basis  different  from  his  accounting  period  wiU  necessarily  overlap 
his  next  previous  return.  For  the  method  of  adjusting  the  tax  in  such  a case  see  secUon 
-Oo  of  the  smtute  and  articles  1621-1621.  Section  226  has  no  applicaUon  to  tbU  situation. 
Lxeept  in  the  cases  of  a return  for  the  taxablh  year  1919  and  of  a first  return  for  income  tax 
a taxpayer  shaU  make  his  return  on  the  basis  (fiscal  or  calendar  year)  upon  which  he  made 
toa  return  for  the  taxable  year  immediately  preceding  unless,  with  the  approval  of  the 
Commissioner,  he  has  changed  the  basis  of  computing  his  net  income 

If  a taxpayer  changes  his  accounting  period,  and  not  merely  his  taxable  year  to  con- 
orm  with  hie  existing  accounting  period,  he  shall  as  soon  as  pomible  give  to  the  coUcctor 
for  traMmission  to  the  Commissioner  written  notice  of  sueh  change  and  of  his  reasons  there- 
for  The  Commissioner  wiU  not  approve  a change  of  the  basis  of  computing  net  income 
unless  such  nouee  is  given  at  a time  which  is  both  (a)  at  least  thirty  days  before  the  due 
date  of  the  taxpayer’s  return  on  the  basis  of  his  existing  taxable  year  and  (5)  at  least  tliirt y 
days  before  the  due  date  of  his  return  on  the  basis  of  the  proposed  taxable  year  If  the 
. change  in  the  basis  of  computing  the  net  income  of  the  taxpayer  is  approved  by  the  Com- 
missioner the  taxpayer  shall  thereafter  make  his  returns  upon  the  basis  of  the  new  account- 
ing penod  in  accordance  with  the  requirements  of  section  226  of  the  statute  and  his  net 
income  shall  be  computed  as  therein  provided.  See  Article  431,  Regulations  45. 

V.  SEPARATION  OF  INCOME,  ASSIGNABLE  TO  DIFFERENT  YEARS. 

In  showing  the  distribution  of  income  among  beneficiaries  in  Item  7,  page  1.  enter 
separately  the  share  of  each  beneficiary  in  income  assignable  to  1913-1915,  1916’  1917 
1918,  and  1919(a11  other  income).  If  Item  Kahoweaminus  quantity  use  this  table  to  in- 
dicate the  loss  asai^able  to  each  beneficiary. 

In  the  ca.se  of  income  to  be  distributed  to  tho  beneficiaries  periodically,  whether  or- 
not  Jl  regular  intervals,  each  beneficiary  must  include  in  his  return  his  distributive  share 
of  the  net  iiicoine,  even  though  not  yet  paid  him.  If  the  taxable  year  on  the  basis  of 
which  he  makes  hm  return  fails  to  coincide  with  the  annual  accounting  period  of  the  estate 
or  trust,  then  he  ^ould  include  in  his  return  his  distributive  share  for  such  accounting 
period  ending  within  his  taxable  year,  which  income  will  be  taxable  at  the  rates  for  the 
year  in  which  the  income  was  received,  except  the  income  from  partnerehips  and  personal 
service  corporations  which  is  included  in  Item  6 (5),  column  7,  and  income  from  stock 
diMdciKls  rojwrted  m Item  1.  which  income  should  be  allocated  accordingly. 

VI.  TIME  AND  PLACE  FOR  FILING. 

If  the  return  is  for  the  calendar  year  1919  file  it  with  the  collector  of  internal  revenue 
for  the  district  in  which  the  Cducivy  resides  or  has  his  principal  place  of  business  so  as  to 
reach  the  collector’s  office  on  or  before  March  15,  1920.  If  for  a period  other  than  a calen- 
dar year  the  return  should  be  filed  on  or  before  the  15th  day  of  the  third  month  following 
the  close  of  such  period.  If  the  fiduciary  has  no  legal  residence  or  principal  place  of  busi- 
ness in  the  United  St-ates  the  return  should  be  forwarded  to  the  Collector  of  Internal  Rev- 
enue, Baltimore,  Md  (See  Articles  -ttl  to  445,  Regulations  45.) 

VII.  AFFIDAVIT- 

1 The  affidavit  must  be  executed  by  the  individual  or  organization  receiving,  or 
having  custody  or  control  and  management  of,  the  income  of  the  estate  or  trust  If  two 
or  more  individuals  art  jointly  as  a fiduciary,  the  affidavit  may  be  executed  by  any  one 
of  them.  ' *' 

2.  The  oath  will  be  administered  without  charge  by  any  collector,  deputy  collector 
or  internal-revenue  agent.  If  an  internal-revenue  officer  is  not  available,  the  return 
ehould  be  sworn  to  before  a notary  public,  justice  of  the  peace,  or  other  person  authorized 
to  adininii^ter  oaths. 

3.  Itisnolneccssarv'toshowthcstatemcntofnetincometotheofficerwlioadminiBtertf 

the  oath. 

VIII.  PENALTY  FOR  FAILING  TO  MAKE  RETURN  ON  TIME. 

A penalty  of  not  more  than  $1,000  attaches  for  failure  to  file  the  return  within  (he 
lime  required  by  law  If  the  failure  ie  willful  or  an  attempt  is  made  to  defeat  or  eva.le 
tho  tax,  the  penalty  is  $10,000  or  imprisonment  for  not  more  than  one  year,  or  both  to"e(her 
With  cost  of  prosecution.  ’ 

IX.  WITHHOLDING  AND  INFORMATION  AT  THE  SOURCE. 

If  the  fiduciary  h.as  the  control,  receipt,  custody,  disposal,  or  payment  of  fixed  or 
determinable  annual  or  periodical  gains,  profits,  and  income  (other  than  income  received 
as  dividends  from  a corporation  whose  income  ie  subject  to  income  tax)  of  any  uourraident 
alien  individual,  he  ie  required  to  deduct  and  withhold  income  tax  at  the' rate  of  8 per  cent 
from  such  income  paid  on  and  after  February  25,  1919,  and  make  return  thereof  on  Forui 
1042,  accompanied  by  Form  1098.  Income  tax  in  such  cases  was  required  to  he  widiheld 
at  the  ram  of  2 per  cent  during  the  year  1918  and  up  to  February  24,  1919.  Tho  fiducion' 
in  excnitiiig  Form  1010  for  a nonresident  alien  should  take  credit  thereon  for  any  tax  so 
withheld  Every  fiduciary  who,  during  1919,  paid  to  any  person  salary,  wages,  commis- 
sions, rcuuls,  etc.,  of  $1,000  or  more  is  required  to  make  a true  and  accurate  return  to  tlin 
Coinmsisioner  of  Internal  Revenue  showing  the  nature  aud  source  of  such  piiymeiits  and 
the  iiaiiic  and  address  of  the  person  receiving  them.  Forma  1096  and  1099,  for  rejxirtiiig 
such  iidoriiiutioii,  will  ho  furnished  by  any  collector  of  iiitenial  revenue. 

In  addition  to  exei  iitiiig  Forms  1099  under  the  conditions  set  lorlh  above  (ho  fiduciary 
should  execute  Form  1099  showing  the  dislribulive  share  of  each  beneficiary  re, sorted  in 
Item  7,  |.  ■.:e  1,  <it  tins  return  All  Forms  1099,  arconip.iiiied  by  Form  1090,  should  ho  for- 
waided  to  the  Commissioner  of  liilernal  Revenue,  Sorting  Division,  Washington,  I).  C., 
and  should  he  m.idu  a jiart  ol  that  relurii,  regardless  of  whether  tliey  represent  iiicouio 
^f  a bfocG'  iary  or  Borue  other  perooo.  >-wi4 


Page  5 of  Form_1041. 


Income  Tax 

Supplementary  Page  73. 


fa|t  2 (f  Lolratfieitt 


INSTRUCTIONS  FOR  FILLING  IN  FIDUCIARY  RETURN  OF  INCOME 


A.  INCOME  FR 

^a^'sie'of  of  products  of  manufectunng.  construction,  mining,  and 

Bgricidture.  (For  farm  income  see  Instruction  I U on  the  reverse  side  of  this  sheet. ) 

(6)  Busincae  service,  such  as  transportation,  storage,  laundering,  hotel  and  restau- 

rant  service.  livcry.and  garage  eervice,  etc.  . . > 

In  general,  report  in  Schedule  A any  income  m the  eanung  of  whi^  »xpen^  for 
labor,  rent.  etc.,  were  incurred.  Do  not  report  here  ps^erehip  profits  tr  profito  of 
personal  service  corporatioiis,  which  should  be'ehtered  under  B,  or  dividends  from  other 
corporations,  which  should  be  entered  under  J.  ^ ^ a.  • 

If  the  estate  or  trust  derives  income  from  farming,  enter  on  line  22  the  net  income 
from  fanning,  as  shown  by  the  “Schcduleof  Farm  Income  and  Expenses’  (Form  10401‘). 

If  the  books  for  the  estate  or  trust  are  kept  on  the  accrual  basis,  report  such  income 
instead  of  cash  received,  and  report  expenses  incurred  instead  of  expenses  paid. 

Income  received  from  sale  ot  lands,  buildings,  equipment,  stocks,  bonds,  and  other 
propr^notdealtin  as  a business  and  from  liquidating  divadends  should  be  reported 

If  a comnlete  profit  ‘and  loss  statement  is  made,  showing  all  the  information  called 
for  under  “Cost  of  goods  sold  and  “Other  business  deductions,”  attach  it  to  the  return 
and  enter  the  amount  of  net  income  on  line  22,  Schedule  A.  ^ j . j 

Kind  of  business.—State  kind  of  goods  dealt  in  or  kind  of  services  rendered,  and 
whether  manufacturer,  jobber,  wholesaler,  retailer,  importer,  broker,  etc.  ^ 

Total  sales  and  Income  from  business.— Report  the  tujtal  amount  denved  from 
business  less  any  discounts  or  allowances  from  the  sale  price  or  eervico  char^. 

Inventories.— Write  “C”  or  “Cor  M“  on  lines  8 and  10,  immediately  before  the 
amount  column;  to  indicate  that  inventories  aro  valued  at  either  cost,  or  cost  or 
market,  whichever  is  lower,  write  “C  or  M.**  . . , . . • 

Inventories  at  the  end  of  the  taxable  penod  must  be  valued  on  the  same  basis  as 
those  at  the  end  of  the  preceding  taxable  period,  unless  permission  to  make  a change  has 
been  first  obtained  from  the  Commissioner.  If  claims  for  loflees  on  inventonea  or 
rebates  on  sales  made  under  Section  214  (a)  12  of  the  act  have  been  allowe^  the  own- 
ing inventory  must  be  correspondingly  adjusted.  (See  articles  266  and  1581-1585.)  ^ 
Other  business  deductions.— Do  not  include  cost  of  business  equipment  or  furm- 
ture,  expenditures  for  replacements  or  for  permanent  improvements  to  property,  or 
living  and  family  expenses  of  any  beneficiary. 

Salaries.— Enter  as  Item  12,  salaries  and  wages  not  reported  as  lAbor  under 

“ Cost  of  goods  sold.’*  . . , . • . ^ - 

Rent— Enter  as  Item  IS,  rent  on  busmess  property  m which  the  estate  or  trust 
has  no  equity.  Do  not  include  rent  for  dwelling  occupied  by  any  beneficiary  for 

inlerest^^^SSer  as  Item  14,  interest  on  business  indebtedness  to  others.  Do  not 
include  interest  on  capit^  investment  of  the  estate  or  trust.  ^ . 

Taxes.— Enter  as  Item  15,  only  toxea  on  business  property  or  for  carrying  on  busi- 
ness.  Do  not  include  taxes  aioessed  against  local  benefits  of  a kind  tending  to  increase 

OM  BUSINESS. 

the  value  of  the  property  aaseesed,  as  for  paving,  sewers,  etc.,  nor  Federal  income 
taxes.  Stale  inheritance  taxes  and  Federal  estate  taxes  are  not  deductible. 

Repairs,  wear  and  tear,  obsolescence,  and  property  losses. — Enter  as  Item  16  (a) 
ordinar^rpairs  required  to  keep  property  in  usable  coudition;  (61  re,isonable  allowance 
for  exhaustion,  wear  and  tear  of  property  used  in  the  trade  or  busincae,  including  a 
reasonable  allowance  for  obsolescence;  (e)  losses  of  business  prowrly  by  fire,  storm,  or 
other  casualty,  or  theft,  not  compensated  for  by  insurance  or  otherwise  and  not  made 
good  by  repairs  claimed  as  deductions.  Explain  these  deductions  in  table  at  foot  of 
page  2 of  retum. 

The  amount  claimed  for  wear  and  tear  (depreciation)  incUiding  obsotoManco  should 
not  exceed  tho  original  cost  of  the  property  (or  its  value  March  1,  1913,  if  acquired 
before  thatdate)  divided  by  its  total  estimated  life  in  years.  If  obsolescence  isclaimcd 
state  in  table  at  foot  ot  page  2 why  useful  life  is  loss  than  actual  life.  When  the  amount 
of  depreciation  and  obsolescence  allowed  equals  the  cost  of  the  property  (or  its  value 
March  1,  1913)  no  further  claim  should  be  made. 

Depreciation  of  patents,  copyrights,  etc.,  and  depletion  of  mines,  etc. — If  you  wieh 
to  claim  a deduction  on  account  of  depreciation  in  the  value  of  patents,  copyrights,  fran- 
chises, and  other  legal  privileges,  or  oh  account  of  depiction  of  mines  or  oil  and  gas 
wells,  see  Regulations  45. 

Amortization  of  war  facilities.— If  amortization  of  war  facilities  U claimed,  the 
taxpayer  is  required  to  submit  with  this  return  the  infqrmation  and  schedules 
called  tor  in  Articles  181  to  188  of  Regulations  45. 

Bad  debts.— Enter  as  Item  18  only  debts  which  you  have  ascertained  to  be  worth- 
less and  have  charged  off  during  the  year. 

A bad  debt  oflselliiig  income  accrued  since  March  1,  1913,  will  not  be  allowed  as  a 
deduction  unless  the  amount  was  reflected  in  the  income  reported  for  the  year  in  which 
the  debt  was  created.  In  the  case  of  debis  existing  prior  to  March  1,  1913,  only  their 
value  on  that  date  may  be  deducted  upon  subsequently  ascertaining  them  to  be  worth- 

State  under  “ Explanation  of  deductions,”  at  the  foot  of  the  p^,  how  the  debts 
were  ascertained  to  be  worthless.  Insolvency  of  the  debtor,  iuability  to  collect  by 
IcgM  proceedings,  or  inability  of  debtor  to  pay  as  ascertained  by  a mercantile  agency, 
woulil  be  a euniciciit  indication  of  worthlessness, 

A debt,  previously  charged  off  as  bad,  must  be  returned  as  income  for  tho  year  io 
which  collected.  , . , . 

Bad  debts  arising  out  of  loans  not  connected  with  business  should  be  reported  in 
Schedule  H. 

Other  expenses. — Expenses  of  administration  of  an  estate,  eueh  as  court  costs, 
attorney’s  foes,  executor’s  commissions,  etc.,  are  chargeable  against  the  corpus  of  the 
estate  and  are  not  deductible.  Expenses  of  management  of  a trust  estate  are  deductible. 

Wet  loss.— If  the  net  cost  of  goods  sold  plus  other  business  deductions  is  in  excess 
oFthe  total  amount  of  sales  and  income  from  business,  report  the  difference  as  a loss  by 
using  red  ink  or  a minus  sign. 

B.  INCOME  FROM  PARTNERSHIPS,  PERSONAL  SER 

Report  the  ehare  of  the  estate  or  trust  (whether  received  or  not)  in  the  profits  of 
a partnerahip  or  personal  service  corporation  45r  in  the  income  of  another  estate  or 
trust.  Do  not  include  the  part  of  suen  share  that  consisted  of  dividends  on  stock  of 
domestic  or  resident  corporations  (to  be  included  in  Item  J (a)),  interest  on  obhga- 
tions  of  the  United  States  (to  be  included  in  Item  J (b)),  or  interest  on  corporation 
bonds  containing  a tax-free  covenant,  received  through  fiduciaries  upon  which  a tax 
of  2 per  cent  was  paid  (or  will  be  paid)  by  the  debtor  corporation  (to  be  included  in 
Item  E). 

VICE  CORPORATIONS,  AND  OTHER  FIDUCIARIES. 

Apportionment  of  partnership  income  between  years. — If  tho  income  waa  received 
from  a partnerahip  or  personal  service  coporation  whose  fiscal  year  differed  from  the  • 
calendar  year,  assign  to  1918  as  many  twelfths  of  your  share  of  such  income  (except 
dividends  and  Liberty  Bonds  interest  received  through  the  partuorship  or  personal 
service  corporation)  as  the  number  of  months  of  tho  fiscal  year  that  fell  in  the  calendar 
yeai  1918.  Assign  to  1919  the  remainder  of  the  share  of  such  income,  except  stock 
dividends  and  Liberty  Bond  interest,  which  should  be  apportioned  as  provided 
instructions  under  J (a)  and  J (b)  below. 

C.  PROFIT  FROM  SALE  OF  LAND,  BUILDING 

If  the  profits  or  losses  on  sales  made  through  any  one  broker  aggregated  $1,000  or 
more,  report  the  transactions  on  a separate  line  with  the  name  and  addreas  of  the  broker. 

Kind  of  property. — Describe  the  property  as  definitely  as  you  can  in  a word  or  two, 
as  “farm,”  “house,”  “lot,”  “stocks,”  “bonds.” 

Sale  price  or  liquidating  dividends.— State  the  actual  consideration  or  pnee,  or, 
in  case  ofan  exchange,  tb^air  market  value  of  the  property  received. 

Cost— The  basis  for  computing  profit  derived  by  an  estate  or  trust  from  the  sale 

,S,  STOCKS,  BONDS  AND  OTHER  PROPERTY. 

or  other  difiporitioQ  of  property  is  the  fair  market  value  as  of  March  1, 1913,  If  acquired 
by  the  fiduciary  prior  to  tiiat  date,  or  the  inventory  value  at  t!ic  time  of  the  death  of 
the  decedent  if  acquired  by  the  fiduciary  subsequent  to  March  1,  1913  (or  the  cost  of 
the  property  if  purchased  by  the  fiduciary  since  th^t  date). 

Leases. — If  the  total  of  columns  5 and  6 is  iu  excess  of  the  total  of  columns  3 and  7, 
report  the  diSerence  aa  a loss  by  U3i|^  red  ink  or  a minus  sign. 

D.  INCOME  FROM  REl 

Kind  of  property.— Describe  briefly,  as  in  C.  ^ . 

Rent. — if  property  or  crops  was  received  in  Ueu  of  cash  rent,  report  the  income 
as  though  the  rent  ha(l  been  paid  in  cash.  Crops  received  as  rent  on  a crop-share  basis 
should  DO  reported  as  income  for  year  in  wliich  disposed  of  (unless  your  return  shows 
income  accrued). 

MTS  AND  ROYALTIES. 

Repairs,  wear  and  tear,  obsolescence,  depletion,  and  property  losses.— See  instruc- 
tions for  Schedule  A,  above.  Explain  in  table  at  foot  of  page  2 of  the  return. 

Other  expenses.— Report  taxes  on  rented  or  leased  projierty  and  interest  on  indebti 
edness  incurred  or  continued  to  purchase  or  carry  it.  Do  not  include  taxes  assessed 
against  local  benefits  of  a kind  tending  to  increase  the  value  of  tho  property  assessed. 

E INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  TAX  OF  2%  WAS  PAID  BY  DEBTOR 

CORPORATION. 

Thia  item  should  include  all  intercet  received  directly  or  through  other  fiduciaries  I bonds.  If  exemption  was  claimed  (by  ^ing  a yellow  certificate,  Form  1001),  the  tn- 
on  bonds  of  corporations  oiganiaed  or  doing  business  in  the  United  States,  containing  a terest  received  must  bo  reported  in  b . The  ainouiitcf  tax  paid  by  the  debtor  corpora- 

clause  by  which  the  debtor  corporation  agrees  to  pay  the  interest  without  any  deduction  tiou  should  bo  reported  as  additiouo.1  income  in  Schedule  F,  hue  4. 

for  taxes,  provided  exemption  from  withholding  was  not  claimed  by  the  owner  of  the  | 

F.  OTHER  INCOME  (NOT  INCLUDING  DIVIDENDS,  OR  INTEREST  ON  OBLIGATIONS  OF  THE  UNITED  STATES). 

Report  in  this  schedule  interest  on  bank  deposits,  notes,  mortgages,  etc.,  and  all  other  taxable  income  for  which  no  place  is  provided  elsewhere  on  this  return. 

H.  GENERAL  1 

Interest. — Report  here  intereet  paid  on  other  indebtedness  as  distinguished 
from  business  indebtedness  (which  should  be  reported  under  A or  D above).  Do  not 
include  interest  on  indebtedness  incurred  for  the  purchase  of  bonds  and  other  odU- 
gations,  the  interest  on  which  is  exempt  from  tax,  except  interest  on  indebtedness 
incurred  to  purebaae  or  carry  obligations  of  the  United  States,  issued  after  September 

24,  1917.  ^ 

Texes. — Report  here  taxes  paid  on  property  not  used  in  huainess,  not  including 
those  assessed  against  local  benefits  of  a kin<i  tending  to  increase  the  value  of  the  prop- 
erty. Do  not  include  Federal  income  taxes,  or  estate  nor  State  inheritance  tax(». 

Lo.*;ses. — Report  here  losses  of  property  not  connected  with  the  trade  or  business, 
sustained  during  the  year  from  fire,  storm,  shipwreck,  or  other  casually,  or  from 
theft,  which  were  not  compeneated  for  by  insuranco  or  otherwise.  Do  not 
include  lo-'^ses  from  transactions  not  entered  into  for  profit.  Ixisscs  claimed  should 
bo  explained  in  table  at  foot  of  page  2.  For  net  looses,  see  section  204  (c)  of  the  act. 

DEDUCTIONS. 

Contributions.— Report  here  any  part  of  llie  gro.«3  income  which,  pursuant  to  the 
■ terms  of  the  mil  or  deed  creating  the  trust,  was  during  tlio  taxable  year  paid  to  or 
permanently  set  aside  for  the  United  Stales,  any  Suite,  Territory,  or  any  political 
subdivision  thereof,  or  the  District  of  Columbia,  or  any  corporation  organized  and 
operated  exclusively  for  religious,  charitable,  ecionlific,  or  educational  purposes,  or 
for  the  prevention  of  cniclty  to  children  or  animals,  no  nart  of  the  not  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  iuaividual. 

Enter  under  “Explanation  of  deductions”  at  the  foot  of  page  2 of  the  return,  the 
name  and  address  oi  each  organization  falling  within  the  classes  named  above  and 
the  amount  paid  to  each. 

Bad  debts  and  other  deductions. — Bad  debts  arisi  ng  out  of  loans  should  bo  reported 
here,  and  other  proper  deductions  not  claimed  elsewhere.  (Sec  instructions  for 
Schedule  A,  above.) 

J (a),  dividends. 

Enter  as  Item  J (a)  all  cash  or  stock  dividends  received  during  the  year  except  I sequent  to  December  31,  1917;  and  (!,)  stork  dividends  received  during  the  Uxabla 
(a)  dividends  paid  by  ^reonal  service  corporations  out  of  earnings  accumulated  sub-  j period  which  are  not  included  in  Uetn  ■).  columns  3,  4 and  5,  page  1. 

J (b).  INTEREST  ON  OBLIGATIONS  OF  THE  UNI 

Interest  upon  First  Liberty  Loan,  3^  per  cent  bonds  and  Victory  Liberty  Loan 

3}  per  cent  convertible  gold  notes  is  exempt  from  normal  income  taxes  and  graduated 
additional  income  taxes,  commonly  known  as  surtaxes.  Irilcrcst  upon  all  other  issues 
of  Liberty  Loan  Bonds,  as  well  as’intercet  upon  c crlificales  of  indebtedness  qnd  War 
Saving  Certificates,  is  exempt  from  normal  income  tax  regardless  of  the  amouqt  of  the 

ITED  STATES  ISSUp  SINCE  SEPTEMBER  1,  1917. 

principal  and  is  exempt  from  siirfaxcs  only  to  the  extent  provided  for  in  the  act 
aiilhoriziiig  tho  issue  and  subsequent  acts.  Interest  on  War  Finance  Corporation 
bonds  is  exempt  from  all  normul  income  tax  and  is  exempt  from  surtax  only  with 
respect  to  a princip.al  rot  exceeding  S'l.txlO  This  cxciiipliou  is  in  addition  to  tho 
exemptions  above  rcfcried  to.  Sco  Article  3JC  of  Regulations  45. 

J (c)  OTHER  INCOME  RECEIVED  FROM  PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS,  AND  OTHER  FIDUCIARIES. 

Renort  here  all  other  income  received  from  partnorshipa,  personal  service  corpo-  1 in  Item  6 (6),  column  7,  page  1.  Includi*  hero  also  income  received  through  other 
r.itions  and  other  fiduciarice,  including  interest  on  tax-free  covenant  bonds  received  fiduciaries,  if  such  incoiiio  is  derived  from  partnerships  Olid  personal  ecrncc  corpora- 

through  partnerships  and  personal  service  corporations  only,  which  should  be  reported  1 lions  Cliug  returns  on  a fiscal  year  basis. 

Page  6 of  Form  1041. 


Income  Tax 
Supplementary  Page  74. 


ATTACH' THIS  FORM 
TO  YOUR  INCOME 
TAX  RETURN  FORM 
1040A  OR  1040  AND 
FILE  IT  WITH  THE 
COLLECTOR  OF 
INTERNAL  REVENUE. 


Page  1. 

Form  1040  F.— UNITE!)  STATES  INTERNAL  IcSVENUE  SERVICE, 

SCHEDULE  OF  FARM  INCOME  AND  EXPENSES 

FOR  THE  YEAll  1919.  


(Name.) 


(Po3t  office  and  State.) 


IF  YOUR  ACCOUNTS 
ARE  KEPT  ON  A 
CASH  RECEIPT  AND 
DISBURSEMENT 
BASIS,  FILL  IN  PAGES 
1 AND  3 ONLY. 

IF  YOU  KEEP  BOOKS 
OF  INCOME  AND 
EXPENSES  ON  AN 
ACCRUAL  BASIS,  FILL 
IN  PAGES  2 AND  3 
INSTEAD. 


FARM  INCOME  FOR  TAXABLE  PERIOD. 


1.  Sxixor  IHVB  Stock  Raised  on  and  Peoducts 
TEOM  TOXJB  FaKM. 

2.  Sale  of  Chops  and  Peoducts  Geown  on  your  Farm. 

3.  Other  Receipts. 

Kind  of  animals.  | 

Quantity. 

Amount. 

Kind  of  crop. 

Quantity. 

Amount. 

Items. 

Amount. 

1 

$ 

Merchandise  rec’d  for  T>roduce_ 

$ 

Machine  v. 

Hire  of  te 

Breeding : 

7ork 

n.ms 

fees 

j 

1 

1 

1 

Mulee 

Colts 

1 

i 

1 

1 

xxugo  — — 

Pi  mi 

1 

1 

1 

Cotton  Seed 

!; 

i 

Turkeys  

Sirup 

1 

i 

! 11  1 

ij 

1 

1 

Lr:iir  1 

Totat.  . __ 

$ 

.1  Tot 

AL 

$ ' 

AIli&  

Suttor ........ ^ 

(Enter  onli 

ne  2.) 

(Enter  on  line  3.) 

4.  Sale  of  Live  Stock,  Chops,  or  Other  Items  Purchased. 

Description. 

. Received. 

Cost. 

Profit. 

£,gg8 

$ 

- 

j 

" 



a Z££aSi 



L UTAX..  

(Enter  ont 

inel.) 

(Enter  on  lino  4.) 

SUMMARY  OF  INCOME  AND  EXPENSES  COMPUTED  ON  A CASH  RECEIPT  AND^DISBURSSareN^^BASIS^ 


1.  Sale  of  live  stock  and  stock  products  raised 

2.  Sale  of  crops  and  crop  products  grown  

$ 1 

7.  Expenses  (column  1,  page  3) 

8.  Expenses  (column  2,  page  3) 

$ 

1 

1 

4.  Sale  of  stock,  or  other  items  purchased 

K PnoWTTA  

$ 

1.  J 

11.  Total  Expenses ^ ■1’ 

::: — — 1 

6.  Net  faum  profit  to  be  reported  in  ScheduleA , line  21.  Form  1040A.  or  line  22,  Form  KMO  (Item  5 minim  I tein  .U_K - ^ J.^1: 


[Page  1 of  Form  1040F.] 


Income  l ax 

Supplementary  I’age  75, 


Page  2.  farm  INt’ENTORY  FOR  INCOME  COMPUTED  ON  AN  ACCRUAL  BASIS.  _ , , 'T 

Description. 

(Kind  of  animals,  crops, 
or  other  products.) 

On  n.txn  AT 
Beginning  of  Year. 

PuucnA?r.n  Dviux-i 
Vkak. 

R. VISED  During 
Year. 

CONSUilED  OR  LOST 

During  Year. 

SOLD  During  Year. 

•A  r 

On  Hand  at  End 

OF  Year. 

Quan- 

tiiy. 

Inventory 

value. 

Quan- 

tity. 

Amount 

paid. 

Quan- 

tity. 

Inventory 

value. 

Quan- 

tity 

Inventory 

value. 

Quan- 

tity. 

Amount 

received. 

Quan- 

tity. 

Inventory 

value. 

1 

1 

1 



* 

! 



j 

1 

I 

I 



1 

i 

1 

1 

1 

i 

1 

1 

! 

1 

I. 

1 

! 

! 

j i 

! 1 

1 

! ! 

1 

■■■.  - 

1 

1 

Totals 

$ 

$ 

$ 

$ 



I$- 



. $ 

(Enteronlm6  4.)  (Enter  on  lino  5.) 

SUMMARY  OF  INCOME  AND  EXPENSES  COMPUTED  ON  AN  ACCRUAL  BASIS. 


1.  Inventxsry  of  live  stock,  crops,  and  products  at  end  of  year  j $ . 

2.  Sales  of  live  stock,  crops,  and  products  during  year... .... 

2a.  Other  miscellaneous  receipts ^ 

3.  Total 


4.  Inventory  of  live  stock,  crops,  and  products  at 
beginning  of  year .'. 


6,  Cost  of  live  stock  and  products  purchased  during 
year 


6,  Gross  profits  (Item  3 minus  the  sum  of  Items  4 and  5) . 


7.  Expenses  (column  1,  page  3). 

8.  Expenses  (column  2,  page  3). 

9.  Repairs 

10.  Depreciation  


Total  Expenses 


12.  Net  farm  profit  to  be  reported  in  Schedule  A,  liiie‘21,  Form  1040.^■,  or  line.2.2j:  Form  1040  (Item  6 ihinuB  Item  11).-. — t-.-I  $ . 

2 — 0615 


[Page  2 of  Form  1040F.] 


Income  Tax 

Supplementary  Page  76, 


FARM  EXPENSES  FOR  TAXABLE  PERIOD. 


Items. 

(1)  Amount. 

Items.  ^ (2)  Amount. 

1 1 

$ 

1 ■ j ' 

i' i 

VTillino  on/4  crrin/lincf  fc»/a/4  . ' 

on/4  onro\nn<y  TnofPTnflJfl  ' . 



1 



Fuel  dud  oil  for  fonn  work, ............................ 

T4p_rrplg  bRg3  cKitrOS,  3.iid  twino...... 

(fypfipt.  P'p/lpral  iTiPHTTip  f.n  YP.q)  .... 

Insuraiico  (except  on  your  dwelling)., — 

nn  nr»|pa  onrl 

Water  rent - 

1 

i 

Itent  for  farm 

1 

Total.- 

$ 

Total 

$ 

/■Tr.Tt+rfxr  r\r\  li-nA 

fi  ^ 

REPAIRS  AND  DEPRECIATION. 


DE3CE£PT!0N. 

Date  Acquired 

OE  CONSTEUCIED. 

Cost  (or  Market 
Value  March  1, 
1913,  IF  Acquired 
Prior  Teereto). 

Repairs. 

Depreoation. 

Enrm  hnilfTinj^  

$ 

$ 

5 

Farm  macliinery  and  tools 

Farm  fences,  drains,  ditches,  etc 

1 

! 

1 

1 

... 

' 

1 

Totals ^ $ 1 1 

$ 

$ 

(Ent'or  oh  line 

i 9.)  (Enter  on  line  10.) 

Remarks; 


[Page  3 of  Form  104()F.] 


Income  T'ax 

Supplementary  Page  77. 


Page  4.  INSTRUCTIONS. 


Pages  1 and  8 are  to  be  filled  In  by  farmers  who  either  keep 
uo  records  or  only  records  of  cash  receipts  and  disburse- 
ments. Pages  2 and  3 are  to  be  filled  in  by  farmers  who  keep 
complete  accounts  on  an  accrual  basis  with  Inventories  to 
determine  net  profits.  Returns  on  an  inventory  basis  are 
not  acceptable  unless  the  inventories  were  actually  taken 
and  so  recorded  at  the  beginning  and  end  of  the  taxable 
period. 

If  you  do  not,  as  a matter  of  settled  practice,  keep  books  of 
account  upon  an  accrual  basis,  no  attempt  should  be  made  to  fill 
out  the  items  in  the  form  relating  to  inventories,  and  the  omission  of 
those  items  in  that  case  will  not  result  in  an  incorrect  computation 
of  your  farm  net  profit.  If,  how'ever,  you  regularly  keep  books  of 
account  upon  an  accrual  basis,  which  clearly  reflect  your  net  income, 
you  should  report  the  value  of  your  crops  and  stock  on  hand  at  the 
end  of  the  year  in  gross  profits,  as  provided  on  the  form. 

This  schedule  may  be  used  by  farmers  who  work  their  own  farms 
or  rent  them  out  on  shares,  and  if  two  or  more  farms  are  owned  it 
may  be  desirable  to  fill  out  a separate  schedule  for  each  farm. 

Attach  this  schedule  to  your  income  tax  return  (Form  1040A  or 
Form  1040).  You  should  keep  a copy  for  future  reference. 

When  you  have  determined  the  net  farm  profit,  transfer  the 
amount  to  line  21  in  Schedule  A of  the  income  tax  return  Form 
1040A,  or  line  22,  Form  1040. 

Cash  Receipts  and  Disbursements  Basis. 

A farmer  reporting  on  the  basis  of  cash  receipts  and  disburse- 
ments shall  include  in  his  gross  income  for  the  taxable  year  the 
amount  of  cash  or  the  value  of  merchandise  or  other  property  received 
from  the  sale  of  live  stock  and  produce  which  were  raised  during  the 
taxable  year  or  prior  years,  also  the  profits  from  the  sale  of  any 
stock  or  other  items  w'hich  were  purchased.  The  farm  expenses 
will  be  the  actual  amounts  paid  out  during  the  taxable  year. 

Accrual  Basis. 

For  those  reporting  on  the  accrual  basis,  the  gross  profits  are 
obtained  by  adding  to  the  inventory  value  of  live  stock  and  products 
on  hand  at  the  end  of  the  year  the  amount  received  from  the  sale 
of  stock  and_  products  and  other  miscellaneous  receipts,  for  hire  of 
teams,  machinery,  etc.,  during  the  year,  and  deducting  from  this 
sum  the  inventory  value  of  stock  and  products  on  hand  at  the 
beginning  of  the  year  plus  the  cost  of  stock  and  produce  purchased 
during  the  year.  The  farm  expenses  will  be  the  actual  expenses 
incurred  during  the  year,  whether  paid  or  not. 

Inventory. — If  you  render  your  return  for  the  taxable  period  of 
1919  upon  an  accrual  basis,  you  may  value  closing  inventory  for 
1919  according  to  the  farm  price  method  which  contemplates  valua- 
tion of  inventories  at  market  less  cost  of  marketing.  In  the  event 
the  use  of  the  farm  price  method  of  valuing  your  closing  inventory 
for  1919  represents  a change  in  method  of  taking  inventories  from 
that  employed  by  you  for  1918,  the  opening  inventory  for  1919 
should  be  brought  in  at  the  same  value  as  ^e  closing  inventory 
for  1918  (this  being  the  same  in  effect  as  valuing  the  opening 
inventory  on  the  new  basis  and  crediting  income  with  the  excess 
valuation  brought  in).  However,  if  such  treatment  of  your  opening 
inventory  for  1919  results  in  abnormally  large  income  for  1919,  by 
reason  of  the  fact  that  certain  stock  which  was  on  hand  at  the  begin- 
ning is  still  on  hand  at  the  end  of  the  year,  then  adjustments  in  the 
form  of  an  adjustment  sheet  attached  to  your  1919  return  may  be 
made  of  your  taxes  for  1915  and  each  succeeding  year  to  1919,  based 
on  the  new  method  of  taking  inventories  (using  for  each  of  such 
years  prior  to  1919  the  same  method  employed  for  1919). 

Farmers  who  have  kept  no  records  or  only  records  of  cash  receipts 
and  disbursements  and  who  desire  to  report  on  the  accrual  basis 
with  inventories,  must  calculate  their  net  income  for  the  current 
toxable  year  without  entering  as  a credit  on  line  4,  page  2,  the 
inventory  of  live  stock,  crops,  and  products  at  the  beginning  of 
the  year;  except — 

(а)  If  any  live  stock,  grain,  or  other  property  on  hand  at  the 
beginning  of  the  taxable  year  had  been  purchased  and  the  cost 
thereof  not  charged  to  expense,  only  the  difference  between  the 
cost  and  the  selling  price  should  be  reported  as  income  for  the 
year  in  which  sold; 

(б)  But  if  the  cost  of  such  property  has  been  charged  to  expense 
for  a previous  year,  the  entire  amount  received  must  be  reported 
as  income  for  the  year  in  which  sold. 

Income. 

^ the  farm  income  from  whatever  source  must  be  reported  in 
this  schedule.  Anything  of  value  received  instead  of  cash  must  be 
considered  income  to  the  extent  of  its  cash  value.  Thus,  the  total 
value  of  groceries,  merchandise,  etc.,  received  in  exchange  for  eggs, 
butter,  or  other  produce  must  be  reported  as  income. 


Hail  and  fire  insurance  on  growing  crops  should  be  included  in 
gross  income  to  the  amount  received  in  cash  or  equivalent  for  the 
crop  destroyed. 

If  you  sold  your  farm  or  any  part  of  it,  report  the  profit  in  Sched- 
ule D of  Form  1040A  or  1040. 

The  value  of  farm  produce  which  is  consumed  by  the  farmer  and 
his  family  need  not  be  reported  as  income;  but  expenses  incurred 
in  raising  produce  thus  consumed  must  not  be  claimed  as  deductions. 

The  term  “farm”  embraces  the  farm  in  the  ordinarily  accepted 
sense,  and  includes  stock,  dairy,  poultry,  fruit,  and  truck  farms, 
also  plantations,  ranches,  and  all  land  used  for  farming  operations. 
All  individuals,  partnerships,  or  corporations  that  cultivate,  opeii^  e, 
or  manage  farms  for  gain  or  profit,  either  as  owners  or  tenants,  are 
designated  farmers.  A person  cultivating  or  operating  a farm  for 
recreation  or  pleasure,  tne  result  of  which  is  a continual  loss  from 
year  to  yeaS,  is  not  regarded  as  a farmer. 

Expenses  and  Other  Deductions. 

Labor. — Only  that  part  of  the  board  of  hired  labor  which  is  pur- 
chased should  be  included  as  a deduction.  The  value  of  products 
furnished  by  the  farm  and  used  in  the  board  of  hired  labor  is  not  a 
deductible  expense.  Rations  purchased  and  furnished  to  laborers 
or  share  croppers  are  deductible  as  a part  of  the  labor  expense. 
Do  not  deduct  the  value  of  your  own  labor  or  that  of  your  wife  or 
dependent  minor  children,  unless  you  report  such  value  as  income 
in  Schedule  B (Form  1040.\  or  1040).  Do  not  deduct  amounts 
paid  to  persons  engaged  in  household  workj  except  to  the  extent 
that  the  services  of  such  employees  are  used  in  boarding  and  other- 
wise caring  for  farm  laborers.  Services  of  such  employees  engaged  in 
caring  for  the  farmer’s  own  household  are  not  a deductible  expense. 

Fertilizers,  manures,  etc.- — The  cost  of  manures,  commercial  fer- 
tilizers, lime,  raw  rock  phosphate,  etc.,  that  were  bought  during 
the  year  may  be  deducted  as  an  expense. 

Taxes. — Do  not  deduct  inheritance  or  estate  taxes.  Federal 
income  taxes,  or  taxes  for  any  improvement  or  betterment  tending 
to  increase  the  value  of  theproperty.  Be  ready  to  show  tax  Receipts 
lor  taxes  claimed  as  a deduction.  Do  not  d.educt  taxes  on  your 
dwelling  or  household  property  on  this  form.  They  shouli  be 
claimed  in  Schedule  I (Form  1040A  or  1040). 

Interest  on  indebtedness. — All  interest  paid  on  farm  mortg^ee, 
notes,  and  other  obligations  incurred  to  carry  on  the  farm  business 
should  be  deducted. 

Bad  defcfs.— Report  only  debts,  arising  from  sales  that  have  been 
reported  as  income,  which  have  been  definitely  proved  within  the 
year  to  be  worthle.ss.  If  you  report  your  farm  income  on  a cAsh 
basis,  bad  debts  are  not  an  allowable  deduction. 

Repairs  and  depreciation. — Depreciation  claims  should  not  exceed 
the  actual  cost  of  buildings  and  equipment  (or  the  fair  market  value 
March  1,  1913,  if  acquired  before  that  date)  divided  by  its  probable 
life  in  years.  In  computing  depreciation  do  not  include  the  value 
of  farm  land  nor  the  land  on  which  farm  buildings  are  located.  Do 
not  deduct  repairs  or  depreciation  on  .the  dwelling  you  occupy 
or  on  your  personal  or  household  equipment.  Do  not  claim  as  a 
separate  item  depreciation  on  live  stock  or  any  other  property 
included  in  your  inventory,  as  such  depreciation  is  taken  care  of 
in  the  reduced  amount  of  the  inventory  at  the  close  of  the  year. 
Depreciation,  however,  may  be  claimea  on  draft  or  work  animals 
and  animals  held  for  breeding  purposes  which  were  purchased  and 
which  are  not  included  in  your  inventory  of  stock  bought  or  raised 
lor  sale. 

Losses. — You  may  deduct  on  Form  1040A  or  Form  1040  losses  of 
buildings,  machinery,  and  other  property  not  included  in  your 
inventory,  resulting  from  fires  or  other  casualties  and  not  compen- 
sated for  by  insurance  or  otherwise.  Losses  of  property  includ^  in 
your  inventory  are  taken  care  of  by  the  reduced  amount  of  the  inven- 
tory at  the  close  of  the  year.  The  total  loss  by  frost,  storm,  flood,  or 
fire  of  grow^pg  crops,  or  loss  of  animals  raised,  is  not  deductible. 

Tools,  machinery,  and  equipment. — The  cost  of  small  tools  of  short 
life,  such  as  shovels,  rakes,  etc.,  may  be  deducted  a an  expei^. 
You  may  deduct  expenses  of  operation,  repairs,  and  depreciation 
on  automobiles  used  exclusively  m farm  busmess.  If  an  automobile 
is  used  in  farm  business  for  a part  of  the  time  only,  a corresponding 
part  of  the  expense  may  be  deducted.  Amoimts  expended  for 
automobiles,  farm  machinery,  farm  buildings,  or  other  farm  equip- 
ment of  a permanent  nature  are  not  deductible  as  expenses,  as  such 
expenditures  are  regarded  as  investment  of  capital  which  is 
returned  to  the  owner  through  depreciation  allowances  prorated 
over  the  useful  life  of  the  property. 

Rent  void  in  crops. — Where  a tenant  farmer  pays  his  rent  to  the 
landlord  in  form  of  crops  raised  on  the  farm  (me  agreement  bring 
on  a crop-share  basis),  tne  tenant  may  not  deduct  as  rent  the  value 
of  the  crop  given  to  the  landlord,  but  he  may  deduct  all  amounts 
paid  by  him  in  raising  the  crop.  2— mu 

[Page  4 of  Form  1040F.] 


Income  Tax 

Supplementary  Page  78. 


2-16-20. 


TREASURY  DEPARTMENT 
iNtERNAL  Revenue  Bureau 
Form  1119— RevuedJanuary,  1920 

Income  and  Profits  Tax  Bond 

(UNDER  SECTION  238  (a)  OP  THE  REVENUE  ACT  OF  1918) 

For  taxable  year  1919 

Or  for  period  begun , 19 , and  ended 


KNOW  ALL  MEN  BY  THESE  PRESENTS,  That  we a-. 

of  , as  principal,  and — 

of  - — - — - 

as  surety,  arc  held  and  firmly  bound  unto  the  United  States  of  America  in  the  sum  of 

dollars,  laAvful  money  of  the 

United  States,  for  the  payment  whereof  we  bind  ourselves,  our  heirs,  executors,  administrators,  suc- 
cessors, and  assigns,  jointly  and  severally,  firmly  by  these  presents. 

Whereas,  at  the  time  of  filing  its  return  of  income  for  the  taxable  period  indicated  above,  the 
above-bounden  principal  claimed  a credit  on  its  income  tax  return  for  income  or  war-profits  and  excess- 
profits  taxes  accrued  but  not  paid  to  foreign  countries  or  to  possessions  of  the  United  States,  and  duly 
attached  thereto  Form  1118  prescribed  for  such  purpose;  and 

Whereas,  section  238  (a)  of  the  Revenue  Act  of  1918  provides  that,  in  the  case  of  such  a tax  accrued 
but  not  paid,  if  the  tax  when  paid  differs  from  the  amount  claimed,  or  if  any  tax  paid  is  refunded,  the 
Commissioner  shall  redetermine  the  amount  of  tax  due,  and,  as  a condition  precedent  to  the  allowance 
of  the  credit,  niay  require  the  taxpayer  to  give  bond,  with  satisfactory  sureties,  in  such  penal' sum  as  the 
Commissioner  may  require,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  found  to  be 
due  upon  any  such  redetermination,  and  the  Commissioner  has  required  that  the  bond  given  in  such  a 
case  shall  be  in  the  amount  of  the  credit  claimed,  and  this  bond  is  in  the  amount  of  the  credit  claimed; 

Now,  THEREFORE,  the  conditiou  of  the  foregoing  obligation  is  such  that  if  the  principal  shall,  on 
notice  and  demand  by  the  Collector,  duly  pay  any  income  or  war-profits  and  excess-profits  tax  found 
by  the  Commissioner  upon  any  such  redetermination  to  be  due  from  the  principal,  under  the  Revenue 
Act  of  1918,  and  shall  otherwise  well  and  truly  perform  and  observe  all  of  the  provisions  of  law  and  the 
regulations  tbereunder,  then  this  obligation  is  to  be  null  and  void;  otherwise  to  remain  in  fuLl  force  and 
effect. 

^ Witness  our  hands  and  seals,  tliis day  of , 1920. 

Signed,  sealed,  and  delivered  in  the  'presence  of — 

- [l.  s.] 


-.[l.  s.l 

Principal. 


- - : [L.S.] 

Surety. 

Bond  approved  this day  of , 1920. 


Commissioner  of  Internal  Revenue. 


Income  Tax 

Supplementary  Page  79. 


[Upper  half  of  Form  1125.) 


Income  Tax 

Supplementary  Page  80. 


Total  taxable  interest  cn  all  obligatioos  as  computed  on  line  above  (to  be  entered  in  Schedule  K (b),  Fonn  1040,  or  Schedule  A,  line  4,  Foiin  1120) 


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[Lower  half  of  Form  1125.] 


Income  Tax 

Supplamentary  Page  tl» 


Form  1126.— XmiTED  STATES  INTERNAL  REVENUE  SERVICE 

CERTIFICATE  OF  INVENTORY 

(To  b*  filed  with  CoUoctor  of  InUrnal  Rarono*  with  Income  Tee  Return) 

FOR  CALENDAR  YEAR  19. 

Or  for  period  begun  - - /9 , and  ended  — .....r  

Name - - - - 

Address - - - - * 


PRINCIPAL  CERTIFICATE 


Number  of  sheets 
submitted  herewith. 


I swear  (or  affirm)  that  the  closing  inventory  of  the  taxpayer  named  above,  amounting  to  , was  taken  under  my 

direction,  and  that  to  the  best  of  my  knowledge  and  belief  is  true  and  complete  in  evwj'  respect;  that  the  method  of  pricing  the  raw 

material,  work  in  process,  and  finished  goods  was  at  *. - 

that  I have  carefidly  read  all  of  the  instructions  on  the  reverse  side  of  this  form;  that  this  inventory  was  taken  in  accordance  therewith; 
and  that  the  following-named  persons  whose  separate  certificates  are  subscribed  hereon  or  attached  hereto,  are  the  officers  and 
employees  under  whose  personal  direction  the  various  parts  of  this  inventory  were  taken ; 

jVoTne.  Title  or  positwn.  Part  of  inventory  taken.  Amount. 


Sworn  to  and  subscribed  before  me  this day  of . 


19.. 


(Signature,) 


(Signature  of  offloer  administerisg  oath.) 

•State  “cost"  or  “cost  or  market,  whichever  is  lewer."  If  any  other 
reconciled  with  stock. 


(Title.)  (Title.) 

was  used,  describe  fully,  state  why  used  and  date  on  whldl  inventory  was  bst 


SUBSIDIARY  CERTIFICATE 

I (or  we),  the  undersigned  employees  of  the  taxpayer  named  aboversweax  (or affirm)  that  1 (or  we)  personally  directed  and  observed 
the  taking  of  the  parts  of  the  inventory  set  opposite  my  (or  our)  names,  and,  to  the  best  of  . my  (or  our)  knowledge  and  beli^,  ia  true 
and  complete  in  every  respect;  that  I (or  we)  have  carefully  read  the  instructions  on  the  reverse  side  of  this  form  and  that  the  parts  of 
the  inventory  for  which  I am  (or  we  are)  respioDsible  was  taken  in  accordance  therewith. 

Signatwre.  Title  or  position  Part  of  inventory  taken. 


Sworn  to  and  subscribed  before  me  this day  of  . 


(Signature  of  officer  administering  oath.) 


19 


(Title) 

[Page  1 of  Form  1126.] 


Income  Tax 

Supplementary  Page  82. 


INSTRUCTIONS. 


This  certificate  of  inventory  inust  be  eubmitted  by  all  tax- 
payers engaged  in  a trade  or  business  in  which  the  production, 
purchase,  or  ede  of  merchandise  of  any  kind  is  an  income- 
producing  faetSr. 

The  principal  certificate  will  be  signed  by  the  taxp^er  or  an 
executive  officer,  and  the  subsidiary  certificate  by  officers  and 
employees  (such  as  department  heads,  superintendents,  etf.) 
designated  by  the  taxpayer  or  executive  officer.  If  the  taxpayer 
who  fills  in  the  principal  certificate  actually  directs  and  observes 
the  taking  of  the  inventory,  the  subsidiary  certificate  need  not 
be  filled  in. 

In  case  there  is  not  sufficient  space  on  this  form  to  enter  the 
names  of  those  directed  to  take  the  inventory,  or  it  is  not  con- 
venient for  them  to  take  the  oath  jointly,  additional  copies  of 
this  forth  should  be  used,  but  the  oath  or  the  principal  officer 
need  only  be  made  on  the  first  sheet,  stating  thereon  the  number 
of  sheets  submitted. 

If  the  return  has  already  been  filed,  the  certificate  should  be 
sent  to  the  collector  of  the  district  in  which  the  return  was  filed. 

The  attention  of  taxpayers  is  called  to  the  following  methods 
which,  among  others,  are  sometimes  used  in  taking  or  valuing 
inventories,  but  which  are  not  in  accord  with  the  regulations,  viz: 

(a)  Deducting  from  the  inventory  a reserve  for  price  changes. 

(b)  Taking  work  in  process,  or  other  parts  of  the  inventory,  at 

a nominal  price  or  at  less  than  its  proper  .value. 

(c)  Oniitting  portions  of  the  stock  on  hand. 

(a)  Using  a constant  price  or  nominal  value  for  a so-called  nor- 
md  quantity  of  materials  or  goods  in  stock. 

(«)  Including  stock  in  transit,  either  shipped  to  or  from  tax- 
payer, the  title  of  which  is  not  vested  in  taxpayer. 

(/)  Using  a constant,  an  average,  or  a nominal  price. 


Section  203  op  the  Revenue  Act  op  -1918. 

T^at  ^eneyer  in  the  opinion  of  the  Commissioner  the  use 
of  inventories  is  necebsary  in  order  clearly  to  determine  the 
income  of  any  taxpayer,  inventories  shall  be  taken  by  such 
taxpayer  upon  such  basis  as  the  Commissioner,  with  the  approval 
of  the  Secretary,  may  prescribe  as  conforming  as  nearly  as  may 
be  to  the  best  accounting  practice  in  the  trade  or  business  and 
as  most  clearly  reflecting  the  income. 

Extracts  From  Regulations  45. 

Art.  1581,  Need  of  inventories. — In  order  to  reflect  the  net 
income  correctly,  inventories  at  the  beginning  and  ending  of 
each  year  are  necessary  in  every  case  in  which  the  production, 
purcliase  or  sale  of  merchandise  is  an  income-producing  factor. 
The  inventory  should  include  raw  materials  and  supplies  on 
hand  that  have  been  acquired  for  sale,  consumption  or  use  in 
productive  processes,  together  with  all  finished  or  partly  finished 
goods.  Title  to  the  merchandise  included  in  the  inventory 
would  be  vested  in  the  taxpayer  and  goods  merely  ordered  for 
future  delivery  and  for  which  no  transfer  of  title  has  been  effected 
should  be  excluded.  The  inventory  should  include  merchan- 
dise sold  but  not  shipped  to  the  customer  at  the  date  of  the 
inventory,  together  with  any  merchandise  out  upon  consignment, 
but  if  such  goods  have  been  included  in  the  sales  of  the  taxable 
year  they  should  not  be  taken  in  the  inventory.  It  should  also 
include  merchandise  purchased,  although  not  actually  received, 
to  which  title  has  passed  to  the  purchaser.  In  this  regard  care 
should  be  exercised  to  take  into  the  accounts  aU  invoices  or  other 
charges  in  respect  of  merchandise  properly  included  in  the 
inventory,  but  which  is  in  transit  or  for  other  reasons  has  not 
been  reduced  to  physical  possession. 

Art.  1582.  Valuation  of  inventories. — Inventories  should  be 
valued  at  (a)  cost  or  (6)  cost  or  market  whichever  is  lower. 
Whichever  basis  is  adopted  must  be  applied  to  each  item  and 
not  merely  to  the  total  of  the  inventory;  that  is,  if  for  instance, 
basis  {b)  is  adopted,  the  value  of  each  item  in  the  inventory  will 


be  measured  by  market  if  that  is  lower  than  coat,  dr  by'cost  if 
that  is  lower  than  market.  A taxpayer  may,  regardless  of  bk 
past  practice,  adopt  the  basis  of  cost  or  market  whichever  is 
lower,  for  his  1918  inventory,  provided  a dicclosure  of  the  fact 
and  that  it  represents  a change  is  made  in  the  return.  There- 
after changes  can  be  made  only  after  permission  is  secured  from 
the  Commissioner.  But  see  article  1585  for  inventories  by 
dedera  in  securities.  Inventories  should  be  recorded 'in  a 
legible  manner  and  properly  computed  and  summarized,  and 
should  be  preserved  as  a part  of  the  accounting  records  of  the 
taxpayer.  Goods  taken  in  the  inventory  which  have  been  so 
intermingled  that  they  can  not  be  identified  wi^  specific  in- 
voices will  be  deemed  to  be  the  goods  most  recently  purchased 

Art.  1583.  Inventories  at  cost. — Cost  means: 

(1)  In  the  case  of  merchandise  purchased,  the  invoice  price 
less  trade  or  other  discounts  except  strictly  cash  discounts  ap- 
proximating a fair  interest  rate,  which  may  be  deducted  or  not 
at  the  option  of  the  taxpayer  provided  a consistent  course  is 
followed.  To  this  net  invoice  price  should  be  added  transpior- 
tation  or  other  necessary  charges  incurred  in  acquiring  possession 
of  the  goods. 

(2)  fn  the  case  of  merchandise  produced  by  the  taxpayer,  (a) 

the  cost  of  mw  materials  and  supplies  entering  into  or  consumeu 
in  connection  with  the  product,  (6)  expenditures  for  direct 
labor,  (c)  indirect  exjienses  incident  to  and  necessary  for  the 
production  of  the  particular  article,  including  in  such  indirect 
expenses  a reasonable  proportion  of  management  expenses,  but 
;not  including  any. cost  of  selling  or  return  on  capital  whether 
by  way  of  interest  or  profit.  In  any  industry  in  which  the 
usual  rules  for  computation  of  cost  of  production  are  inapplicable, 
costa  may  be  approximated  upon  such  basis  as  may  be  reason- 
able and  in  conformity  with  established  trade  practice  in  the 
particular  industry.  ^ 

Art.  1584.  Inventories  at  market. — Market  means  the  current 
bid  price  prevailing  at  the  date  of  the  inventory  for  the  par- 
ticular merchandise,  and  is  applicable  to  goods  purchased  and 
on  hand  and  to  basic  materials  in  goods  in  process  of  manufaev 
ture  and  in  finished  goods  on  hand,  exclusive,  however,  of  goods 
on  hand  or  in  process  of  manufacture  for  delivery  upon  firm  sales 
contracts  at  fixed  prices  entered  into  before  the  date  of  the  inven- 
tory. Where  no  open  market  quotations  are  available  the  tax- 
payer must  use  such  evidence  of  a fair  market  price  at  the  date 
or  dates  nearest  the  inventory  as  may  be  available  to  him,  such 
as  sp’ecific  transactions  in  reasonable  volume  entered  into  in 
good  faith,  or  compensation  paid  for  cancellation  of  contracts  for 
purchase  commitments.  The  burden  of  proof  will  rest  upon  Ibe 
taxpayer  in  each  case  to  satisfy  the  Commissioner  of  the  correct- 
ness of  the  prices  adopted. 

Art.  1585.  Inventories  by  dealers  in  securities. — A dealer  in 
securities,  who  in  his  books  of  account  regularly  inventories 
unsold  securities  on  hand  either  (a)  at  cost  or  (6)  at  cost  or  market 
value  whichever  is  lower,  may  make  his  return  upon  the  basis 
upon  which  his  accounts  are  kept;  provided  that  a description  of 
the  method  employed  shall  be  included  in  or  attached  to  the 
return,  that  all  the  securities  must  be  inventories. by  the  same 
method,  and  that  such  method  must  be  adhered  to  in  subsequent 
years,  unless  another  be  authorized  by  the  Commissioner.  For 
the  puiq)ose  of  this  rule  a dealer  in  securities  is  a merchant  of 
securities,  whether  an  individual,  partnership  or  corporation, 
with  an  established  place  of  business,  regularly  engaged  in  the 
purchase  of  securities  and  their  resale  to  customers,  that  is,  one 
who  as  a merchant  buys  securities  and  sells  them  to  customers 
with  a view  to  the  gains  and  profits  that  may  be  derived  there- 
from. If  such  business  is  simply  a branch  of  the  activities  car- 
ried on  by  such  person,  the  securities  inventoried  as  here  pro- 
vided may  include  only  those  held  for  purooses  of  resale  and 
not  for  investment.  Taxpayers  who  buy  and  sell  or  hold  securi- 
ties for  investment  or  speculation,  and  not  in  the  course  of  an 
established  business,  and  officers  of  corporations  and  members 
of  partnerships,  who  in  their  individual  capacities  buy  and  sell 
securities,  are  not  dealers  in  securities  within  the  meaning  of 
this  rule.  s^-«mb 


[Page  2 of  Form  1126.] 


Income  Tax 

Supplementary  Page  83. 


1 


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INTERNAL  REVENUE  COLLECTION  DISTRICTS. 

Including 

NAMES  AND  ADDRESSES  OF  COLLECTORS  . . 
and 

SERVICE  STATIONS 


ALABAMA  (Comprising  the  State  of  Alabama), 

Collector;  John  D.  McNeel,  Birmingham. 

Service  Stations:  Mobile,  Ft.  Morgan.* 

ALASKA  (See  Washington). 

ARIZONA  (Comprising  the  State  of  Arizona), 

Collector;  Alfred  Franklin,  Phoenix. 

ARKANSAS  (Comprising  the  State  of  Arkansas), 

Collector:  Jack  Walker,  Little  Rock. 

Service  Stations:  Fort  Smith,  Helena. 

CALIFORNIA 

First  District. — Comprising  the  following  counties  in  California:  Alameda,  Alpine, 
Amador,  Butte,  Calaveras,  Colusa,  Contra  Costa,  Del  Norte,  Eldorado,  Fresno,  Glenn, 
Humboldt,  Inyo,  Kings,  Lake,  Lassen,  Madera,  Marin,  Mariposa,  Mendocino,  Merwd, 
Modoc,  Mono,  Monterey,  Napa,  Nevada,  Placer,  Plumas,  Sacramento,  San  Benito,  San 
Francisco,  San  Joaquin,  San  Mateo,  Santa  Clara,  Santa  Cruz,  Shasta,  Sierra,  SisMyou, 
Solano,  Sonoma,  Stanislaus,  Sutter,  Tulare,  Tehama,  Trinity,  Tuolumne,  Yolo  and  Yuba. 

Collector;  Justus  S.  Wardell,  San  Francisco. 

Service  Stations:  Sacramento,  Oakland,  Reno  (Nevada),  Stockton, 
Fresno,  San  Jose. 

sixth  District. — Comprising  that  part  of  California  included  in  the  following  counties:  Imperial, 
Kern,  Los  Angeles,  Orange,  Riverside,  San  Bernardino,  San  Diego,  San  Luis  Obispo, 
Santa  Barbara  and  Ventura. 

Collector:  John  P.  Carter,  Los  Angeles. 

Service  Station;  San  Diego.* 

COLORADO  (Comprising  the  State  of  Colorado), 

Collector:  Mark  A.  Skinner,  Denver. 

Service  Station;  Pueblo. 

CONNECTICUT  (Comprising  the  State  of  Connecticut), 

Collector:  James  J.  Walsh,  Flartford. 

Service  Stations:  Bridgeport,  New  Haven. 

DELAWARE  (Comprising  the  State  of  Delaware), 

Collector:  Henry  T.  Graham,  Wilmington. 

DISTRICT  OF  COLUMBIA  (See  Maryland). 

FLORIDA  (Comprising  the  State  of  Florida), 

Collector;  James  M.  Cathcart,  Jacksonville. 

Service  Stations:  Tampa,  Key  West.* 

GEORGIA  (Comprising  the  State  of  Georgia), 

Collector:  Aaron  O.  Bla’ock,  Atlanta. 

HAWAII  (Comprising  the  Territory  of  Hawaii), 

Collector:  Howard  Hathaway,  Flonolulu. 

Service  Station:  Hilo.* 

*Stamp  Office  Only. 


Income  Tax 
Supplementary  Page  101 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


IDAHO  (Comprising  the  State  of  Idaho), 

Collector:  Lewis  Williams,  Boise. 
Service  Stations:  Pocatello,  Lewiston. 


ILLINOIS 

First  District. — Comprising  that  part  ot  the  State  of  Illinois  included  in  the  following  counties; 
Boone,  Bureau,  Carroll,  Cook,  Dekalb,  Du[)age,  Grundy,  Henderson,  Henry,  Jo  Daviess, 
Kane,  Kankakee,  Kendall,  Knox,  Lake,  LaSalle,  Lee,  McHenry,  Marshall,  Mercer, 
Ogls,  Peoria,  Putnam,  Rock  Island,  Stark.  Stephenson,  Warren,  Whiteside,  Will,  and 
Winnebago. 

Collector:  Harry  W.  Mager,  Chicago. 

Service  Stations:  Chicago  (six),  Joliet,  Rock  Island,  Peoria,  Rock- 
ford, Aurora. 

Eighth  District. — Comprising  that  part  of  the  State  of  Illinois  included  in  the  following  counrtes: 
Adams,  Alexander,  Bond,  Brown,  Calhoun,  Cass,  Champaign,  Christian.  Clark,  Clay,  Clint- 
on,Coles,  Crawford,  Cumberland,  Dewitt,  Douglas,  Edgar,  Edwards,  Eftingham,  Fayette, 
Ford,  Franklin,  Fulton,  Gallatin,  Greene,  Hamilton,  Hancock,  Hardin,  Iroquois,  Jackson. 
Jasper,  Jefferson,  Jersey,  Johnson.  Lawrence,  Livingston,  Logan,  McDonough.  McLean, 
Macon,  Macoupin,  Mason,  Madison,  Marion,  Massac,  Menard,  Monroe,  Montgomery, 
Morgan,  Moultrie,  Perry,  Platt.  Pike,  Pope,  Pulaski,  Randolph,  Richland,  St.  Clair, 
Saline,  Sangamon,  Schuyler,  Scott,  Shelby,  Tazewell,  Union,  Vermilion,  W^abash,  Washing- 
ton, W’ayne,  White,  W’^illiamson,  and  Woodford. 

Collector:  John  L.  Pickering,  Springfield. 

Service  Stations:  East  St.  Louis,  Cairo,  Centralia,  Danville,  Decatur, 
Bloomington,  Quincy,  Belleville,  Pekin,*  Jacksonville.* 

INDIANA  (Comprising  the  State  of  Indiana), 

Collector:  Wm.  L.  Elder,  Indianapolis, 

Service  Stations:  Gary,  South  Bend,  Ft.  Wayne,  Logansport, 
Lafayette,  Muncie,  Columbus,  New  Albany,  Bedford,  Evansville, 
Terre  Haute,  Vincennes,  Lawrenceburg,*  Hammond.* 

IOWA  (Comprising  the  State  of  Iowa), 

Collector:  Louis  Murphy,  Dubuque. 

Service  Stations:  Davenport,  Des  Moines,  Burlington,*  Ottumwa,* 
Sioux  City.* 

KANSAS  (Comprising  the  State  of  Kansas), 

Collector:  Wm.  H.  L.  Pepperell,  ^^^^chira. 

Service  Station:  Kansas  City. 

KENTUCKY  (Comprising  the  State  of  Kentucky), 

Collector:  Elwood  Hamilton,  Louisville. 

Service  Stations:  Ashland,  Middlesboro,  Bowling  Green,  Paducah, 
Owensboro,  Danville,  Lexington,  Covington,  Frankfort.* 

LOUISIANA  (Comprising  the  State  of  Louisiana), 

Collector:  R.  W.  Fontenot,  New  Orleans. 

Service  Stations:  Shreveport,  Baton  Rouge,  Alexandria,  Lake 
Charles,  Monroe. 

MAINE  (Comprising  the  State  of  Maine), 

Collector:  L.  O.  Tebbetts,  Augusta. 

Service  Stations:  Portland,  Bangor,  Lewiston.* 

MARYLAND  (Comprising  the  State  of  Maryland  and  the  District  of  Columbia). 
Collector:  Joshua  W.  Miles,  Baltimore. 

Service  Stations:  Washington,  D.  C.,  Cumberland. 

•Stamp  Office  Only. 


Income  Tax 
Supplemientary  Page  102 


7-1-20. 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


MASSACHUSETTS  (Comprising  the  State  of  Massachusetts), 

Collector:  John  J.  Mitchell,  Boston. 

Service  Stations:  Springfield,  Worcester,  Fall  River,  Lawrence, 
Lowell,  Lynn,  Brockton,  New  Bedford,  Pittsfield,  Fitchburg. 


MICHIGAN  ^ , n , 

First  District —Comprising  that  part  of  the  State  of  Michigan  included  in  the 

St.  Clair,  Tuscola,  Washtenaw  and  Wayne. 

Collector:  John  A.  Grogan,  Detroit. 

Service  Stations:  Bay  City,*  Saginaw.* 

F.ortl,  nk!rict.-Comprlsing  th»l  part  of  the  State  of  MlAton  ineloded  In  the 

eountiea:  Aljcr,  Allegan,  Antrim,  Bara^ga,  B»rry,  Benrie,  Berrien,  Ca.3,  (^arlevoii, 
Chippewa,  Delta,  Dickinson,  Eaton,  Emmet,  GogeHc,  Grand  Traverse,  Hougnton, 
lowSia,  Iron,  Kalamazoo.  Kalkaska,  Kent.  Keweenaw  Lake,  I-eelanau,  Luce,  Mackinac, 
Mainetee,  Marquette.  Mason,  Mecosta,  kT^enominee 

Newaygo,  Oceana,  Ontonagon.  Osceola,  Ottawa,  St.  Joseph,  Schoolcraft,  van  Huren, 
Wexford 


Collector:  Emanuel  J.  Doyle,  Grand  Rapid: 


MINNESOTA  (Comprising  the  State  of  Minnesota), 

Collector:  Edward  J.  Lynch,  St.  Paul. 

Service  Stations:  Minneapolis,  Duluth,  Winona,  Mankato,  St, 
Cloud. 

MISSISSIPPI  (Comprising  the  State  of  Mississippi), 

Collector:  George  L.  Donald,  Jackson. 

MISSOURI 

First  District.— Comprising  that  part  of  the  State  of  Missouri 

Adair,  Audrain,  Pollinger.  Boone,  Butler,  Cailaway,  Cape  Girardeau.  Carter,  Clark. 
Crawford.  Dent,  Dunklin,  Franklin.  Gasconade.  Howard.  Aron, 

Lincoln.  Linn,  Macon,  Madison,  Maries,  Marion,  Mississippi,  Montgomery,  Monroe, 
New  Madrid,  Oregon,  Osage.  Pemiscot,  Perry.  Phelps,  Pike,  Ralls,  Randolph, 

Reynolds,  Ripley,  St.  Charles.  St.  Francois.  Ste.  Genevieve,  St.  I^uis,  Schuyler,  Scot 
land,  Scott,  Shannon,  Shelby,  Stoddard,  Warren,  Washington,  and  Wayne. 

Collector:  George  H.  Moore,  St.  Louis. 

Sixth  District.-Comprising  that  part  of  the  State  of  Mis.souri  included  in  the  following 

counties:  Andrew,  Atchison.  Benton,  Barry,  Barton.  Bates,  Buchanan,  Caldwell,  Camden. 

Carroll,  Cass,  Cedar.  Chariton.  Christan,  Clay,  ^mton.  Cole, 

Davies^,  Dekalb,  Douglas,  Gentry,  Greens,  Grundy.  Harrison,  Ben^V’  Hickory,  Holty 
Howell,  Jackson,  Jasper,  Johnson,  Laclade,  Lafayette,  Lawrence,  d, 

Mercer,  Miller,  Moniteau,  Morgan.  Newton,  Nodaway.  Ozark, 

Putnam,  Ray,  St.  Clair,  Saline,  Stone,  Sullivan,  Taney,  Texas,  Vernon,  Webster,  Worth, 
Wright. 

Collector:  George  F.  Crutchley,  Kansas  City. 

Service  Station:  St.  Joseph.* 

MONTANA  (Comprising  the  State  of  Montana), 

Collector:  James  A.  Walsh,  Llelena. 

Service  Stations:  Butte,  Missoula. 

NEBRASKA  (Comprising  the  State  of  Nebraska), 

Collector:  George  L.  Loomis,  Omaha. 

Service  Station:  Lincoln. 

NEVADA  (Comprising  the  State  of  Nevada), 

Collector:  William  A.  Kelly,  Reno. 

NEW  HAMPSHIRE  (Comprising  the  State  of  New  Hampshire), 

Collector:  Seth  W.  Jones,  Portsmouth. 

Service  Stations:  Manchester,  Berlin. 

•Stamp  Office  Only. 

Income  Tax 
Supplementary  Page  103 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


NEW  JERSEY 

First  District.— Comprising  that  part  of  the  State  of  New  Jersey  Included  in  the  following 
counties:  Atlantic,  Burlington,  Camden,  Cape  May,  Cumberland.  GJoucester.  Mercete 
Monmouth,  Ocean,  and  Salem. 

Collector:  Samuel  Iredell,  Camden. 

Fifth  District. — Comprising  that  part  of  the  State  of  New  Jersey  included  in  the  followint 
TOunties:  Bergen,  Essex,  Hudson,  Hunterdon,  Middlesex,  Morris.  Passaic,  Somerset, 
Sussex,  Unjon,  Warren. 

Collector:  Charles  V,  Duffy,  Newark. 

Service  Stations:  Jersey  City,  New  Brunswick,  Paterson. 


NEW  MEXICO  (Comprising  the  State  of  New  Mexico), 
Collector:  Carl  A.  Hatch,  Albuquerque. 


NEW  YORK 


First  DlsWct.— Comprising  that  part  of  the  State  of  New  York  included  in  the  followia* 
counties:  Kings,  Nassau,  Queens,  Richmond  and  Suffolk. 


Collector:  Bertram  Gardner,  Brooklyn. 


County  of  New  York.  N.  Y.,  and  those  three  certain  islands 
situated  in  the  East  River  known  as  Randalls  Island.  Wards  Island  and  Blackwells 
island. 


Collector:  William  H.  Edwards,  New  York. 

Service  Stations:  28  West  23rd  Street,  New  York  City;  126  Street, 
San  Juan,  P.  R,* 


Fonrteenth  District.— Comprising  that  part  of  the  State  of  New  York  included  in  the  foUowint 
countiM!  Albany.  Bronx  (formerly  the  23rd  and  24th  wards  of  New  York  City),  Clintoa 
Columbia,  Dutchess,  Essex,  Fulton,  Greene,  Hamilton.  Montgomery,  Orange,  Putnam 
KenMelaer,  Rockland,  Saratoga,  Schenectady,  Schoharie,  Sullivan,  Ulster,  Warren. 
Washington,  and  Westchester. 


Collector:  Roscoe  Irwin,  Albany. 

Service  Stations:  Schenectady,  Troy,  Newburgh,  Yonkers,  Pough- 
keepsie, Bronx,  Peekskill.* 


Twenty-Srst  District.- Comprising  that  part  of  New  York  included  in  the  following  counties: 

Chenango,  Cortland,  Delaware,  Franklin,  Herkimer,  Jefferson,  Lewis, 
T^fmpkins  Md*^WaynO^^^^’  Oswego,  Otsego,  St,  Lawrence,  Schuyler,  Seneca,  Tioga. 

Collector:  Neal  Brewster,  Syracuse. 

Service  Stations:  Utica,  Binghamton.* 

Di8trict.~Comprising  that  part  of  New  York  included  in  the  following  counties. 

Ohautauqu^  Chemung,  Erie,  Genesee,  Livingston,  Monroe, 
Niagara,  Ontario,  Orleans,  Steuben,  Wyoming,  and  Yates. 

Collector:  V.  H.  Riordan,  Buffalo. 

Service  Stations:  Rochester,  Elmira.* 


NORTH  CAROLINA  (Comprising  the  State  of  North  Carolina), 

Collector:  Josiah  W,  Bailey,  Raleigh. 

Servme  Stations:  Rocky  Mount,  Washington,  Newbern,  Wilmington 
Charlotte,  Asheville,  Statesville,  Winston-Salem,  Greensboro, 
Durham,*  Reidsville.* 

NORTH  DAKOTA  (Comprising  the  State  of  North  Dakota), 

Collector:  William  E.  Byerly,  Fargo. 


*Stamp  Office  Only. 


Income  Tax 
Supplementary  Page  104 


g:7-l-20. 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


OHIO 

First  District. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  foUowing  counties: 
Brown,  Butler,  Clarke,  Clermont.  Clinton,  Fayette,  Greene,  Hamilton,  Highland,  Miami. 
Montgomery,  Preble,  and  Vv’arren. 

Collector:  Stephen  W.  hlcGrath,  Cincinnat!. 

Service  Stations:  Dajiton,  Middletown,*  Hamilton.* 

Tenth  District.— Comprising  that  part  of  the  State  of  Ohio  included  in  the  following  counties: 
Allen,  Auglaize,  Champaign,  Crawford,  Darke,  Defiance,  Erie,  Fulton,  Hancock, 
Hardin,  Henry,  Huron,  Logan,  Lucas,  Mercer,  Ottawa,  Paulding,  Putnam,  Sandusky. 
Seneca,  Shelby,  Van  Wert,  Williams,  Wood,  and  Wyandot. 

Collector:  Frank  B.  Niles,  Toledo. 

Eieventh  Disirict. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  following 
counties:  Adams,  Athens,  Coshocton,  Delaware,  Fairfield,  Franklin,  Gallia,  Guernsey, 
Hocking,  Jackson,  Knox.  Lawrence,  Licking,  Madison,  Marion,  Meigs,  Morgan,  Morrow, 
Muskingum,  Noble,  Perry,  Pickav.'ay,  Pike,  Ross,  Scioto,  Union,  Vinton,  and  Washington. 

Collector:  B.  E.  Williamson,  Columbus. 


Service  Station:  Portsmouth.* 

Eighteenth  District. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  following 
counties:  Ashland.  Ashtabula,  Belmont,  Carroll,  Columbiana,  Cuyahoga,  Geauga, 
Harrison,  Holmes,  Jefferson,  Lake,  Lorain,  Mahoning,  Medina,  Monroe,  Portage,  Rich- 
land, Stark,  Summit,  Trumbull,  Tuscarev/as,  and  Wayne. 

Collector:  lEarry  H.  Weiss,  Cleveland. 

Service  Stations:  Akron,  Canton,  Youngstown,  Steubenville, 


OKLAHOMA  (Comprising  the  State  of  Oklahoma), 
Collector:  Hubert  L.  Bolen,  Oklahoma. 
Service  Station:  Tulsa. 


OREGON  (Comprising  the  State  of  Oregon), 

Collector:  Milton  A.  Miller,  Portland. 


PENNSYLVANIA 

First  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  m the  fobbing 
counties;  Adams,  Bedford,  Berks,  Blair,  Bucks,  Chester,  Cumberland,  Dauphin,  l^la- 
ware,  Franklin,  Fulton,  Huntingdon,  Juniata,  Lancaster,  Lebanon,  Lehigh,  Mifflin, 
Montgomery,  Perry,  Philadelphia,  Schuylkill,  Snyder,  and  York. 

Collector:  Ephraim  Lederer,  Philadelphia. 

Service  Stations:  Allentown,  Altoona,  Chester,  Harrisburg,  Lan- 
caster, Norristown,  Pottsville,  Reading,  A^ork. 

Twelfth  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  in  the  following 
counties:  Bradford,  Carbon,  Center,  Clinton,  Columbia,  Lackawanna,  Luzerne,  Lycoming, 
.Monroe,  Montour,  Northampton,  Northumberland,  Pike,  Potter,  Sullivan,  Susquehanna, 
Tioga,  Union,  Wayne,  Vv^yoming. 

Collector:  Fred  C.  Kirkendall,  Scranton. 

Service  Stations:  Wilkesbarre,  WllHamsport,  Easton,*  I.ockhaven.* 

Twenty-third  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  in  the 
following  counties:  Allegheny,  Armstrong,  Beaver,  Butler,  Cambria.  Cameron,  Clarion, 
Clearfield,  Crawford,  Elk,  Erie,  Fayette,  Forest,  Greene,  Indiana,  Jefferson,  Lawrence, 
McKean,  Mercer,  Venango,  Warren,  Washington,  and  ■V\’'estmoreland. 

Collector:  C.  G.  Lewcllyn,  Pittsburgh. 

Service  Stations:  Erie,  Meadville,*  Uniontown.* 

RHODE  ISLAND  (Comprising  the  State  of  Rhode  Island), 

Collector:  Geo.  P.  O’Shaunessy,  Providence. 

SOUTH  CAROLINA  (Comprising  the  State  of  South  Carolina), 

Collector:  Duncan  C.  He>ward,  Columbia. 

Service  Station:  Charleston. 

SOUTH  DAKOTA  (Comprising  the  State  of  South  Dakota), 

Collector:  James  W.  Mce,  Aberdeen. 

TENNESSEE  (Comprising  the  State  of  Tennessee), 

Collector:  Edward  B.  Craig,  Nashville. 

Service  Stations:  Memphis,  Chattanooga,  Knoxville, 

*Stamp  Office  Only. 


Income  Tax 

Supplementary  Page  105 


INTERNAL  REVENUE  DISTRICTS  AND  COLLECTORS. 


TEXAS 

First  District.- — Comprising  that  part  of  the  State  of  Texas  included  in  the  following  c<mnties: 
Aransas,  Atascosa,  Austin,  Bandera,  Bastrop,  Bee,  Bexar,  Blanco,  Brazoria,  Brazos, 
Brewster,  Brooks,  Burleson,  Burnet,  Caldwell,  Calhoun,  Cameron,  Chamois,  Colorado, 
Comal,  Crockett,  Culberson,  Dewitt,  Dimmit,  Duval,  Edwards,  El  Paso,  Fayette,  Fort 
Bend,  Frio,  Galveston,  Gillespie,  Goliad,  Gonzales,  Grimes,  Guadalupe,  Hardin,  I^rns, 
Hays,  Hidalgo,  Pludspeth,  Jackson,  Jasper,  Jeff  Davis,  Jefferson,  Jim  Hogg,  Jim  Wells, 
Karnes,  Kendall,  Kerr,  Kimble,  Kinney,  Kleberg,  La  Salle,  Lavaca,  Lee,  Liberty,  Live 
Oak,  Llano,  McMullen,  Madison,  Mason,  Matagorda,  Maverick,  Medina,  Milam,  Mont- 
gomery, Newton,  Nueces,  Orange,  Pecos,  Polk,  Presidio,  Real,  Reeves,  Refugio,  Robert- 
son, San  Jacinto,  San  Patricio,  Starr,  Sutton,  Terrell,  Travis,  Tyler,  Uvalde,  Valyerde, 
Victoria,  Walker,  Waller,  Washington,  Webb,  Wharton,  Willacy,  Williamson,  Wilson, 
Zapata,  Zavalla. 

Collector:  Alexander  S.  Walker,  Austin. 

Service  Stations:  San  Antonio,  Beaumont,  Houston. 

Second  District. — Comprising  that  part  of  the  State  of  Texas  included  in  the  following  counties: 
Anderson,  Andrews,  Angelina,  Archer,  Armstrong,  Bailey,  Baylor,  Bell,  Borden,  Bosoue, 
Bowie,  Briscoe,  Brown,  Callahan,  Camp,  Carson,  Cass,  Castro,  Cherokee,  Childress,  Clay, 
Cochran,  Coke,  Coleman,  Collin,  Collingsworth,  Comanche,  Concho,  Cooke,  Coryell, 
Cottle,  Crane,  Crosby,  Dallam,  Dallas,  Dawson,  Deaf  Smith,  Delta,  Denton,  Dickens, 
Donley,  Eastland,  Ector,  Ellis,  Erath,  Falls,  Fannin,  Fisher,  Floyd,  Foard,  Franklin, 
Freestone,  Gaines,  Garza,  Glasscock,  Gray,  Grayson,  Gregg,  Hale,  HaU,  Hamilton, 
Hansford,  Hardeman,  Harrison,  Hartley,  Haskell,  Hemphill,  Henderson,  Hill,  Hockley, 
Hood,  Hopkins,  Houston,  Howard,  Hunt,  Hutchinson,  Irion,  Jack,  Johnson,  Jones, 
Kaufman,  Kent,  King,  Knox,  Lamar,  Lamb,  Lampasas,  Leon,  Limestone,  Lipscomb, 
Loving,  Lubbock,  Lynn,  McCulloch,  McLennan,  Marion,  Martin,  Menard,  Midland, 
Mills,  Mitchell,  Montague,  Moore,  Morris,  Motley,  Nacogdoches,  Navarro,  Nolan, 
Ochiltree,  Oldham,  Palo  Pinto,  Panola,  Parker,  Parmer,  Potter,  Rains,  Randall,  Reagan, 
Red  River,  Roberts,  Rockwall,  Runnels,  Rusk,  Sabine,  San  Augustine,  San  Saba, 
Schleicher,  Scurry,  Shackelford,  Shelby,  Sherman,  Smith,  Somervell,  Stephens,  Sterling, 
Stonewall,  Swisher,  Tarrant,  Taylor,  Terry,  Throckmorton,  Titus,  Tom  Green,  Trinity, 
Upshur,  Upton,  Van  Zandt,  Ward,  Wheeler,  Wichita,  Wilbarger,  Winkler,  Wise,  Wood, 
Yoakum  and  Young. 

Collector:  Scott  Reed,  Dallas. 

Service  Stations:  Wichita  Falls,  Fort  Worth,  Waco. 

UTAH  (Comprising  the  State  of  Utah), 

Collector:  David  C.  Dunbar,  Salt  Lal<e  City. 

Service  Station:  Ogden. 

VERMONT  (Comprising  the  State  of  Vermont), 

Collector:  J.  E,  Kennedy,  Burlington. 

Service  Stations:  Rutland,  Montpelier. 

VIRGINIA  (Comprising  the  State  of  Virginia), 

Collector:  Richard  C.  L.  Moncure,  Richmond. 

Service  Stations:  Norfolk,  Lynchburg,  Roanoke,  Alexandria  (no 
stamps  sold),  Petersburg.* 

WASHINGTON  (Comprising  the  State  of  Washington  and  the  Territory  of 
Alaska), 

Collector:  David  J.  Williams,  Tacoma. 

Service  Stations:  Seattle,  Spokane,  Bellingham,  Everett,  Walla 
Walla,  Yakima. 

WEST  VIRGINIA  (Comprising  the  State  of  West  Virginia), 

Collector:  Samuel  A.  Hays,  Parkersburg. 

Service  Stations:  Wheeling,  Charleston,  Huntington,  Fairmont,* 
Martinsburg.* 

WISCONSIN  (Comprising  the  State  of  Wisconsin), 

Collector:  Burt  Williams,  Milwaukee. 

Service  Stations:  Madison,  Sheboygan,  Green  Bay,  Oshkosh, 
Superior,  Eau  Claire,  La  Crosse,  Berlin.* 

WYOMING  (Comprising  the  State  of  Wyoming), 

Collector:  Leslie  A.  Miller,  Cheyenne. 

•Stamp  Office  Only. 

Income  Tax 
Supplementary  Page  106 


12-29-20. 


TABLE  OF  CASES. 


Paragraph 

Allen:  Altheimer  & Rawlings  Investment  Co.  ys.  (248  Fed  688) . . 905 

Allen:  National  Bank  of  Commerce^in  St.  Louis  vs  (223  Fed  472) 1258 

Altheimer  & Rawlings  Investment  Co.  vs.  Allen  (248  Fed.  688) 905 

Anderson:  Brady  vs.  (240  Fed.  665) VAAo  "17  ‘ j ‘ 1918 

Anderson:  Jacobs  and  Davies  (Inc.)  ys.  (228  Fed.  505) 

Anderson:  Jewelers  Safety  Fund  Society  vy  (V  D.  ^078). . .........  . . . . .2960 

Anderson:  Mail  & Newspaper  Transportation  Company  vs.  (234  Fed.  590). 2184 

Anderson:  Thorne  vs.  (240  U.  S.  115).  . . . ..  . . • • • • • 

Anderson:  Tyee  Realty  Company  vs.  (240  U S 115)  2290 

Baldwin  Locomotive  Works  vs.  McCoach  (221  hed.  59) 960 

Baltic  Mining  Co.:  Stanton  vs.  (24-0  U.  S.  103) 

Brady  vs.  Anderson  (240  Fed.  665) 

Brady:  Dodge  vs.  (240  U.  S.  122) ; -^091 

Brewster  vs.  Walsh  (U.  S.  D.  C.,  Dec.  16,  9960 

Brushaber  vs.  U.  P.  Railroad  Company  (240  U-  S.  D- • y • • • t j’j 

Carter:  Union  Hollywood  Water  Company  vs.  (238  Fed.  239) 727,  1205 

Chicago  & Alton  Railroad  Co.  vs.  U.  S.  (43  C.  of  C.  41) Jqa’i^ss 

Crocker,  et  al..  Trustees:  Malley  vs.  (249  U.  S.  223) 2399 

Cryan  vs.  Warded  (263  Fed.  

De  Ganay  vs.  Lederer  (250  U.  S.  376) ••••••  • • •;  • • * * ‘9.717 

Digest  of  Recent  Decisions  of  the  Supreme  Court  (Acts  of  1909  and  1913) .. 2317 
(The  opinion  in  the  cases  Involving  the  1909  Act  are  not  included 
herein.  But  see  the  Digest,  paragraph  2317.) 

Dodge  vs.  Brady  (240  U.  S.  122) 

Dodge  vs.  Osborn  (240  U.  S.  118).  ...  • • • • • ,9^^ 

Doyle:  Grand  Rapids  and  Indiana  Railway  Co.,  vs.  (24o  Fed.  792) 1206 

Eliot  National  Bank  vs.  Gill  (218  Fed.  600) ^ 

Eisner:  Macomber  vs.  (Jan.  23,  1919).  ■_ 

Supreme  Court  decision  (252  U.  S.  189) 

Eisner:  Mente  vs.  (T.  D.  3029) 

Eisner:  Peabody  vs.  (247  U.  S.  347) 

Eisner:  Prentiss  vs.  (260  Fed.  589). . . . . . . . . ...  • • . • • • • 90. ^ 

U.  S.  Circuit  Court  of  yVppeals  Decision  ( I . D.  3050) 2848 

Eisner:  Towne  vs.  (245  U S.  418) 

Evans  vs.  Gore  (262  Fed.  550) 97 T? 

Supreme  Court  Decision  (253  U.  S.  245) ....  ...  • ■ • A'  ' * '-L ‘ 

First  Trust  and  Savings  Bank.  Trustee  under  the  will  of  Otto  Youn^  ^s 

Smietanka,  Collector  (C.  C.  A.,  nn^Cir.,  Oct.  2935 

General  Inspection  & Loading  Co.:  U.  S.  ys.  (192  LyjL^223)^.  

General  Inspection  & Loading  Company:  U.  S.  vs.  (204  Fed.  657) 2027 

Gill:  Elliot  National  Bank  vs.  (218  Fed.  600) 

Gore:  Evans,  vs.  (262  Fed.  550) 9719 

Supreme  Court  Decision  (253  U.  S.  245) 

Gould  vs.  Gould  (245  U.  S.  151). ’ T Tofc  '7Q9^ 1906 

Grand  Rapids  & Indiana  Railway  Company  vs  Doyle  (245  7^2) 

Grand  Raoids  & Indiana  Railway  Company;  U.  S.  vs  (239  Fed.  153) 2043 

Gulf  Oil  Corporation  vs.  Lewellyn:  Example  of  procedure 

U.  S.  Supreme  Court  Decision  (248  U.  S.  71). 

Haiku  Sugar  Co.  et  al.  vs.  Johnstone  (249  Fed.  103) 

Heller,  Hirsh  & Co.:  In  re  (258  Fed.  208) 

Jackson  vs.  Smietanka  (U.  S.  District  Court  )(i.  D.  2960) q 

Jacobs  and  Davies  (Inc.)  vs.  Anderson  (228  Fed.  505).. a nripr.nn 

Jewelers  Safety  Fund  Society  vs.  Lowe,  Collector:  Same  vs.  Anderson, 

Collector  (T.  D.  3078) 

lohnstone:  Flaiku  Sugar  Co.  et  al.  vs.  (249  Fed.  103) 

Kirkendall:  Markle  et  al.  vs.  (267  Fed.  498) 3018 

Kohlhamer  vs.  Smietanka  (239  Fed.  408). ^ 

Lawrence  vs.  Wardell  (U.  S.  District  Court)  (T.  D.  3102) t ’94,68 

Lederer:  De  Ganay  vs.  (250  U.  S.  376) ‘/Ico’f ' V 088 

Lederer:  Penn  Mutual  Life  Insurance  Co.  vs.  (258  Fed.  81) 

Supreme  Court  Decision  (253  U.  S.  523). . . ... . . * ’ 

Lederer:  Philadelphia,  Harrisburg  5c  Pittsburgh  Railroad  Company  vs.  (242 

Fed.  492) 

Lederer  vs.  Stockton  (266  Fed.  676) ^ * 

Income  Tax. 

Supplementary  Page  107. 


TABLE  OF  CASES. — Concluded. 


Paragraph 

Lewellyn:  Gulf  Oil  Corporation  vs.  (Example  of  procedure) 2189 

U.  S.  Supreme  Court  Decision  (248  U.  S.  71) • - • * • • 

Lowe:  Cohen  vs.  (234  Fed.  474).  • * • -^96,  1353 

Loomis  vs.  Wattles  (266  Fed.  876) ^ ...  ‘ • • • * 

Lowe:  Jewelers  Safety  Fund  Society  vs.  (T.  D.  3078) 2960 

Lowe:  Southern  Pacific  Company  vs.  (247  U.  S.  330) .2380 

Lynch  vs.  Hornby  (247  U.  S.  339) 

Lynch  vs.  Turrish  (247  U.  S.  221) ; ’ V^-  -j,'  * oao 

McCoach:  Baldwin  Locomotive  Works  vs.  (221  ^9) 960 

McHatton:  U.  S.  vs.  (U.  S.  District  Court)  (T.  D.  3043) 2770 

Macomber  vs.  Eisner  (Jan.  23,  1919).  . 

:'■  Supreme  Court  decision  (252  U.  S.  189) . V 

Mail.&  Newspaper  Transportation  Company  vs  Anderson  (234  Fed.  590).  .2184 
M^lley  vs.  Alvah  Crocker,  et  al..  Trustees  (249  U.  S.  223). . .............  .239| 

Marlon  Hotel  Company:  Urquhart  vs.  (194  S.  W.  1) .............  

Markle  et  al.  vs.  Kirkendall  (267  Fed.  498) . . . ...  v.  3_ 

Maryland  Casualty  Company  vs.  United  States  (251  U.  S.  342) 2517 

Mohawk  Mining  Co.:  Weiss  vs.  (264  Fed.  502)  . . . 2668 

Nashville,  Chattanooga  & St.  Louis  Railway:  U.  S.  vs.  (249  Fed.  678) 2050 

National  Bank  of  Commerce  in  St.  Louis  vs.  Allen  (223  Fed-  '172) 1258 

Oregon-Washington  R.  & Nav.  Co.:  U.  S.  vs.  (251  Fed.  211) 

Osbdrn:  Dodge  vs.  (240  U.  S.  118) - - • i • -llfl 

Peabody  vs.  Eisner  (247  U.  S.  347) s . s ........  

Peck  vs.  Lowe  (247  U.  S.  165) }UQr'y  o\\"  ' orr 

Penn  Mutual  Life  Insurance  Co.  vs.  Lederer  (258  Fed.  81).... 988 

Supreme  Court  Decision  (253  U.  S.  523) •••••••  y iiool  ’ ’ooni 

Philadelphia,  Harrisburg  & Pittsburgh  R R.  Co.  vs.  Lederer  (242  Fed.  492) . .2203 
Pittaro:  U.  S.  vs.  (U.  S.  District  Court).  (T.  D.  2874) 2104 

'''■aVcSS'c'r,  SiS.  DVdiio.-  it;  d:  ;»« 

R°I^a!  and^D^R.^R.^Co.  vs.  U.^S.  (*U.  S.  Supreme  Court,  Nov.  22,  1920).  .3014 
Skinner:  U.  P.  Coal  Co.  vs.  (U.  S.  Supreme  Court,  March  22,  1920)  ..  . .2651 

Smietanka:  First  Trust  and  Savings  Bank,  Trustee  under  the  will  of  Otto 

Young,  vs.  (C.  C.  A.,  7th  Circ.,  Oct.  1920  Term) 2935 

Smietanka:  Jackson  vs.  (U.  S.  District  Court).  T.  D.  2960) * 242l 

Smietanka:  Kohlhamer  vs.  (239  Fed.  408) . . . . . .^. . * 2175 

Southern  Pacific  Company  vs.  Lowe  (247  U.  S.  o30) ^380 

Stanton  vs.  Baltic  Mining  Co.  (240  U.  S.  103) 2297 

Stockton:  Lederer  vs.  (266  Fed.  676) 2985 

Thorne  vs.  Anderson  (240  U.  S.  115) 

Towne  vs.  Eisner  (245  U.  S.  418) 

Turrish:  Lynch  vs.  (247  U.  S.  221)....  . . ...  . . . 

Tyee  Realty  Company  vs.  Anderson  (240  U.  S.  115)  . . . . . .2290 

Union  Hollywood  Water  Company  vs.  Carter  (238  Fed.  329)  . 727,  1205 

U.  P.  Coal  Co.  vs  Skinner  (U.  S.  Supreme  Court,  March  22,  1920) 2651 

U.  P.  Railroad  Company:  Brushaber  vs.  (240  U.  S.  1).. 2260 

U.  S.:  Chicago  & Alton  Railroad  Co.  vs.  (53  C.  of  C.  41) 955 

U.  S.  vs.  General  Inspection  & Loading  Co.  (192  Fed.  223)  . • • • 1^°1 

U.  S.  vs.  General  Inspection  & Loading  Company  (204  1- ed.  657) 202/ 

U.  S.  vs.  Grand  Rapids  & Indiana  Railway  Company  (239  Fed.  153) 2043 

U.  S.  vs.  McHatton  (U.  S.  District  Court)  (T.  D.  3043). 2760 

U.  S.:  Maryland  Casualty  Company  vs.  (251  U.  S.  342).  ......  2517 

U;  S.  vs.  Nashville,  Chattanooga  & St.  Louis  Railway  (249  Fed.  678) 2050 

Ul  S.  vs.  Oregon-Washington  R.  & Nav.  Co.  (251  Fed.  211) 944 

U.  S.  vs.  Pittaro  (U.  S.  District  Court)  (T.  D.  2874). • * • * 

U.  S.:  R.  I.  A.  and  L.  R.  R.  Co.  vs.  (U.  S.  Supreme  Court,  Nov.  22,  1920).3014 

Urquhart  vs.  Marlon  Hotel  Company  (194  S.  W.  1) 1^32 

Waddell:  Loomis  vs.  (266  Fed.  876) 

Walsh:  Brewster  vs.  (U.  S.  D.  C.,  Dec.  16,  1920) 3021 

Wardell:  Cryan  vs.  (263  Fed.  248) 

Warden*.  Lawrence  vs.  (U.  S.  Dist.  Court)  (T.  D.  3102) 3066 

Weiss  vs.  Mohawk  Mining  Co.  (264  Fed.  502) 2oo 

Income  Tax 

Supplementary  Page  108. 


7-1-20. 


RUNNING  TABLE  OF  CONTENTS. 

PART  11—1920. 

(Page  433  (^2420)  et  aeq.) 

Regulations,  Special  Rulings,  Decisions,  etc.,  Issued  since  December  22,  1919. 


T.  D. 

Date 

Subject  Paragraph 

Special 

Nov. 

18, 

1919 

Proceeds  of  insurance  policies  paid  to  partner- 
ships on  death  of  insured  are  exempt 

2420 

2959] 

Jan. 

5, 

1920 

(Distilled  spirits  and  wines.) 

2960 

« 

7, 

When  income  taxable — Court  decision 

2421 

2961 

7, 

it 

Inspection  of  returns. 

2427 

2962 

7, 

it 

P'urnishing  copies  of  returns  and  the  inspection 
of  returns 

2450 

2963 

12, 

it 

Art.  1568,  Reg.  45,  amended. — Determination  of 
g gain  or  loss  from  subsequent  sale  of  stock  and 
securities  received  in  exchange  on  reorganiza- 
tion, merger  or  consolidation 

2479 

2964 

14, 

a 

(Admissions — War  Tax  Service.) 

Special 

Apr. 

5, 

1919 

Taxable  and  exempt  status  of  War  Finance  Cor- 
poration bond  interest  with  the  law  provision 

2480 

Special 

Nov.  21, 

Dividends  received  from  foreign  corporations 
subject  to  income  tax  are  exempt  from  the  tax 
on  corporations  as  well  as  from  normal  tax  on 
individuals 

2482 

Special 

Jan. 

7, 

1920 

Excise  taxes  on  sales  imposed  on  the  manufac- 
turer, producer,  or  importer,  not  deductible  by 
consumers 

2484 

Special 

Jan. 

5, 

Manner  of  determining  gain  or  loss  on  the  assign- 
ment of  a life  insurance  policy  to  the  writing 
company 

2485 

Special 

Dec. 

13, 

1919 

A discussion  of  a “reasonable  allowance  for 
salaries” 

2489 

Special 

Jan. 

19, 

1920 

Returns  in  respect  of  money  and  other  property 
of  enemies  surrendered  to  the  Alien  Property 
Custodian 

2497 

2965 

a 

29, 

it 

(Excise  Taxes. — War  Tax  Service.) 

Special 

€i 

21, 

it 

Procedure  when  foreign  item  is  presented  with- 
out ownership  certificate  and  owner  is  unknown 

2498 

2966 

Feb. 

4, 

it 

Art.  251,  Reg.  45,  amended.' — Determination  of 
I?:''  amount  of  gift  for  purposes  of  the  deduction 
1'^  on  account  of  contributions  where  the  gift 
is  other  than  money 2499, 

2516 

2967 

<( 

4, 

it 

i^rt.  367,  Reg.  45,  amended. — On  the  use  of  sub- 
stitute certificates 

2500 

Special 

3, 

ti 

On  the  use  of  Form  1001-B  generally  and  its  use 
for  prior  years  during  which  there  w^as  statutory 
provision  for  personal  exemption  to  non-resi- 
dent aliens 

2501 

2968 

it 

4, 

tt 

(Oleomargarine.) 

2969 

it 

4, 

it 

Art.  375,  Reg.  45,  amended. — Ownership  certi- 
ficates: Alien  property  custodian 

Amended  returns  in  connection  with  changes  in 
accounting  methods 

2503 

Special 

it 

6, 

it 

2504 

2970 

it 

4, 

it 

Art.  307,  Reg.  45,  amended.^ — When  nonresident 
alien  individual  entitled  to  personal  exemption 

2505 

2971 

it 

4, 

it 

Art.  1563,  Reg.  45,  amended. — ^Method  of  deter- 
mining gain  or  loss  on  exchange  of  property.  . . 

2506 

2972 

tt 

7, 

a 

Art.  141,  Reg.  45,  amended. — Deductible  and 
nondeductible  losses 

2507 

2973 

it 

9, 

tt 

Instructions  relative  to  acceptance  of  Treasury 
Certificates  of  Indebtedness 

2508 

2974 

it 

9. 

it 

(Admissions  and  Dues. — War  Tax  Service.) 

2975 

ti 

11, 

it 

(Admissions  and  Dues. — War  Tax  Service.) 

Income  Tax. 

Supplementary  Page  109, 


RUNNING  TABLE  OF  CONTENTS.— Contmued. 

PART  11—1920. 


(Page  433  S,^'2420)  et  seqj 

Regulatioas,  Special  Rulings,  Decisions,  etc.,  Issued  since  December  22,  1919. 


T.  D. 

Date 

2976 

Feb. 

11,  1920 

2977 

1L  “ 

2978 

4t 

11,  “ 

2979  ^ 

11, 

Decision 

Jan. 

12,  “ 

Special 

Feb. 

16, 

(i 

2980 

it 

IL 

(( 

2981 

18, 

€i 

Special 

<C 

19, 

ii 

2982 

Jan. 

20, 

(C 

2983 

« 

3, 

it 

2984 

Feb. 

25, 

€t 

2985 

Jan. 

16, 

ti 

2986 

Feb. 

5, 

tt 

2987 

Mar. 

1, 

ti 

Special 

July 

21, 

1919 

2988 

Mar. 

3, 

1920 

2989 

3, 

tt 

Mim. 

ti 

5, 

it 

2990  ^ 

5, 

ti 

Decision 

C€ 

8, 

it 

M 2429 

a 

10, 

«« 

2991 

ta 

13, 

tt 

2992 

a 

20, 

U 

Decision 

22, 

<< 

2993 

u 

22, 

ti 

Special 

6, 

it 

2994 

U 

24, 

it 

M.2436 

u 

12, 

tt 

2995 

« 

24, 

it 

2996 

<( 

24, 

it 

Special 

— 

it 

2997  . 

April 

1, 

it 

2998 

<i 

10, 

ti 

2999 

10, 

it 

3000 

iC 

10, 

it 

3001 

15, 

tt 

Sabjecc  ^ Paragraph 

(Estate  Tax. — War  Tax  Service.) 

Art.  251,  Reg.  45,  ame.nded. — Charitable  con- 
tributions  ; 2516 

(Utilities  and  Insurance. — War  Tax  Service.) 

(Capital  Stock  Tax. — War  Tax  Service.) 

(Acts  of  1909  and  1913.)  Insurance  compaaieg; 
Premiums  collected  by  agents  but  not  trans- 
mitted to  the  company  during  the  taxable 
year;  “net  addition  to  reserve  funds”;  “re- 
leased reserve”  as  taxable  income;  a question 

as  to  the  Statute  of  Limitations 2517 

What  constitutes  the  “date  of  the  tax  return” 
in  connection  with  conditional  additional 

exemptions  of  Liberty  Bond  interest 2558 

(Compensation  of  storekeeper-gaugers.) 

(Special  occupations  taxes. — War  Tax  Service.) 

On  the  deduction  of  the  Alabama  State  Income 

Tax  for  Federal  Tax  purposes 2561 

(Reg.  34,  Revised. — Withdrawal  of  oleomar- 
garine, etc.,  for  use  of  the  United  States.) 

(Reg.  59. — Special  taxes  on  occupations. — War 
Tax  Service.) 

(Decision.— Unlav<?ful  searches  and  seizures.) 

(Reg.  60.  Intoxicating  Liquors.) 

(Reg.  61.  Industrial  and  denatured  alcohol.) 

Art.  347,  Reg.  4S,  added. — Estates  and  trusts 


which  cannot  be  treated  as  a unit 2563 

Status  of  board  and  lodging  furnished  seamen. . . 2568 
Returns  by  fiduciaries  for  nonresident  alien  bene- 

eficiaries 2569 

(Excise  Tax. — War  Tax  Service.) 

Extension  of  time  for  the  filing  of  returns  by  cor- 
porations to  May  15,  1920;  tentative  returns; 

payment  of  first  instalment 2570 

(Soft  drinks  at  fountains,  etc.) 

U.  S,  Supreme  Court. — The  opinions  in  the 
Macomber  vs.  Eisner  stock  dividend  case. ....  2575 
Credit  and  refund  claims  on  account  of  taxes  paid 

on  stock  dividends 2644 

(Office  procedure  in  connection  with  sales  taxes.) 

Art.  33,  Reg.  45,  amended. — Compensation  paid 

other  than  in  cash 2650 

U.  S.  Suprtme  Court.  Act  of  Oct.  3,  1913.^  Profits 
earned  in  1912  but  distributed  as  cash  dividends 

in  1913  are  taxable  income  of  1913 . 2651 

(The  manufacture,  removal,  and  registry  of  stills) 
Excise  and  stamp  taxes  are  deductible  by  the  one 

only  against  whom  such  taxes  are  levied. 2652 

(Automobile  bodies — War  Tax  Service.) 

Further  instructions  relative  to  overpayments  of 

of  taxes  on  stock  dividends. 2652 

(Utilities. — War  Tax  Service.) 

(Administrative  accounting.) 

Depreciation  of  fruit  trees  and  the  computation 

of  deductible  loss  in  event  of  death 2665 

(Excise  taxes. — War  Tax  Service.) 

Art.  251,  Reg.  45,  amended. — Charitable  contri- 
butions   2666 

(Excise  Tax. — War  Tax  Service.) 


(Priority  of  Federal  Taxes.— Lower  court  decision.) 
Court  Mecision.  No  depletion  allowance  to 

lessees  under  the  Act  of  1916 2668 


Income  Tax. 

Supplementary  Page  110. 


12-8-20. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 
PART  11—1920. 


(Page  433  ( *112420)  et  seq.) 


Reguktions,  Special  Rulings,  Decisions,  etc..  Issued  since  December  22,  1919. 


T.  D.  Date 

Decision  Dec.  23,  1919 
3002  Apr.  20,  1920 

Special  “ 17,  “ 


Special 

u 

15, 

a 

Special 

u 

20, 

u 

Decision 

u 

19, 

u 

3003 

u 

21, 

u 

3004 

u 

21, 

a 

3005 

a 

22, 

u 

3006 

u 

22, 

u 

3007 

u 

22, 

u 

3008 

a 

22, 

u 

3009 

u 

22, 

u 

3010 

u 

26, 

a 

3011 

« 

26, 

a 

3012 

May 

3, 

a 

3013 

u 

3, 

u 

3014 

u 

3, 

u 

3015 

u 

3, 

u 

3016 

a 

3, 

u 

3017 

m 

3, 

M 

Decision 

Feb. 

2, 

« 

Special 

May 

5, 

« 

3018 

a 

18, 

u 

3019 

a 

18, 

u 

Special 

« 

17, 

u 

3020 

3021 

a 

u 

19, 

26, 

u 

3022 

u 

26, 

u 

3023 

tt 

27, 

u 

3024 

June 

2, 

u 

3025 

a 

2, 

a 

3026 

a 

2, 

a 

3027 

a 

2, 

u 

3028 

« 

2, 

a 

Law 

tt 

5, 

It 

Decision 

tt 

tt 

Subject  Paragraph 

Salaries  of  United  States  judges 2669,  2713 

(Stamp  taxes. — War  Tax  Service.) 

Purchase  and  sale  of  acceptances  on  behalf  of 
foreign  corporations  having  no  office  or  place 

of  business  in  the  United  States  2670 

Continued  use  of  1919  ownership  certificates 2671 

Isolated  sales  of  real  and  personal  property  on 
the  installment  or  deferred  payment  plan  . 2672 

Act  of  Oct.  3,  1913. — Dividends  paid  by  mutual 

insurance  companies  2673 

(Munition  Manufacturer’s  Tax. — Decision  of 

Court.) 

(Corporation  Excise  Tax. — Decision  of  Court. — 

Act  of  Aug.  5,  1909.) 

(Transportation  tax. — War  Tax  Service.) 

(Corporation  excise  tax. — Decision  of  Court. — 

Act  of  Aug.  5,  1909.) 

(Inheritance  taxes. — Decision  of  Court. — Act  of 
June  13,  1898.) 

(Succession  taxes. — Decision  of  Court. — Act  of 


June  13,  1898.) 

(Capital  Stock  Tax. — War  Tax  Service.) 

Reprint  of  the  opinion  in  the  Macomber  vs. 

Eisner  case 2691 

Art.  1585  (a),  Reg. 45  added. — Inventories  of  live- 
stock raisers  and  other  farmers  2692 

(Industrial  alcohol.) 

Reprint  of  the  opinion  in  the  Maryland  Casualty 
Company  vs.  United  States  Case,  ^2517 2694 


(Stamp  Taxes. — War  Tax  Service.) 

(Excise  Tax. — War  Tax  Service.) 

(Office  procedure  in  connection  with  sales  taxes: 
extension  of  T.  D.  2991.) 

(War  Excess  Profits  Tax  (Act  of  1917). — War 


Tax  Service.) 

Act  of  Sept.  8,  1916. — Building  erected  on  leased 

ground  by  lessee  as  income  to  lessor 2695 

Manner  of  adjusting  corrected  tax  liability  over 

a period  of  prior  years 2702 

Art.  368,  Reg.  45,  amended. — Interest  coupons 

without  ownership  certificates 2703 

Art.  294,  Reg.  45,  amended. — Premiums  on 

business  Insurance 2704 

Basis  for  determination  of  gain  or  loss  on  sale 


of  securities  by  a committee  for  an  incompetent  2705 
(Narcotic  Law.) 

(Oleomargarine.) 

(Transportation  Tax. — War  Tax  Service.) 

(Physicians  prescriptions  for  intoxicating  liquor.) 

Art.  1585  (b),  Reg.  45,  added. — Inventories  of  lum- 
ber manufacturers 2706 

(Oleomargarine.) 

(Alcohol  in  bond.) 

(Estate  Tax. — War  Tax  Service.) 

Art.  385,  Reg.  45,  revised. — Countries  which  do  or 

do  not  satisfy  the  similar  credit  requirements 2711 

Special  exemption  granted  to  owners  of  vessels 
documented  under  the  laws  of  the  United 
States  and  built  prior  to  January  1,  1914,  on 


the  proceeds  of  the  sale  thereof 2712 

Salaries  of  United  States  judges 2713 


Income  Tax. 

Supplementary  Page  111. 


T.  D. 

3029 

3030 


3031 

3032 

3033 

3034 

3035 

3036 

3037 


June 


3038^ 

Special 


3039 

3040 


Date 
9,  1920 

9.  “ 


12 

21, 

21, 

21, 

21, 

21. 

22, 

10, 


2763 


2766 


2764 


“ 21, 

Mayl25, 


RUWFIRG  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 

(Page  433  (112420)  ct  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  December  22,  1919. 

Subject  Paragraph 

Decision  of  Court— Act  of  1913— Losses  incurred 

outside  of  one’s  principal  regular  business.  . . . 2754 
Art.  1078  (a),  Reg.  45,  added.— Foreign  items 
presented  for  collection  unaccompanied  by 

ownership  certificates ^ ; • • 2751 

Art.  1078,  Reg.  45,  amended. — Ownership  certifi- 
cates for  foreign  items 2750 

Art.  26,  Reg.  45,  amended. — Change  in  account- 
ing period..^ 

(Intoxicating  liquor.) 

(Narcotics.) 

Qndustrial  alcohol.)  c • \ 

(Tax  on  pawnbrokers. — War  Tax  Service.) 

Reprint  of  the  Supreme  Court  decision  on  salaries 

of  United  States  judges 

(Narcotics.) 

Substitution  by  collecting  agent  of  proper  certi- 
ficate for  improper  form  accompanying  item 

presented  for  collection ,*;  * ‘A.*  ‘ ' 

(Reg.  50,  Rev.— Capital  Stock  Tax.— War  Tax 
Service.) 

(Reg.  51,  Rev. — Toilet  and  Medicinal  prepara: 

tions. — War  Tax  Service.) 

(Intoxicating  liquor.)  ^ 

Procedure  relative  to  service  of  warrants  oi  dis- 
traint  ; • • 

Decision  of  Court — Act  of  1916 — Retrospective 
law— Following  assets  of  corporation  into 
hands  of  stockholders  for  purpose  of  collecting 

the  tax 

Adjustment  of  accounts  and  amended^  returns  on 
account  of  refund  by  Government  in  one  year 
of  excess  taxes  (duties)  paid  in  prior  years  and 
reflected  in  cost  of  goods  sold:  Attorney’s  fees 

in  connection  with  refund 2775 

Foreign  corporations  or  countries  having  fiscal 
or  paying  agents  in  this  country  under  no  obli- 
gation to  withhold  on  their  tax-free-covenant 
bond  interest  in  case  of  domestic  or  resident 

foreign  corporation  bondholders ; • • 

Changeintaxableyear;  Loss  in  inventory:  Opin- 
ion of  Attorney-General ' V * 

Basis  in  determining  profit  (or  loss,  if  properly  de- 
ductible) on  dispostion  of  homestead  by 

original  entry  man ^ ; • • 

Deductibility  of  losses  sustained  in  connection 
./ith  wagering  on  horse  races:  Winnings  to  be 

included  in  gross  incorne ........ . . 

Attorney-General’s  opinion:  Salaries  of  U.  S. 

judges  appointed  subsequent  to  Feb.  24,  1919.  2813 
Attorney-General’s  opinion:  Returns  by  Alien 
Property  Custodian:  Satisfaction  of  tax  lia- 
bility on  income  on  account  of  property  taken 

over  by  him 2814 

(Intoxicating  liquors.)  , t •/  t 

Reprint  of  opinion  in  The  Penn  Mutual  Life  In- 
surance Company  case  (112673) 2815 

Substitution  by  collecting  agent  of  proper  cer- 
tificate for  improper  form  accompanying  item 
presented  for  collection 2816 


3041 

July 

1,  “ 

3042 

(( 

1,  “ 

3043 

ii 

2.  “ 

Special 

June  26,  “ 

Special 

July 

7,  “ 

3044 

9,  “ 

Special 

8,  “ 

Special 

(< 

12,  “ 

Opinion 

June 

21,  “ 

Opinion 

(C 

21,  “ 

3045 

Jujy 

3046 

21,  “ 

Special 

July 

14,  1920 

2767 


2770 


2780 


2804 


2807 


Income  Tax. 

Supplementary  Page  112. 


12-8-20. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 

(Page  433  (112420)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  December  22,  1919. 


T,  D. 

Date 

Special 

July  21,  1920 

Special 

“ 17,  “ 

3047 

“ 24,  “ 

3048 

« 24,  “ 

3049 

“ 27,  “ 

3050 

“ 27,  “ 

3051 

“ 27,  “ 

3052 

Aug.  4,  “ 

Special 

“ 9,  “ 

3053 

“ 9,  “ 

3054 

July  24,  “ 

3055 

Aug.  12,  “ 

3056 

“ 14,  “ 

3057 

“ 16,  “ 

3058 

“ 16,  “ 

3059 

“ 16,  “ 

Special 

“ 17,  “ 

3060 

“ 25, 

3061 

“ 27,  “ 

Special 

“ 23,  “ 

3062 

Sept.  1,  “ 

3063 

Aug.  30,  “ 

3064 

Sept.  4,  “ 

3065 

“ 4 “ 

3066 

“ 4’  “ 

3067 

“ 4’  “ 

3068 

“ 4,  “ 

3069 

“ 4,  “ 

Subject  Paragraph 

Interest  on  tax-free  covenant  bonds  sold  between 
interest  dates:  Ov/nership  certificates;  with- 
holding; credit  for  tax  withheld;  account- 
ing for  interest  income 2817 

Sale  of  personal  property  on  installment  plan; 
Procedure  on  changing  method  of  reporting 

profit  to  an  apportioning  basis 2822 

Art.  1584,  Reg.  45,  amended. — Inventories  at 

market 2834 

(Corporation  excise  tax — Decision  of  court — 

Act  of  Aug.  5,  1909.) 

Compensation  of  Federal  judges — Opinion  of 

Attorney-General 2835 

Decision  of  Court — Deductibility  of  New  York 

inheritance  tax  in  computing  income  of  legatee  2848 

(War  Excess  Profits  Tax — War  Tax  Service.) 

Stock  dividends:  Some  applications  of  the 
Eisner  v.  Macomber  decision,  in  the  deter- 


mination of  the  taxability  of  dividends 2841 

Taxability  of  discount  on  State  and  municipal 

obligations 2872 

Art.  549,  Reg.  45,  amended. — Gross  income  of 

life  insurance  companies 2873 

(Reg.  57,  Revised, — Utilities  Taxes. — War  Tax 
Service.) 

Art.  214,  Reg.  45,  amended. — Computation  of 
depletion  allowance  for  combined  holdings  of 

oil  and  gas  wells 2874 

Art.  541  (a),  Reg.  45,  added. — Creation  of 
sinking  fund  by  corporation  to  secure  the 

payment  of  its  indebtedness 2876 

(Corporation  excise  tax. — Decision  of  Court. — 

Act  of  Aug.  5,  1909.) 

Art.  1588,  Reg.  45,  added. — Inventories  of  retail 

dry  goods  dealers 2877 

Art,  1545,  1545,  and  1642,  Reg.  45,  revoked,  and 

Art.  1547,  Reg.  45,  amended. — Stock  dividends  2884 
Interest  on  bonds  sold  between  interest  dates. — 
Ownership  certificates. — Ruling  of  July  21, 

1920,  held  in  abeyance 2889 

Art.  385,  Reg.  45,  amended. — Countries  which 
door  do  not  satisfy  the  similar  credit  require- 
ment of  Section  222  (a)  (3) 2892 

Art.  166,  Reg.  45,  amended. — Modification  of 

method  of  computing  depreciation 2894 

Suggested  method  of  identifying  dividend  checks 
of  resident  foreign  corporations  as  domestic 

items 2895 

Arts.  48,  109  and  164,  Reg.  45,  amended. — In- 
come to  lessors  of  improvements  made  on 

real  estate  by  lessees 2858 

(Reg.  58,  Rev.  Issuance  of  insurance  policies — 

^ War  Tax  Service.) 

Art.  211,  Reg.  45,  amended. — Computation  of 

allowance  for  depletion  of  gas  wells 2902 

(Excise  Tax — War  Tax  Service.) 

(Excise  Tax — War  Tax  Service.) 

(Tax  on  beverages.) 

(Federal  prohibition.) 

(Federal  prohibition.) 


Supplementary  Page  113 


12-8-20. 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 

(Page  433  (1f2420)  et  seq.). 

Regulations,  Special  Rulings,  Decisions,  etc.,  Issued  since  December  22,  1919. 


T.  D. 

Date 

3070 

Sept.  10,  1920 

3071 

18,  “ 

3072 

(i 

24,  “ 

3073 

a 

27,  “ 

3074 

Oct. 

1,  “ 

Decision 

(f 

if 

3075 

5,  “ 

3076 

fS 

5,  “ 

3077 

if 

7,  “ 

3078 

ii 

13,  “ 

3079 

if 

15,  “ 

3080 

if 

19,  “ 

3081 

if 

19,  “ 

3082 

if 

20,  “ 

3083 

if 

22,  “ 

3084 

it 

26,  “ 

3085 

i( 

27,  “ 

3086 

if 

27,  “ 

3087 

if 

28,  “ 

Special 

if 

28,  “ 

3038 

“ 30, 

if 

Special 

“ 30, 

if 

3089 

Nov.  6, 

if 

Decision  July  28, 

if 

Deeision 

July  8, 

if 

3090 

Nov.  13, 

if 

3091 

“ 15, 

it 

3092 

“ 16, 

if 

3093^ 

“ 16, 

it 

Special 

0/ct.  26, 

ft 

Special 

Nov.  3, 

if 

Decision 

Nov.  22, 

if 

3094 

Oct.  26,  “ 

3095 

Nov.  27, 

3096 

Nov.  27,  “ 

Subject  Paragraph 

(Reg.  56,  Rev.,  Motion  Picture  Films.— War 
Tax  Service.) 

Return  of  income  by  husband  and  wife  from 

community  property 2903 

(Distillery  warehouses.) 

(Tobacco.) 

(Tobacco.) 

Liability  to  tax  of  estates  and  trusts  as  entities 


under  the  Act  of  1913 2935 

(Tax  on  brokers. — War  Tax  Service.) 

Arts.  228,  229,  230,  231,  233,  234  and  235,  Reg. 

45,  amended,  and  Arts.  236  and  237  added. — 

Depletion  of  timber 2944 

(Commercial  cider.) 

A mutual  fire  insurance  society  is  a fire  insurance 
company  under  the  1909  and  1913  Acts. 
(Captions  of  court  decision) 29^ 


(Federal  prohibition.) 

(Excess  Profits  Tax  (1917  Act). — War  Tax 
Service.) 

(Denatured  alcohol.) 

Art.  42,  Reg.  45,  amended. — Sale  of  personal 

property  on  installment  plan 2963 

(Federal  prohibition.) 

(Federal  prohibition.) 

(Narcotic  law.) 

(Federal  prohibition.) 

(Excise  taxes. — Wool  rugs. — War  Tax  Service.) 

Relief  to  debtor  corporation  on  account  excess 
liability  for  tax  on  tax-free-covenant  bond 
interest  due  to  compulsory  filing  of  Form 
1000  by  partnership  with  member  having 
personal  exemption  in  excess  of  taxable 

income 296i 

(Estate  Tax. — Power  of  Appointment. — War 
Tax  Service.) 

Taxability  of  discount  on  interest-bearing 

municipal  bonds 2971 

Allowance  for  depletion  in  case  of  discovery  by 
the  taxpayer  subsequent  to  March  1,  1913. — 
Apportionment  between  lessor  and  lessee... . 2972 

Conditions  precedent  to  bringing  suit  for  recov- 
ery of  taxes  paid  on  second  assessment 29S2 

Ultimate  beneficiary  of  a trust  subject  to  tax  at 

an  entity  being  a person  exempt  from  tax.. ..  2985 

(Federal  proh  bition.) 

(Stamp  taxes. — War  fax  Service.) 

(Intoxicating  liquor.) 

(Stamp  taxes;  “calls.” — War  Tax  Service.) 
Attorney-General’s  opinion:  National  banks 

may  not  lawfully  declare  stock  dividends. . . . 2993 

Attorney-General’s  opinion:  whether  certain  for- 
eign corporations  and  partnerships  derive 
income  from  sources  within  the  United  States  2994 
U.  S.  Supreme  Court:  Claim  for  refund  essential 
to  right  to  sue  for  recovery  of  taxes  though 
claim  for  abatement  has  been  filed  and  ad- 
versely acted  on 3014 

(Reg.  55,  Rev. — War  Tax  Service.) 

(Denaturing  plants.) 

(Demurrage  charges. — War  Tax  Service.) 


The  foregoing  Regulations,  T.  D’s,  and  Special  Matters  are  indexed. 


Income  Tax. 
Supplementary  Page  114. 


11-30-20. 


2944 


296® 


2965 


RUNNING  TABLE  OF  CONTENTS.— Continued. 

PART  11—1920. 

(Page  433  (^2420)  et  seq.). 

Regulations,  Special  Rulings,  Decisions,  etc..  Issued  since  December  22,  1910. 

Subject  Paragraph 

(Reg.  56,  Rev.,  Motion  Picture  Films. — War 
Tax  Service.) 

Return  of  income  husband  and  wife  from 

community  property 2903 

(Distillery  warehouses.) 

(Tobacco.) 

(Tobacco.) 

Liability  to  tax  of  estates  and  trusts  as  entities 

under  the  Act  of  1913 2935 

(Tax  on  brokers. — War  Tax  Service.) 

Arts.  228,  229,  230,  231,  233,  234  and  235,  Reg. 

45,  amended,  and  Arts.  236  and  237  added. — 

Depletion  of  timber 

(Commercial  cider.) 

A mutual  fire  insurance  society  is  a fire  insurance 
company  under  the  1909  and  1913  Acts. 

(Captions  of  court  decision) 

(Federal  prohibition.) 

(Excess  Profits  Tax  (1917  Act). — War  Tax 
Service.) 

(Denatured  alcohol.) 

Art.  42,  Reg.  45,  amended. — Sale  of  personal 

property  on  installment  plan 

(Federal  prohibition.) 

(Federal  prohibition.) 

(Narcotic  law.) 

(Federal  prohibition.) 

(Excise  taxes. — Wool  rugs. — War  Tax  Service.) 

Relief  to  debtor  corporation  on  account  excess 
liability  for  tax  on  tax-free-covenant  bond 
interest  due  to  compulsory  filing  of  Form 
1000  by  partnership  with  member  having 
personal  exemption  in  excess  of  taxable 

income 

(Estate  Tax. — Power  of  Appointment. — War 
Tax  Service.) 

Taxability  of  discount  on  interest-bearing 

municipal  bonds 2971 

Allowance  for  depletion  in  case  of  discovery  by 
the  taxpayer  subsequent  to  March  1,  1913. — 
Apportionment  between  lessor  and  lessee., . . 
Conditions  precedent  to  bringing  suit  for  recov- 
ery of  taxes  paid  on  second  assessment 

Ultimate  beneficiary  of  a trust  subject  to  tax  as 
an  entity  being  a person  exempt  from  tax..  .. 
(Federal  proh  bition.) 

(Stamp  taxes. — War  fax  Service.) 

(Intoxicating  liquor.) 

(Stamp  taxes;  “calls.” — War  Tax  Service.) 
Attorney-General’s  opinion;  National  banks 
may  not  lawfully  declare  stock  dividends. . . . 
Attorney-General’s  opinion:  whether  certain  for- 
eign corporations  and  partnerships  derive 
income  from  sources  within  the  United  States 
U.  S.  Supreme  Court;  Claim  for  refund  essential 
to  right  to  sue  for  recovery  of  taxes  though 
claim  for  abatement  has  been  filed  and  ad- 
versely acted  on 3014 

(Reg.  55,  Rev. — War  Tax  Service.) 

(Denaturing  plants.) 

(Demurrage  charges. — War  Tax  Service.) 


T.  D. 

Date 

3070^ 

Sept.  10, 

192( 

3071 

18, 

it 

3072 

“ 24, 

it 

3073 

“ 27, 

it 

3074  ^ 

Oct.  1, 

it 

Decision 

Oct. 

it 

3075 

Oct.  5, 

it 

3076 

“ 5, 

it 

3077 

“ 7, 

a 

3078 

“ 13, 

a 

3079 

“i  15, 

it 

3080 

“ 19, 

it 

3081 

“ 19, 

it 

3082 

“ 20, 

a 

3083 

“ 22, 

it 

3084 

“ 26, 

a 

3085 

“ 27, 

a 

3086 

“ 27, 

it 

3087 

“ 28, 

a 

Special 

“ 28, 

3038 

“ 30, 

a 

Special 

“ 30, 

“ 

3089 

Nov.  6, 

it 

Decision  July  28, 

a 

Decision  July  8, 

it 

3090 

Nov.  13, 

3091 

“ 15, 

a 

3092 

“ 16, 

a 

3093^ 

“ 16, 

Special 

Oct.  26, 

Special 

Nov.  3, 

cc 

Decision 

Nov.  22, 

- 

3094 

Oct.  26, 

a 

3095 

Nov.  27, 

it 

3096 

Nov.  27, 

a 

2966 


2972 


2982 


2985 


2993 


2994 


Income  Tax. 
Supplementary  Page  115. 


.01-08-11 


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ia-ai-so'i 


RUNNING  TABLE  OF  CONTENTS. 

PART  11—1920. 

(Page  433  (^2420)  et  seq.) 

Regulations,  Special  Rulings,  Decisions,  etc.,  issued  since  December  22,  1919. 

All  previous  matters  are  fully  indexed. 


The  matters  listed  below  are  not  indexed. 


T.  D. 

Date 

Subject  Paragraph 

Decision  Sept.  27, 

1920 

Collection  by  distraint,  from  members  of  suc- 
cessor partnership,  of  tax  assessed  ex  parte 
against  long  since  dissolved  corporation 

3018 

3097 

Dec. 

6, 

(industrial  alcohol.) 

3098 

7, 

(National  prohibition.) 

3099 

(C 

10, 

fi 

(Tobacco.) 

3100 

cc 

11, 

a 

(Stamp  Taxes — War  Tax  Service.) 

3101 

C( 

16, 

a 

Art.  292,  Reg.  45,  Rev.,  amended.  Traveling  ex- 
penses  

Correction  of  above 

3019 

3065 

Decision 

(C 

16, 

a 

Increase  in  value  of  capital  assets  when  realized 
by  sale  or  other  disposition,  by  one  not  a trader 
or  dealer  therein  is  not  income,  and  hence  is 
not  taxable  as  such 

3021 

3102 

24, 

Decision.  Liability  to  tax  of  U.  S.  citizens  resi- 
dent in  Philippines 

3066 

3103 

u 

27, 

(Stamp  Taxes. — War  Tax  Service.) 

3104 

<< 

27, 

a 

Art.  1585  (a),  Reg.  45,  Rev.,  amended. — Inven- 
tories of  live  stock  dealers  and  other  farmers.. 

3068 

3105 

27, 

iC 

Contributions  to  Red  Cross,  etc.,  by  corporations 
in  1918:  statements  to  be  filed  and  additional 
tax  to  be  paid  at  once  to  avoid  5%  penalty, 
with  interest 

3069 

3106 

iC 

29, 

(National  prohibition.) 

3107 

C( 

29, 

a 

Arts.  201-208,  210,  215-217,  219,  222  and  224, 
Reg.  45,  Rev.,  amended. — Depletion  (1921 
Service). 

3108 

ii 

30, 

a 

Art.  1582,  Reg.  45,  Rev.,  amended. — Valuation  of 
inventories 

3072 

3109 

30, 

iC 

Art.  1584,  Reg.  45,  Rev.,  amended. — Inventories 
at  market 

3073 

END  OF  1920  SERVICE. 


Income  Tax. 

Supplementary  Page  115. 


t6  suctAt  ornmnja 

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’■'.5 


12-8-20 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX 

TO  THE  LAW  AND  REGULATIONS. 

Revised  to  December  6,  1920, 

THE  REFERENCES  ARE  TO  PARAGRAPH  NUMBERS. 


COMMENT. 

This  index  is  very  comprehensive  and  it  is  believed  that  by  means  of  it  any 
subject  embraced  within  the  Service  may  readily  be  found.  It  is  to  be  borne 
in  mind,  however,  that  in  many  cases  immediately  succeeding  paragraphs  of  a 
group  treat  of  the  same  phase  of  an  identic  subject.  Obviously  a reference  to 
the  first  paragraph  of  such  a group  is  all  that  is  necessary.  To  do  more  would 
serve  no  helpful  purpose,  and  would,  indeed,  prove  confusing. 


Atotement  claims:  (See  “Claims  for  abatement”  at  2,  Index  Page  6.) 

Absence:  agent  may  make  return . . 674 

Absence  as  cause  for  extension  of  time  for  filing  returns.  .1847,  1850 

Acceptances:  purchase  and  sale  of  on  account  of  nonresident  foreign  corporations.  .2670 

Accident  expenses:  reimbursement  of . . 1127 

Accident  Insurance,  combined  with  life  and  health  in'one  policy . .994 
Accident  insurance:  proceeds  of  exempt.  .1111,  1114 
Accounting:  charging  off  depreciation. . 1363 
Closing  depreciation  account . . 1371 
Accounting  for  gross  income.  .807,  945,  2421 
Accounting  methods  regularly  employed  . .778 
Changing.  .784 

Amended  returns.  .785,  2504 
Asking  authority  to  change.  .786 
In  case  of  installment  sales.  .914,  2822,  2965 
In  case  of  inventories . .1092 
If  no  accounting  method  has  been  employed.  779/798 
No  specified  method  prescribed  . .788 
To  reflect  true  income.  ,779,  788 
Accounting  period:  annual . .778,  793 
Change  of.  .800,  2763,  2784 
Returns . .1855 
Net  Income  based  on.  .778 
Nom-esident  aliens.  .1541 

Accounts  current:  withholding  tax  on  Interest  on.  .1612,  1620 
Accounts  payable  as  Income  determining  factor.  .771 
Accounts  receivable  as  Income  determining  factor.  .771 
Accounts  receivable  purchased:  uncollectible,  as  bad  debts..  1319 
Accrual  of  Income. . 783 

As  opposed  to  constructive  receipt.  ,946 
Accrual  to  cash  receipts  basis:  change.. 784,  786 
“Accrued  or  paid”.  .781 

Accruing  foreign  taxes  to  be  paid.  .1283-1301,  2711,  2892,  2960 
Active  service  in  military' or  naval  forces  defined  . . 1176 
Acts:  constitutionality  of 

Act  of  1909:  recent  cases.  .2317,  2517 

Act  of  1913.  .2242;  also,  2517,  2651,  2673,  2815,  2935,  2960,  2985 
Acts  of  1916,  1917,*1918.  .2241,  2575,  2713,  2766,  2813,  2835 
Acts  of  1916,  of  1917,  of  1918:  entitling  of.  .773 
Actual  vs.  record  owner  of  stock.  .1777 
Ad  valorem  penalties. . 1885,  1886,  1894,  1896,  2011,  2015 
Collected  as  part  of  the  tax.  . 1897,  1903 
Additional  tax  (See  “Surtax”  at  1,  Index  Page  35.) 

Additional  tax  payments.  .1882,  1889 

Foreign  taxes:  overestimating  accruals ..  1288,  1294 
Additions  and  betterments.  .791,  1188,  1200 

Made  by  lessee  or  tenant.  .939,  1231,  2899,  2900 
Administration  of  act.  .2227 
Administration  of  estate.  .637 

Amounts  paid  or  cr'Kiited  to  legatees  during.  .646,  658 
“Period  of  administration”  defined.  .638 
Administrative  provisions  of  law,  general,  are  applicable. . 1998 
Administrator  (See  “Executor”  at  2,  Index  Page  14.) 

Advertising  expenses. . 1198,  1227 

Other  than  trade  advertising.  .1227 
Sale  of  Liberty  Bonds,  etc. . 1227 
Advisory  Tax  Board.  .2211 
Dissolved..  2228 
Personnel.  .2216 
Procedure  before . . 2222 
Submission  of  questions  to.  .2221 

Succeeded  by  Committee  on  Review  and  Appeal . . 2224 


Index  Page  1, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Affiliated  corporations.  .1835 

Assessment  of  tax.  .1824,  1829 

“By  the  same  interests”  defined.  .1838,  1841 

Change  in  ownership  during  year.  .1842 

Consolidated  returns  of . .1821,  1827 

Credit  for  taxes  by  foreign  corporation . . 1843 

Differing  fiscal  years.  .1832 

Foreign  corporations . . 1843 

Government  contracts:  chief  income  from  . . 1822  . 

Public  utilities . . 1833,  1839 
Specific  credit  of  $2,000. . 1826 
Agency:  personal  service  corporation . . 685 
Borrowed  capital . . 692 
Agent  vs.  fiduciary . . 672 

Agent  for  nonresident  alien:  what  constitutes.  .1679 
Return  by.  .1579  . 

Agent  having  entire  charge  of  property  is  not  a fiduciary . . 672 
Agent  may  make  return.  .673 
For  nonresident  alien. . 1679 
Agents,  Income  tax:  duties  of . . 1868 
Leaves  of  absence . . 2239 

Agents  of  foreign  corporations.  .1018,  1019,  1044,  1048 

Agricultural  colleges:  compensation  of  certain  employees ..  llo7  iic-r 

Agricultural  experiment  stations:  compensation  of  certain  employees,  .llo/ 
Agricultural  organizations.  .740,  756 
Clubs.. 766 

Contributions  to  fairs.  .1228 
Alabama  state  income  tax.  .2561 
Alaska  included  in  “United  States” . . 1009 
Income  accruing  to ..  1164 

Interest  on  obligations.  .1130,  1135,  2872,  2971 
Alaska:  salaries  of  Government  employees.  .803,  2813,  2835 
Allen  property  custodian.  .1854,  2814 

Bond  interest. . 1699,  2497,  2503,  2814 

All  aliens  presumed  to  be  nonresidents . . 623,  1599 
Change  of  status.  .1608 

Leaving  the  country . .2073  , , ^ . 

Nonresident  (See  “Nonresident  aliens”  at  1,  Index  Page  2o.) 

Resident:  what  income  of,  is  liable  to  tax.  .611 

Credit  for  certain  foreign  taxes.  .1286,  2711,  2892 
Form  1078  should  be  filed  by  all.  .624 
Loss  of  residence.  .622,  1611 
Proof  of  residence.  .621,  623,  1600 
Reliance  on  Form  1078  by  employer.  .523,  625,  1600 
Seamen.  .519,  1647  coo 

Status  on  last  day  of  taxable  year  governs  as  to  tax  liability  - 
Withholding  against,  unless  proof  of  residence  is  furnished . . 52o 
Alimony. . 1129,  1186  . , i i iobo 

Allocation  of  assessments  for  construction  and  maintenance  of  local  benents. . izxjz 
Allocation  of  credits  to  particular  income. . 628 
Allocation  of  deductions  to  particular  source . . 489,'],629 
Foreign  corporations. . 1033,  1035 
Nonresident  aliens. . 1562 

Allocation  of  different  rates  to  particular  income.  .628 
Allocation  of  dividends  to  particular  years. . 816.  866 
Application  of  different  rates.  .631,  860,  2884 
Allocation  of  income  to  particular  source.  .489 
Allowance  for  amortization.  . 1376 
Redetermination  of.  .1395 

Allowance  for  credit  for  foreign  taxes  paid  or  accrued.  .1293,  1301,  2 <11,  2 9- 
Allowances  to  one’s  own  chil^en. . 1186 
Ambassadors,  foreign.  .1163 
Amended  returns: 

Amortization  claims . . 1382 

Banks  on  account  of  method  of  handling  discounts.  .787 
Change  in  accounting  methods.  .785,  2504^ 

Claims  in  abeyance:  recent  unsettled  conditions.  .946 
Depreciation:  failure  to  take.  .1373 
Losses  discovered  in  later  year.  .792 
Not  required  in  certain  cases.  .1994,  2702 
Refunded  taxes  paid  in  prior  years. . 1263, '2775 
Time  to  be  allowed  to  make. .1992 
Amortization.  .1376 

Allowances  received,  as  gross  Income.  .891 
Bonds  of  corporation:  sinking  fund.  .902,  1374 
Reserve;  investment  of  in  corporation’s  own  bonds . .902.  lo 
Amortization  allowances:  special,  due  to  war.  .1376 
Amended  returns . . 1382 
Computation  of . . 1393 
Costs  In  connection  with.  .1386 
Depreciation  vs.  amortization. . 1385 
Information  to  be  furnished  by  taxpayer.  .1390 
R^etermination  of..  1377,  1896 
Salvage  values  ^.1887,  1888 
Seo^  of  provision . , 188^ 


Index  Page  2, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Analysis  of  credit  for  taxes  paid  or  accrued . . 1290 
Ancillary  administrator;  return  liability ..  699 
Annual  and  periodical  payments.  .1596,  1736 
Annual  report  of  Commissioner . . 1987 
Annuities. . 938,  1113,  1114 

Charged  upon  devised  land.  .938 
Apartment  house,  depreciation  of:  court  case.  .1355 
Appeal  from  collector’s  Increase  of  taxable  income  on  return.  .1866 
Application  to  change  method  of  accounting.  .786 
Apportionment  of  deductions: 

Foreign  corporations.  .1033,  1035 
Nonresident  aliens. . 1562 
Appreciation  in  value  of  assets 

Accrual  of  income;  appreciation  is  not.  .783 
Decedent  prior  to  death . . 686 

Executor’s  custody  prior  to  distribution  in  kind . . 686 
.Architect’s  services  as  part  of  cost  of  building.^  1190 
Army  and  navy: 

Compensation . . 1172 
Equipment.  .1186 
Return  requirements. . 1176 
Salaries  paid  by  employers  during  war. . 1226 
Army  contract  surgeons;  compensation.  .1176 
Army  Nurse  Corps,  Female;  compensation ..  1172 
Assessment  districts  special:  exempt  interest.  .1135,  2872,  2971 
Assessment  insurance  companies.  .1003 
Assessment  of  the  tax.  .2030 

Continuing  effect  of  prior  laws . . 2032 
First  installment.  .2013 
Five  year  limitation . . 2029 
Notice  of  may  be  sent  by  mail.  .2027 
Three  year  limitation.  .2035 

Second  assessments:  abatement  and  refund.  .2176 
Suits  to  restrain  assessment  or  collection  of  the  tax.  .2164 
Assessments  for  local  benefits.  .1260 
Assessments  on  stock.  .950,  1190 

Assignees  operating  business  or  property  of  a corporation. . 1785 
Associated  charities:  gifts  to . . 1457 
Associations  are  “corporations”.  .729,  730 
Common-law  trusts.  .730,  732,  2399 
Partnership  vs.  association.  .731 
Trust  vs.  association.  .732 

Attorney’s  fees  in  connection  with  refunds,  deduction.  .2779 
Attorney  General’s  opinions 

Alien  Property  Custodian:  Returns  by.  .2814 
Change  in  taxable  year:  loss  in  inventory.  .2784 
Community  property . .2903 

Depletion  in  case  of  discovery  by  taxpayer  subsequent  to  March  1,  1913.  .2972,v' 
Dividends  paid  in  Liberty  bonds ..  829  , tt  o onrw.. 

Foreign  corporations  and  partnerships:  income  frona  U.  S.  .2994 
Liberty  bonds  as  medium  for  payment  of  debt  or  dividend . . 829 
National  banks  may  not  lawfully  declare  stock  dividends.  .2993 
Salaries  of  U.  S.  judges.  .2813  2835 
Attorney-in-fact  is  not  a “fiduciary” . . 672 
Auction:  personal  service  corporation.  .585 
Automobile  insurance  companies,  mutual.  .767 


Automobile  license  fees. . 1253 

Automobiles,  excise  tax  on  sale  of  deductibility . . 1254,  2484,  2652 

Automobiles:  farmers.. 897 

Automobiles,  pleasure:  depreciation.  .1331 

Automobiles:  statement  as  to  estimated  life  of . . 1354 

Bad  debts: 

Compromises. . 1321 
Deductibility . . 1316 
Examples  of.  .1319 
Recoveries.  .945 
Worthless  mortgages.  .1320 

Worthless  securities.  .1323  , . ..  , tt  a 

Baltimore:  place  for  filing  returns  if  no  domicile  or  place  of  business  in  the  u.  a. 
Bank,  Federal  Land.  .752 

Income  from  securities  of.  .1131,  1136 
Bank,  Federal  Reserve:  dividends  on  stock.  .1137 
Bank,  Federal  Reserve  Member:  dividends  on  stock.  .1137 
Bank  Interest:  credited  but  not  drawn.  .947 
Bank  Interest:  withholding  tax  on.  .1612,  1620 
Bank  stock:  taxes  paid  by  bank.  .1256 
Bankruptcy  in  connection  with  bad  debts.  .1318,  1319 
Bankruptcy:  liability  of  trustee  in.  .701,  968-970,  1785 
Banks  as  dealers  in  securities. . 1096 
Banks:  depositors’  guaranty  fund.  .1207 
Banks:  deposits;  deductibility  of  interest  paid.  .1238 
Banks,  domestic  and  foreign;  debit  and  credit  items.  .1621 
Banks;  method  of  handling  discounts.  .787 
Banks,  national:  assessments  on  stockholders  of.  .1190 
Stock  dividends  not  lawful . .2993 


1812,  1814 


Index  Page  3. 


CONSULT  THE  PINE  SHEET. 

GENERAL  _INDEX. 

The  references  are  to  paragraph  numbers. 


Banks,  private:  association,  partnership  or  corporation.  .731,  842 

Income  from;  if  considered  corporations,  is  considered  dividend.  .842 
Income  from,  if  not  considered  corporation . . 894 
Banks:  proper  employment  of  income.  .607 
Banks:  shrinkage  in  value  of  securities.  .1308,  1346 
Beneficiaries 

Accident  insurance.  .1111,  1114 
Credits  allowed  to . . 666 

Depreciation  sustained  by  estate  or  trust.  .657,  2563 
Health  insurance.  .1111,  1114 

Income  and  excess  profits  taxes  paid  to  other  jurisdictions  by  estates  or  trusts.  .1287 
Income  received  through  fiduciaries  subject  to  surtax.  .492 
Incl  uding  dividends  , . 4a4 

Income,  tax-paid  by  fiduciaries,  is  free  of  tax  when  received  by  beneficiaries.  .643 

Legatees;  amounts  credited  to,  during  administration.  ,646,  663 

Liability  for  direct  payment  of  tax.  .645 

Liability  for  payment  of  tax  follows  the  estate.  .643 

Life  insurance. . 1112,  1114,  1197 

Corporation  beneficiaries.  .809,  1197 
Partnership  beneficiaries  . . 2420 

Policies  insuring  lives  of  officers  or  employees.  .1191,  1197 
Losses  sustained  by  estate  or  trust.  .656,  2563 
Nonresident  alien;  return  by  fiduciary.  .681,  705,  2569 
Taxable  year  differing  from  that  of  estate  or  trust.  .648 

Ultimate  beneficiary  exempt  from  tax:  effect  of  on  taxability  of  income  accruing  to 
estate.  .642,  2985 

United  States  bond  exemptions.  .1167 
Bequests. . 1128 

No  deductible  loss  to  decedent.  .2507 
Valuing  on  subsequent  disposition.  .1074 
Betterments.  .791,  1188,  1200 
BUI  in  equity:  enforcement  of  tax  lien.  .2072 
Board  and  lodging  as  part  of  salary . . 889,  2568 
Information  at  the  source.  .1739,  2568 
Board  in  lieu  of  cash  rent.  .940 
Boards  of  trade.  .746,  764 

. Bond  in  connection  with  credit  for  accrued  foreign  taxes.  .1288,  1293,  1301 

Bond  in  connection  with  estabilshmept  of  replacement  fund  with  compensation  for  lossef^ . .942 

Bondboiders:  assessments  on,  by  agreement.  .1190 

Bonds,  amortizing:  sinking  funds.  .902,  1374 

Bonds  and  stock  received  in  exchange  for  property.  .1079,  2506 

Bonds:  assignee  assuming  payment  of . .1669 

Bonds,  District  of  Columbia:  interest  on.  .1130,  1135,  2872,  2971 

Bonds  eschanged  for  stock.  .1077-1079,  2506 

Bonds;  foreign  owned:  usufruct  of ..  1678 

Bonds,  municipal:  interest  on.  .1130,  1135,  2872,  2971 

Bonds,  penal:  U.  S.  bonds  in  lieu  of  sureties . . 1500 

Bonds  purchased  between  interest  dates.  .903,  1677,  2817,  2889 

Bonds:  sale  and  retirement  of,  by  corporation.  .951,  1244,  1675 

Bonds:  shrinkage  in  value  of  . . 1308,  1323,  1343 

Bonds,  State:  interest  on.  .1130,  1135,  2872,  2971 

Bonds:  tax-free  covenant  (See  “Tax-free  covenant  bonds”  at  1,  Index  Page  37.) 

Bonds,  United  States  (See  “United  States  bonds”  at  1,  Index  Page  38.) 

Bonds,  War  Finance  Corporation:  interest  on.  .1133,  1138,  2480 
Bonds,  worthless:  as  bad  debts.  .1323 

Bonus  common  stuck  In  connection  with  sale  of  preferred  or  bonds.  .911 
Bonus  stock  to  employees.  .889,  946,  1222 
Bonuses  generaUy  . .87  6,  1219 
Bookkeeping 

Change  of  method  . .784,  786  ' - 

In  case  of  installment  sales . . 914,  2822,  2965  ’ ' 

In  case  ol  inventories . 1092,  2877 
If  no  books  have  been  kept.  .779,  793 
Method:  no  specified  method  prescribed.  .788 
Taxable  year.  .780,  794 

Change  of.  .800,  2763,  2784 
To  reflect  true  income.  .778,  788 
Books  and  papers:  examination  of  . . 1877,  1999 
Books  and  papers  to  be  maintained  . . 1998 
Borrowed  capital:  personal  service  corporations.  .692 

Branch  banks  or  offices:  licensee  for  the  collection  of  foreign  items.  .1760 
Branch  offices  to  make  returns  of  information.  .1738 
Branches  of  foreign  Insurance  companies  in  the  United  States.  .1018 
Brewers:  obsolescence  ol  good  will,  trade  brands,  etc..  1333 
Brokerage:  peisonal  service  corporation.  .686,  686 
Borrow^  capital . .692 

Brokers  acting  for  nonresident  aliens. . 1579,  1680 
Brokers:  returns^of  information  by ..  1764 

Building  and  land  acquired  lor  lump  sum:  depreciation. . 1348.  1349,  2901  • ' 

Building  and  loan  associ&tiuns:  domestic.  .743,  768 
Amounts  credited  to  shareholders.  .947 
Maturity  ol  shares.  .947 

Building:  architect’s  services  as  part  ol  cost  of . .1190 


Index  Page  4. 


CONSULT  tHE  PINE  SHEEt. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Buildings:  demolition  or  razing  of . . 1306 
Buildings:  expeaditures  for  new  1188 

By  lessees  on  leased  ground.  .1231,  2695,  2899,  2900 
Buildings:  loss  of  useful  value  of.  .1307 
buildings:  statement  as  to  estimated  life  ol . .1354 
Buildings:  voluntary  removal  of ..  1306 
Business:  income  from.  .804,  891 
Business  insurance:  premiums  on.  .1198,  1203,  2704 
Reserves  in  lieu  of  insurance  1204 
Business  (cagnes.  746.,  764 
Business  losses.  .1303,  2507 

Losses  outside  of  business.  .1310,  1311,  2807  (Court  case  under  1913  Act.  .2754) 

Business  of  a corporation:  scope.  .506 
Calendar  year  as  basis  for  computing  income.  .793 
Change  to  fiscal.  .800,  2763 
Change  from  fiscal.  .2763,  2784 
California  Irrigation  assessment^dlsiricts . . 1262 
California  special  partnerships.  .734 
Campaign  contributions . . 1227 

Canadian  corporation:  apportionment  of  deductions.  .1036 
Canceled  contracts;  recent  unsettled  conditions.  .945 
Cancellation  of  debt.  .943 

Capital  assets,  sale  of:  income  from.  .804,  809,  966,  1244 
f Capital  expenditures  vs.  expense.  .790,  1188,  1190 

Construction  and  maintenance  of  local  benefits:  assessments ..  1262 
Estates  and  trusts.  .1190 

Excessive  compensation  to  oflBcers,  etc . . 1211,  1215 
Farmers . .897 

Items  to  be  depreciated.  .790,  1188,  1189,  1200 
Mines.  .1430 

Organization  fees  of  a corporation.  .1192 
Professional  men.  .1201 
Public  utilities.  .1205 
Railroads. . 1206 

Sale  of  its  capital  stock  by  a corporation.  .1193 
Timber.  .1442,  2949 
Wells:  oil  and  gas.  .1431 
Capital:  interest  on,  is  not  deductible.  .1243 
Capital  stock:  additional  assessments_on.  .950 
Capital  stock:  exchange  of  property  for.  .1080 
Capital  stock:  expenses  incident  to  sale  of.  .1193 
Capital  stock:  sale  of,  at  premium  or  discount.  .949,  1194,  1244 
Capital  stock  tax.  .1254 

Additional  for  year  ending  June  30,  1918.  .1255 
Carrying  charges:  real  estate.  .1064 
Car. trust  certificates:  interest  paid  on.  .1239 
Trustees:  status  of . .1240 

Cases  (See  Table  of  Cases  on  Supplementary  Page  107.) 

Supreme  Court  cases.  .2241,  2242:  also,  2517,  2575,  2651,  2673,  2713,  2766,  2813,  2816, 
2835,  3014 

Cash :r gross  income  and  deductions  not  necessarily  “in  cash”.  .780,  810 
Salaries  and  wages . . 889 

Cash  receipts  to  accrual  basis:  change.  .784,  786 
Casualty  losses.  . 1303,  1305,  1311 
‘ Compensated  for:  replacement  fund.  .941,  942 

Cemetery  companies.  .744,  759 
Cent:  fractional  part  of . .2089 
Certificates  of  indebtedness 

Exempt  status  of  interest.  .1139,  1141,  1153  (II) 

Payment  of  taxes  by  means  of.  .2091,  2508 
Certificates  of  ownership  (See  “Ownership  certificates’*  at  1,  Index  Page  26.) 

Chambers  of  commerce.  .746,  764 
Charitable  purposes 

Corporations  organized  for.  .746,  760 

Gifts  on  account  of  (See  “Gifts”  at  2,  Index  Page  18.) 

Charter  money  received  by  nonresident  aliens . . 1546 
Chautanquas.  .761 

Checks,  uncertified:  payment  of  taxes  by  means  of . .2091 
Churches  and  church  funds:  gifts  to..  1453,  1467 
Citizens  defined.. 512 

Leaving  the  country.  .2083 
Residing  abroad.  .612,  616 
Serving  foreign  governments . , 1163 
What  income  of  is  subject  to  tax.  .611 
Citizenship.  .614 

Civic  leagues  or  organizations.  .747,  765 
Claim:  unconditional  on  March  1,  1913..  1177 
^ Claims  for  allowance  of  net  loss. . 1107 
* Claims  for  abatement:  2030,  2115,  2702 
Efiect'on  collection  of  the  tax.  .2119 
Effect  on  interest  on  delayed  tax  payments.  .2012 
Inventory  losses . .1467,  1482 
Rebate  payments . . 1467,  1482 
Second  assessments ..  2176 

Suit  against  U.  S.  may  be  maintained  under  certain  conditions.  .2982,  but  sse  3014 

Index  Page  5. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Claims  for  credU  against  future  installments  ^ 

Foreign  taxes:  underestimated  accruals ..  1288,  1294 

Stock  dividends  under  1913  Act  .21^9  2653,  2842,  2885 

2982,  3014 

0l  return,  ol  prior  year,.  .2121 

Amounts  recovered  by  suit.  .2210 
Foreign  corporation  ..lOM 

Inventory  losses . .1471,  148.S 

Limitation . .2122,  2180  ^ ^ oiqa  2159 

May  be  filed  with  Commissioner  2159 

NOTresideut  alien.:  eaces.  amount,  withheld ..  1679 
Rebate  payments . . 148ii 

Itock'di'riden*  under  1913  Acts  .2132,  2644,  2653,  2842.  288S 

|Sfno*trMtaL\d^K^^^^  Med.  .2177,  2982,  ,014 

» \"eMy'SeTt.-ryufen^ni-lo  S..1467.  1471.  1482 
aalSi  uLettleif:  war  contract,  etc . .94., 

g'.?h»vatra«^^^ 

aubm  pleasure,  recreation,  etc.  .748,  7bt> 

&a'errS|et7r  aliens.  ,519 

Collection  Districts.  .Sup.  Pages  101-106 

a&'otfnmriM  Eerenue. 

Sllefmrs  rma“f  fni.dr‘,”toough  dfetric^ . . 1867 

To  renort  violations  of  law . . gJUbo  , goo 

Collec?ors^to  render  assistance  and  to  answer  questions . . 1 
Colleges:  compensation  of  certain  employees ..  1167 
Commerce:  income  from . 804 

Commercial  men’s  associations.  .7,^3  771 

Commercial  net  Income  as  statutory  net  income  . .771 
SmS7on  business:  pcmonal  service  cnrporation  . .686 
Borrowed  capital . . 592 
Commissioner  defined.  .504 

^uthorize§°to  make  rules  and  regulation . . 2227 
Certifying  as  to  unreasonable  accumulation  of  profits . . 4 , 

gSrnffil^iSSirmiking^  by.  .1986 

Return.. 703  . 

Committee  on  Review  and  Appeal.  .2224 
Common  law  partnerships ..  606 
Common  law  Receivers  701 
Common  law  trusts.  .730,  632,  2399 

Common  stock  as  bonus.  .911  „ j -f.  oqn3 

Community  property  of  husband  and  wife.  .290o 

^ Wka;  Governmentemployees..803,  2813,  2835 

Bonuses.  .876,  1219 
Commissions;  executor  s.  .1190, 

Commissions  on  insiirance  Premiums . . 87J,  887 
Commissions  paid:  buying  and  selling  securities ..  1190 
Commissions  paid  salesmen ..  873,  1223 
Credited  but  not  drawn . . 876 
Paid  in  stock . . 1225 
Contingent.  .1212 

gSricl“  Cof;S:  -30vcrnmeut  2813,  2836 

g*:li’i'r.\?r\s”eU”oT,’r2r4.”^^^^^^^ 

Gross  income ..  803,  2813,  2o3d  oqiq  2835 

Hawaii;  government  employees  . 803.  2813,  2835 

Information  at  source.  .1728,  1/35 

Ki“ot  UnTed  StX  Co«t.  .803:  2669,  2713,  2766.  2818,  2886 
‘i?X1;nltr\d  prior  to.  .1177 
Index  Page  6. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Compensation  for  personal  serrices — Concluded. 

Ministers:  fees  paid  to  . .873 

Minors:  allowances  or  wages  to  one’s  own  children.  .Ilob 
Municipal  officers  and  employees.  .1167 
Nonresident  aliens:  earned  abroad ..  1546 
Not  determined  until  completion  of  services.  .873,  874,  2421 
Notarie,s  public:  fees  of ..  1167 
Paid  other  than  in  cash.  .889,  2568,  2650 
Information  at  the  source.  .1739,  2568 
Paid  in  notes . .890 

Paid  in  stock.  .889,  946,  1222,  1225,  2650 
Pensions  . . 87.3,  1226 
Percentage  of  profits . . 873 

President  of  the  United  States.  .803,  2669,  2713,  2766 
Priests;  fees  paid  to . . 873 

Property:  salary  as  part  payment  for.  .1211,  1215 
Public  schoo  J teachers . . 1167 
Quarters,  mileage,  expenses,  per  diem,  etc.  .879 
Reasonable;  to  be  deductible,  must  be.  .1210,  1213,  2489 
Receivers  appointed  by  State  courts;  commissions.  .1167 

Retired  pay  of  Federal  officers.  .873  ^ 

Retiring  allowan'*e.s . .873,  1226 

Soldiers  and  sailors  (Army  and  Navy)  . . 1173 

Salaries  paid  by  employers  during  the  war.  .1226 
State  officers  and  employees . .1167 

Certain  college  and  university  employees.  .1167 
Stockholdings:  based  on ..  1211,  1215 
Tips. .873 

Uncollectible. . 1319  , . , . iooa 

Completed  and  closed  transaction:  exchange  of  property  for  stock  in  corporation  . 1080 
Compromises  of  indebtedness.  . 1321 
Compromises  of  penalties.  .1928 

Computation  of  amortization  claim  . .1393  „„„„  , 

Computation  of  depletion.  .1416,  1417,  1440,  2902,  2944 
Computation  of  depreciation.  .1350,  1359,  1360,  1363,  2894 
Computation  of  net  income.  .780,  783 
Computation  of  surtax . . 486 

In  case  of  sale  of  mine  or  well , . 488 
Computation  of  tax.  .477,  636,  713 
Condemnation  of  real  estate  for  public  purposes . .941 
Replacement  fund  . .941,  942 
Congressmen;  mileage.  . 1187 
Conservator  included  in  term  “fiduciary” . . 670 
Consolidated  returns  of  affiliated  corporations.  .1821 
Foreign  corporations ..  1827,  1843 
Forms  for  making.  .1827^ 

Personal  service  corporations . . 1827 
Underlying  necessity  for.  .1826 
Consolidations:  gain  or  loss  resulting  from  ..  1082 

Profit  or  loss  from  subsequent  sale  of  securities . • ”479 

Constitutionality  of  Act  of  1909  (recent  cases)  . .2317,  2ol7  ocki  oc'tq  oqik 

Constitutionality  of  Act  of  1913:  cases  in  Supreme  Court.  .2242;  also,  2517,  2651,  2673,  2815 
ConstitutioTi^ility  of  Acts  of  1916,  1917,  1918:  cases  in  Supreme  Court.  .2241;  also,  2575,  2713, 
2766 

Construction  of  local  benefits:  assessments  for.  .1262 
Constructive  receipt  of  income.  .783,  946 
As  opposed  to  accrual  of  income.  .946 
By  decedent  prior  to  death . .685 
Commissions  paid  salesmen.  .876 
Consuls,  foreign.  .1163 
Contingent  compensation.  .1212 

Contracts,  canceled:  recent  unsettled  conditions.  .945 
Contracts,  long  term  . .892 

Contracts;  State:  independent  contractors . . 893 
Contracts  to  purchase:  relation  to  inventories.  .2785 
Contributions  (See  “Gifts”  at  2,  Index  Page  18.) 

Co'operativc  associations.  .749,  768 
Dairies . .768 

Co-operative  telephone  companies.  .749,  767 
Co-owners  of  oil  lands.  .736 
Co-owners  of  vessels:  of  other  property,  .736 
Copyrights:  amounts  expended  for  securing.  .1190 
Copyrights:  depreciation  of ..  1332,  1861 
Copyrights:  sale  of.. 912 

Copyrights,  cost  of:  deter  mi  natIon''of  cost  of.  .1861 
Corporations  718 

Advertising:  trade  and  other..  1198,  1227 
Affiliated  corporations ..  1821,  1836 
Assignees  operating  business  or  property.  .1785 
Bonds:  sale  and  retirement  of . .961 
Business  of:  scope.  .606 


Campaign  contributions . . 1227 
C^n'eelUtidn  bf  Indebtedness 


to  or  by  stockholder.  ,948 


Index  Page  7 


CONSULT  THE  PINK  SHEET, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Corporations — Concluded. 

Capital  stock:  sale  of  its  own.  .949,  1193,11244 
Capital  stock  tax:  additional . . 1254, *125  6 
Charitable  contributions.  .1181,  1227 
Consolidated  returns . . 1821 
Consolidations:  profit  or  loss . . 1082 
Credits  against  income.  . 1527 
Credits  against  the  tax.  .646,  1295’ 

Deductions"allowed  (See  “Deductions”  at  1,  Index  Page^lO.) 

Defined  . . 728 

Dissolution:  distributions  on.  .866 
Receiver  or  trustee.  .701,  968 
Dividends  received  are  deductible.  .1325 

Received  from  foreign  corporations  taxable  on  their  net  income.  .2482 
Domestic  corporation  defined  . . 1532 
Employment  of  income  of.  .606 
Excess  profits  taxes  paid  to  the  United  States.  .1529 
Excess  profits  taxes  paid  to  other  jurisdictions.  .645,  1282,  1295 
Exempt  corporations.  .739 

Corporation  owned  by  an  exempt  corporation.  .725 
Information  at  source  to  be  supplied  by.  .1737 
Proof  of.. 754 
Salaries  paid  by.  .878 

Withholding  by.  .1624  , ^ 

Expenses  deductible  or  otherwise  (See  “Expenses”  at  3,  Index  Page  14.) 

Family . . 724 

Foreign  (See  “Fo’rlgn  Corporations”  at  2,  Index  Page  16.) 

Gifts  made  by.  .1181.  1227,  1460 
Gross  Income  of . . 808 

Income  taxes  paid  to  other  jurisdictions.  .645,  1282,  1295 

Income:  what  income  is  taxable.  .720 

Incorporation  fees.  .1192  . 

Insurance  of  employees  (or  officers)  for  benefit  of  corppration..809,  1191,  1196 

Insurance  of  employees  (or  officers)  for  benefit  of  employees.  .889,  983,  1197,  2oovi 

Interest  deductions . . 1232 

Liability  to  tax.  .720 

Limited  partnership  a.s  corporation . .735 

Liquidating.  .968,  1816,  1818,  1819,  2770 

Lobbying  expenses . . 1227 

Losses.  .1304,  2507,  2807 

Mergers;  profit  or  loss . . 1082 

Net  income;  how  computed.  .770 

Organization  expenses . . 1192 

Ownership  certificates . . 1697 

Partnership;  corporations  as  members  of.  .736 

Pension  fund:  contributions  to . . 1226 

Personal  service  corporations  (See  1,  at  Index  Page  27.) 

Persons;  corporations  are  considered ’as . .472 

Preferred  stock;  redemption  of.  .966 

Public  utility  operating  State  owned  property , ,727 

Receiver  for.  .701,  968,  1785 

Reorganizations:  profit  or  loss . . 1082 

Returns  by . . 1778 

Accounting  period  changed.  .1861 
Specific  credit  of  $2,000.  .1531 

Accounting  period  changed . . 1861  . nrmn 

Stockholders:  Assets  distributed  may  be  followed  for  corporation  tax.  ,,2770 
Surtax;  corporations  not  liable  to.  .493 
Tax  on.. 713,  2770 
Taxes  deductible . . 1249 
Taxes  paid  on  stock  for  stockholders.  .1256 
Treasury  stock . .949 
Trustees  in  bankruptcy. . 1786 
Undistributed  profits.  .497 
Tax  under  1917  Act. . 509 

United  States  bonds;  application  of  exemptions  to  stockholders, .1159 

United  States  bonds:  interest  on,  not  subject  to  income  tax . .1528,  1533 
Withholding  at  source’against  domestic  and  foreign  resident;  none.  .1595 
Withholding  at  source  against  nonresident  foreign  corporations.  .1614 
Correction  of  returns.  .1866,  1989 
Cost,  determination  of:  real  estate.  .1064 
Costt^determination  of:  patents  or  copyrights  . .1361 
Cost:  Inventories.  .1092,  1093,  2877 
Cost  of  goods  sold.  .891,  1198  * 

Import  or  tariff  duties . .1264,  2775 
Cost  or  market  Inventories . . 1092,  1094,  2834 
Costumes:  depreciation . . 1881 
Cotton  exchanges:  Incorporated . .764 
Cotton  exchanges  may  not  be  exempt.  .764 
Country  fairs.  .756 

GUti  to  by  certain  corporations . . 1228 


c 


t 


Index  Page  S* 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


1 


Coopons: 

Conatructlve  receipt  of  interest.  .947,  1631 
Exchanged  for  other  property . . 947 
For  funding  bonds . . 1674 
Joint  owners . . 1667 

March  1,  1913:  due  and  payable  prior  to.  .1631 
Matured  but  not  collected.  .947,  1631 
Maturity  dates:  difiFeiing . . 1668 

Ownership  certificates  (See  “Ownership  certificates”  at  1,  Index  Page  26  ) 

Presented  without  ownership  certificates.  .1704,  2498,  2703,  2751 
Purchased  abroad.  .1634 
Withholding  at  source  on  interest . . 1626,  1636 

(See  “Withholding  at  the  source”  at  2,  Index  Page  40.) 

Court  costs:  expenses  of  administration.  .1190 

Court  decisions  (See  Table  of  Cases.  .Sup.  pages  107-108.) 

Coarts,  district:  jurisdiction  of.  .1878 

Credit  for  amounts  withheld  at  source.  .1719,  1722,  2817,  2889 
Foreign  corporations . . 1051 

Credit  for  excess  amounts  paid  on  installment  tax  payments . . 1881 
Cre«t  for  excess  profits  taxes  paid  to  the  United  States . . 1529 

>“come  and  excess  profits  taxes  paid  to  other  jurisdictions.  .1283,  1295,  2711  2892 
Affiliated  domestic  and  foreign  corporations ..  1843 
Analysis  of  credit.  .1290 
Conditions  of  allowance  of  credit . . 1293 
Estates  and  trusts:  beneficiaries  of.  .1287 
Evidence  in  support  of  claim  . . 1289 
Foreign  corporations . . 1042,  1843 
Meaning  of  terms . . 1292 
Partnership:  members  of . .672,  1287 
Personal  service  corporations:  stockholders  of . .600 
Porto  Rico  and  Philippines:  individuals  and  corporations.  .644,  646 
Redetermination  of  tax  when  credit  proves  incorrect . . 1294 
Resident  aliens.  .1286,  2711,  2892 
Underestimated  accruals ..  1294 
Credit  for  taxes.  .1283,  1295,  2711,  2892 
Foreign  corporations . . 1042 
Credits  against  income  for  corporations.  .1627 

Apportioning  on  change  of  accounting  period.  .1861 
Consolidated  returns  of  affiliated  corporations . . 1826 
Foreign  corporations . . 1041,  1633 
Credits  against  income  for  normal  tax.  .1513 
AUocation  of,  to  particular  income.  .628 
Beneficiaries  of  estates  and  trusts . .666 
Dividends . . 1614 


Exception  in  the  ^se  of  dividends  from  certain  Porto  Rican  and  Philippine  cor- 
porations . . 640,  643 

Foreign  corporation  dividends.  .1517,  2482,  2895 
Estates  and  trusts . . 667 
Interest  on  United  States  bonds.  .1616 
Nonresident  aliens.  .1570,  1671 
Allowed  conditionally . .1574 
Partnerships:  members  of . . 671 
Specific  exemption.  .1618 

Surtax:  these  credits  not  applicable  to.  .483,  1516 
Credits  against  installments  still  due.  .2121,  2124 
Stock  dividends  under  1913  Act.  .2129 

Stock  dividends  under  1916,  1917  and  1918  Act.  .2132,'2644,  2653.  2842 
Credits  against  the  tax.  .1283,  1295,  2711,  2892 

Afi^iated  domestic  and  foreign  corporations.  .1843 
Amounts  withheld  at  source.  .1051,  1719,  1722,  2817,  2889 
Foreign  corporations . . 1042 

Credits  against  tax  or  installments  thereof  due.  .2121,  2124 
Foreign  taxes:  underestimated  accruals . . 1288,  1294 
Stock  dividends  under  1913  Act.  .2129 

Stock  dividends  under  1916,  1917  and  1918  Acts.  .2132,  2644,  2663,  2842 
Suit  not  to  te  maintained  unless  claim  for  credit  or  refund  has  been  filed . .2177 
Crop  losses. .898 
Crop  shares . . 896 

Crops  taking  more  than  year  to  produce.  .896.  897 
Customs  duties . . 1264,  2775 

Cyclone  insurance  companies,  mutual.  .749,  767,  2960 
Dairies,  cooperative.  .768 
Damages  paid:  when  deductible.  .792 
Damages  received:  injuries  or  sickness . . 1111,  1114 
Date  of  tax  return  in  connection  with  Liberty  Bond  exemptions.  .2568 
Dealers  in  securities:  inventories.  .1096 
Banka  as.  .1096 
Debtor  defined . . 1663 
Debts,  bad..  1816 
Recoveries.  .946 
Decedent 

Appreciation  In  value  of  assets  prior  to  death . .688 

Basis  of  drtermining  gain  or  loss  on  sale  of  assets  of  estate  of . .686 

Constructive  Receipt  of  ineome  prior  to  death  . .686 


Index  Page  9. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Decedent— Concluded 

Creditor  of:  bad  debts..  13 19 

Death  between  March  1,  1913,  and  October  3,  1913.  .687 
Delay  in  payment  of  tax.  .2011,  2014 
Dividends  declared  prior  to  death.  .685 
Dividends  earned  and  accumulated  during  hisjife..b58 
Interest  accrued  prior  to  death  . .685  _ 

No  deductible  loss  to,  through  divesting  of  property . .2507 
Property  of,  passing  to  executor . .638,  686 
Return  of  income  to  time  of  death . . 684,  699,  1526 

Specific  exemption.  .684,  1526  lArTiAO'v 

Decisions  of  Courts  (See  Table  of  Cases . . Sup.  Pages  „ 

Declaration  of  intention  to  become  citizen:  effect  on  citizenship.  .512 
As  proof  of  residence.  .519  ' 

Declaration  of  dividend  is  not  a distribution . .815 

T)eclarat?oP  of  teriuination  of  taxable  period.  .207o  , * 40  ^ 

bedSon  of  tax  at  the  source  (See  “Withholding  at  the  source  at  2,  Index  Page  40.) 

1 Deductions.  .1179  _ 

Allocation  of  to  particular  source . .489,  629 
N onresident  aliens  .,1562 

Amortization  allowance,  .1376  , , j o77q 

Attorney’s  fees  and  cost  of  collection  of  refund.  .27<y 

Cashf^dSii’ctions  not  necessarily  actual  cash  disbursements ..  780 
Charitable  contributions . . 1447,  2499,  2516,  _2666 

Corporations.  .1181,  i448,  1460,  2499,  2516,  2666 
Other  gifts  by  corporations . . 1227 
Estates  or  trusts.  .652,  2499,  2516,  2666 
Individuals.  .1447,  2499,  2516,  2666 
Partnerships.  .552,  554,  2516,  2666 
Persona’  service  corporations.  .596 

of  wells,  mines,  etc.. 1397,  1482,  1433,  1448,  2950 
DeprematHmj^l328  timber  properties ..  1397,  1482,  1488,  1443,  2950 

Porto  Rican  and  PhiUppine  corporations  . .640,  548 
Foreign  corporation  dividends.  .2482,  2895 
Estates  and  trusts . . 651,  652 
Depreciation.  .657,  2563 

Losses.  .656,  2563  . .,_g„ 

Excess  profits  taxes  paid  to  foreign  countries.  .1281,  1284! 

Expenses.  .1182 
Farmers . . 897-899 

Foreign  corporations.  .1029  lAOQioQf; 

Apportionment  and  allocation  of . .1033,  1035 
Income  solely  from  dividends  and  interest.  .1036 
Foreign  steamship  companies.  .1023,  1024 
Full  credit  for  all  deductions  to  be  taken  .484 
Income  taxes  paid  to  foreign  countries.  .1281,^1282 
Insurance  companies.  .991,  2517,  2673,  2815 
Interest  payments ..  1232 
Inventory  losses,  substantial:  special.  .1467 
Items  not  deductible.  .1184  a,.4- 

Losses . .1303,  2507,  2807,  (Court  case  under  1913  Act . .2754) 

Substantial  inventory  losses:  special.  .146/ 

Nonresident  aliens . . 1561 

Allowed  conditionally.  ,1574 
Rebate  payments:  special ..  1467 
Rents  and  rentals . . 1229 
Salaries.  .1208,  2489 
Taxes . . 1245,  2484,  2652 

Deed  of  trust:  revocable  654  , iRsn 

Deed  of  trust:  trustee  holding  bonds  issued  under.  .1680 

befault  in  installment  or  deferred  Payments  914  927,  93|  937,  2822,  2965 
Deferred  payment  plan  sales  on,  .914,  937,  2672,  2822,  2965 
Deficit  of  one  year:  effect  on  next  year , .792 
Demand  for  tax . .2019 

First  installment.  .2013  ^ 

Dependents:  specific  exemption  on  account  of  .1524 

Depletion  of  mines,.oi  and  gas  wells,  ^im^f  2902,  2944,  29^2 

Charges  to  capital  and  expense ..  1430,  1431,  1442,  2949 
Combined  holdings  of  oil  and  wells  .2874 
Depreciation  of  improvements ..  1397,  1432,  1433,  1443,  295U 
Discovery  after  March  1,  1913.  .1399,  1426,  2972 
Effect  to  be  given  to,  in  computing  gain  or  loss.  .1058,  ldU5 
Forms,  special ..  1435 

Gross  income:  depletion  m connection  with  .891 
Lessor  and  lessee:  apportionment  1401,  1410 
But  not  under  prior  Acts.  .2319,  2668 

Reserve:  dividends  from.  .868 

Reserve:  use  of,  for  retirement  of  bonds.  ,13/5 

Statements,  special ,.  1424,  1425,  1444,  2951  ^ 

Stockholder  may  not  claim . . 1407 
Timber..  1397,  1440,  2944 


Index  Page  10. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Depositors' guaranty  fund.  .1207 

Deposits,  bank:  interest  payments  on,  are  deductible.  .1239 
Deposits,  bank:  withholding  tax  on  interest  on . .1612,  1620 
Dep  reciation  . . 1328 

Amortization  vs.  depreciation.  .1385 
Automobiles . . 1354 

Capital  sum  recoverable  through.  .1348,  2901 

Charging  off  on  books.  .1363 

Closing  depreciation  account.  .1371 

Clothing:  private  and  professional.  .1331 

Copyrights.  .1332,  1361 

Costumes.  .1331 

Court  case.  .1355 

Defined.  .1331 

Drawings ..  1362 

Effect  to  be  given  to  in  computing  gain  or  loss.  .1058,  1305,  2507 

Estate  or  trust:  bearing  on  taxable  income  of  beneficiaries.  .657,  2563 

Expenditures  to  restore  or  prolong  life  of  property.  .791,  1189,  1200 

Farms  and  farmers.  .899,  1354,  2665 

Franchises . . 1332 

Fruit  trees.  .2665 

Furniture  in  home. . 1331 

Good  will ..  1332 

Gross  income:  depreciation  in  relation  to.  .891 
Income  determining  factor.  .771 
Intangible  property . . 1332 

Inventories:  depreciation  does  not  apply  to.  .1331 

Land  apart  from  buildings  thereon.  .1331 

Land  and  buildings  acquired  for  lump  sum.  .1348,  1349,  2901 

Improvements:  mines,  wells,  timber ..  1401,  1432,  1433,  1443,  2950 
Under  prior  Acts.  .2319,  2668 
New  buildings  built  on  leased  ground.  .1231,  2900 
Licenses . . 1332 
Machinery.  .1354 

Market  values:  change  in.  .1359,  2894 

Method  of  computing. . 1350,  1359,  1360,  1363,  2894 

Mines:  improvements.  .1397,  1432 

Models . . 1362 

Patents.  .1332.  1361 

Permanent  discontinuation  of  use  of  property.  .1371 
Property  subject  to.  .1331 
Rates  for  computing.  .1352 
Rental  value:  loss  of  or  increase  of.  .1369,  2894 
Reserve;  dividends  from  . .868 
Residence:  taxpayer's  own . . 1331 
Secret  processes  or  formulae . . 1332 
Securities . . 1308,  1323,  1343 
Dealers  in . . 1095 

Shifts:  working  plant  in  two  or  more ..  1358 

Stock  in  trade:  depreciation  does  not  apply  to.  .1331 

Timber:  improvements ..  1397,  1443,  2950 

Trade  brands  . . 1332 

Trademarks . . 1332 

Trees.  .2665 

Unearned  increment . . 1351 
Useful  value:  loss  of.  .1307 
Wells,  oil  and  gas:  improvements. . 1397,  1433 
Descent:  amounts  received  by.  .1074,  1128 
No  deductible  loss  to  decedent.  .2507 
Devise:  amounts  received  by ..  1074,  1128 
No  deductible  loss  to  decedent.  .2507 
Devisee:  annuity  payments  charged  upon  devised  land.. 938 
Discount:  bonds  issued  or  retired  at.  .951,  1244 
Discoont:  capital  stock  sold  at.. 949,  1244 
Discount  for  cash:  income  and  capital  account.  .909 
Discount:  method  of  handling  by  banks.  .787 
Discount:  municipal  interest-bearing  bonds.  .2872,  2971 
Discounted  notes:  accounting  for  proceeds.  .890 
Discovery  of  mine  or  oil  or  gas  well . .1399,  1426,  2972 
Disposition  (See  “Gain  or  Loss”  at  1,  Index  Page  18.) 

Dissoiution  of  corporation:  receiver  or  trustee.  ,968 
Distribution  of  a.sset3.  .866 
Returns.. 969,  1816,  1818,  1819,  2770 
Dissolution  of  partnership , . 1089 

Distillers:  obsolescence  of  good  will,  trade  brands  etc.  .1333 
Distraint:  collection  of  tax  by ,.  2071 

Property  subject  to,  for  tax;  nonresident  aliens.  .1582 
Warrants  of.  .2016,  2767 

District  of  Columbia  Included  in  “United  States”  . .1009 
Bonds  of:  interest  on.  .1130,  1135,  2872,  2971 
Income  accruing  to . . 1164 
Salaries  of  employees  of.  .803 
Ditch  companies,  mutual.  .749,  767 


Index  Page  11 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Dividends..  811 

Actual  vs.  record  owner . . 1777 
As  income.  .805,  816 

For  year  in  which  paid ..  816  _ 

Appreciation  in  value  of  capital  assets;  capitalizing . .818,  8^4,  848 
Bank  stock:  taxes  paid  for  stockholders  by  bank  . . 1256 
Beneficiaries;  dividends  received  through  fiduciaries  . .494 
Compensation:  dividend  in  lieu  of.  .1211,  1216 
Constructive  receipt  of . .947 

By  decedent  prior  to  death.  .686 
Credit  for  normal  tax . . 1514 

Beneficiaries . .665  . 

Dividends  from  certain  corporations  taxed  in  Porto  Rico  or  the  Philippines 
excepted  . . 640,  643 
Estates  and  trusts . . 667 
Foreign  corporation  dividends  . .1617,  2895 
Nonresident  aliens.  .1671 
Not  applicable  to  surtax.  .483 
Partnerships:  members  of  . .671 

Personal  service  corporations:  stockholders  oi . .600,  1514 
Decedent:  constructive  receipt  of  prior  to  death  . .685 
Decedent:  earned  and  accumulated  during  life  of.  .658 
Declaration  of,  is  not  distribution  of.  .816 
Deductible  by  corporations  . 1326 

Foreign  corporation  dividends  1617,  2482,  2895 
Depreciation  or  depletion  reserve:  dividends  from  . .868 
Dissolution:  distribution  in . . 866 
Federal  Farm  Land  Bank  stock  1136 
Federal  Reserve  Bank  stock.  .1137 
Federal  Reserve  Member  Bank  stock.  .1137 
Foreign  corporations:  dividends  of.  .1617,  2482,  2895 
Foreign  corporations:  income  of.  .1025 
Deductions  allowed . . 1036 
Foreign  corporations:  stock  dividends  of.  .864 
Forgiveness  of  indebtedness  equivalent  to  dividend  . .943 
Good  will:  capitalizing . . 818.  824,  848 
Information  at  the  source.  .1744,  1762,  2895 
Interest  on  indebtedness  to  purchase  or  carry.  .1237 
Leased  line  certificates  910 
Liberty  bonds  distributed  as  dividends.  .826,  829 
Valuing  the  dividend  . .840 
Life  insurance  policies;  paid  up.  .938,  1119 
Other  wise..  11 13,  1118 
Liquidating  dividends.  .866 
March  1,  1913:  accrued  prior  to.  .1177,  2651 
March  1,  1913:  from  prior  earnings.  .826 
March  1,  1913:  from  subsequent  earnings.  .812 
National  Farm  Loan  Associations.  .1136 

Nonresident  aliens;  dividends  as  income.  .1643,  1645,  1646 
Personal  service  corporation:  when  distribution  by,  is  a dividend.  .813 
Private  banks:  income  from  as  dividends.  .842 
Property;  dividends  paid  in.  .828 
Rates  at  which  taxed . . 816,  823 
Record  vs.  actual  owner . . 1777 
Rental:  dividends  in  lieu  of.  .967 
Scrip  dividends.  .828 
Interest  on.  .1238 

Sixty  days  of  taxable  year,  distributions  during  first . . 821 
Subsequent  thereto . . 822 

Source  of  distribution;  presumption  as  to.  .818,  825 
State  securities,  interest  on:  distributed  as  dividend.  .815 
Stock  dividends.  .848,  2575,  2841,  2884,  2993 
Allocation  to  different  years . . 856 

Application  of  different  rates.  .631,  860,  2884 
Foreign  corporation  dividends  . . 864 
Record  to  be  kept  by  corporation . . 859,  2884 
Stockholders  to  be  advised . . 859,  863,  2884 
Constitutionality  of  taxing  provision 
Act  of  October  3,  1913 . . 850,  2313 

Refund  claims . .2129  _ 

Act  of  September  6,  1916  (and  later  acts).  .853,  2241,  2576,  2841,  2884 
Refund  claims.  .2132,  2644,  2653,  2842 
Estate  or  trust;  received  as  accretion  to.  .849,  2884 
Macomber  vs.  Eisner  case.  .853,  2241,  2575,  2841,  2884 

National  banks  may  not  lawfully  declare.  .2993  

Sale  of  stock:  basis  for  determining  gain  or  loss.  .865,  911,  2655,  2847,  2884,  2885 
Towne  vs.  Eisner  case.  .850,  2313 
Valuing.  .849,  2884 

Stock  of  another  company:  dividends  paid  in . . 828 
Stock  Trust  certificates.  .910 

Subsidiaries;  dividends  guaranteed  by  holding  company. . 1192 
Surplus  and  undivided  profits  as  source  of.  .818 

When  United  States  bonds  are  distributed.  .825 
Tax-free  dividends.  .818,  824,  826,  848 

Withholding  at  source:  none  in  any  case.  .1594 


Index  Page  12. 


CONSULT^THB  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Domestic''corporation  defined. . 1532,  1553 
Domestic  partnership  defined . . 1532,  1553 
Donations  (See  “Gifts”  at  2,  Index  Page  18.) 

Draft  boards:  compensation  of  members^of . . 1176 
Drainage  districts 

Assessments  for . . 1262 
Interest  on  bonds  of.  .1135,  2872,  2971 
Drawings  and  models:  depreciation.  .1862 
Dry  goods  dealers:  inventories.  .2877 
Due  date,  last:  of  returns. . 1820 
Duties:  import  or  customs. . 1254,  2775 

Educational  purposes:  gifts  on  account  of  (See  “Gifts”  at  2,  Index  Page  18.) 

Corporations  organized  for . .745,  760 
Elffective  date  of  the  Art.  .2418 
Effective  date  of  Treasury  Decisions . . 2229 
Emancipation  of  a minor.  .702 
Embezzlement,  loss  from:  when  deductible . .792 
Eminent  domain:  transfer  of  property.  .941,  942 
Employees;  association  of.  as  insurance  company.  .983 
Employees,  insurance  of:  by  corporation.  .889,  983,  1197,  2650 
For  direct  benefit  of  employer  as  beneficiary.  .1191,  1197 
Employers:  duty  in  connection  with  withholding  the  tax.  .1597 
Endowment  contracts ..  938,  1113,  1114 
Enemy  owners  of  bonds.  .16b9,  1854,  2497,  2503,  2814 
Enemy  returns:  extension  of  time  for  filing. . 1854 
Engineering:  personal  service  corporation.  .586 
Entryman’s  disposition  of  homestead . . 2804 
Equipment  of  army  officers.  .1186 
Equipment  trust  certificates . . 1239 
Trustees:  status  of . . 1240 
Estate  taxes  not  deductible.  .1264,  2839,  2848 
1 Estates  and  trusts.  .636,  2563,  2876,  2935 

Basis  for  determining  gain  or  loss  on  sale  of  decedent’s  estate . . 686 
Beneficiary  exempt  from  tax.  .2985 
Capital  expenditures  vs.  expense.  .1190 
Car  and  equipment  trusts . . 1240 

Charitable,  etc.,  gifts  provided  for  by  will  or  deed.  .652,  2499,  2516,  2666 
Credits  allowed  to.  .667 
Deductions  allowed.  .651,  652 

Depreciation  sustained  by:  bearing  on  taxable  income  of  beneficiaries.  .657,  2563 
Estate  during  period  of  settlement.  .637,  641 
Completion  of  administration.  .699 
Period  of  administration  or  settlement  defined  . .638 
Estate  taxes  paid. . 1264,  2839,  2848 
Expenses  of  administration.  .1190 
Income  accumulated  in  trust.  .639,  641,  2935 

Accumulated  or  distributed  in  discretion  of  trustee.  .642,  2985 
Income  collected  by  guardian  for  infant.  .644 
Income  distributable  to  beneficiaries.  .644 
Income  held  for  future  distribution.  .640,  641,  2935 
Income  of:  how  computed  . .651 
Inheritance  taxes  paid.  .1264,  2939,  2848 
Insane  persons:  delay  in  payment  of  tax.  .2011,  2014 
Insolvent  persons:  delay  in  payment  of  tax.  .2011,  2014 
Insurance,  proceeds  of:  received  by  estate  of  insured  . .1112,  1114 
Law  provisions  applicable  to  individuals  apply  to  estates  and  trusts.  .711 
Legatees:  amounts  paid  or  credited  to  during  administration.  .646,  653 
Liability  to  tax  as  entities  under  Act  of  1913.  .2935 
Liability  to  tax  follows  the  estate . . 643 

Losses  sustained  by:  bearing  on  taxable  income  of  beneficiaries. . 656,  2568 
Net  losses:  allowance  to  beneficiaries.  .1195 
Returns . .676,  684 

Death  of  decedent  or  termination  of  trust . . 699 
Guardian  or  committee.  .703 
Minor. .702 

Nonresident  alien  beneficiary.  .705,  2569 
Receiver . .701 
Two  trusts . .700 
Revocable  trusts.  .654 

Stock  dividend  received  as  accretion  to  estate.  .849,  2884 
Taxable  year  differing  from  that  of  beneficiary.  .648 
Termination  of  trust.  .699 

Two  trusts:  same  creator:  different  creators.  .700 
Unit;  estates  and  trusts  which  cannot  be  treated  as.  .2563 
United  States  bonds:  application  of  exemptions.  .1157 
Examination  of  books,  papers,  and  persons.  .1877,  1999 
Excess  profits  tax:  personal  service  corporation.  .597 
Credit  to  stockholders.  .604 

Excess  profits  taxes  paid  to  other  jurisdictions.  .1281-1301,  2711,  2892 
Affiliated  domestic  and  foreign  corporations.  .1843 
Estates  and  trusts:  beneficiaries  of.  .1287 
Foreign  corporations . . 1042,  1843 
Partnerships;  members  of.. 572,  1287 
Personal  service  rorporationa:  stockholders  of.  .600 
Porto  Rico  and  the  Philippines . . 544,  545 

Index  Page  13. 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Excess  profits  taxes  paid  to  possessions  of  the  United  States: 

As  a credit.  .544,  545 

AflSliated  domestic  and  foreign  corporations  . . 1843 
As  a deduction . . 1247,  1253 

1 Excess  profits  taxes  paid  to  the  United  States: 

* Credit  to  corporations  for  income  tax  purposes  . . 1529 

Not  deductible . . 1246,  1253 
Excessive  compensation. . 1213,  2496 
Exchange  of  property  for  other  property.  .1076,  2506 

Consolidations,  mergers,  or  reorganizations  . .1082,  2479 
Convertible  bond  for  stock.  .1077,  2506 
Farm  produce  for  merchandise,  etc.  .896 
For  different  kinds  of  property.  .1078,  2506 
For  property  of  no  market  value.  .1079,  2506 
For  stock  of  corporation . . 1080 
For  substantially  same  property.  .1078,  2506 
Exchange,  prevailing  rates  of:  items  credited  abroad.  .900 
Exchanges  as  exempt  organizations.  .764,  767,  768 
Excise  taxes  deductible . . 1254,  2484,  2652 
Executor  included  in  term  fiduciaries.  .670 

2 Executor:  property  passing  to,  from  decedent.  .638 

Delivery  of  property  to  legatee  in  kind  . .638 
Liability  to  pay  tax  attaches  to  person . . 643 
Executor:  return  for  decedent  to  time  of  death.  .684,  6S9 
Executor's  commissions.  .1190 
Exempt  Income . . 1109 

Damages:  payments  on  account  of ..  1111 
Farm  loan  securities:  income  from . . 1131,  1136 
Gifts,  bequests,  etc.  .1128 
Government  bond  interest.  .1132,  1138,  1152 
Insurance . .1111-1127 
Return  of . . 1110 

State  securities;  interest  and  discount  on.  .1130,  1135,  2872,  2971 
War  Finance  Corporation  bonds:  interest  on.  .1133,  1138,  2480 
Exempt  organizations.  .739 

Corporation  owned  by.  .725 

Foreign  corporations . . 1012 

Information  at  source  to  be  supplied . . 1737 

Proof  of  exemption.  .754 

Salaries  paid  by.  .878 

Withhol^ng  obligations  . . 1624 

Exemption  claims  at  the  source  (See  “Withholding  at  the  source”  at  2,  Index  page  40.) 
Exemption  from  tax  on  proceeds  of  sale  of  vessels  under  certain  conditions.  .2712 
Exemption,  specific  (See  “Specific  exemption”  at  2,  Index  Page  33.) 

Exhaustion  of  property  (See  “Depreciation”  at  1,  Index  Page  11.) 

Expatriation,  presumption  of.  .515 
Expense  vs.  capital  account.  .790,  1188,  1190 

(See  “Capital  expenditures  vs.  expense”  at  1,  Index  Page  6.) 

3 Expenses:  deductible  or  otherwise.  . 1182,  1185,  1198 

Accident:  reimbursement  of.  .1127 
Advertising. . 1198,  1227 
Alimony . .1186 

Allowance  or  wages  to  own  children.  .1186 
Architect’s  services . . 1190 

Bonds  retired  for  amount  in  excess  of  issuing  price.  .951,  1244 

Capital  stock:  sale  of  its  own  by  a corporation  . . 1193,  1244 

Commissions  paid  in  purchasing  securities . . 1190 

Commissions  paid  in  selling  securities  . . 1190 

Compensation  for  personal  services . . 1208 

Copyright  and  plates  . . 1190 

Depositors’  guaranty  fund . . 1207 

Family  expenses . .1185 

Farmers . . 897 

Fire  insurance  on  own  house . .1186 
Foreign  steamship  companies . . 1023,  1024 
Import  or  tariff  duties . . 1254,  2775 
Insurance:  business ..  1198 
Leaseholds:  purchase  of  ..  1231,  2900 
Life  insurance  on  own  life . . 1186 
Living  expenses.  .1185 
Lobbying  expenses . . 1227 
Management:  expenses  of ..  1198 

Ordinary  and  necessary  business  expenses  deductible  from  ncome  from  whatever 
source. .1198 

Organization  expenses  of  a corporation.  .1192 

Personal  expenses.  .1185 

Professional  man.  .1186,  1201 

Public  utilities . .1205 

Railroads . . 1206 

Rent  and  rentals . . 1229 

Salaries.  .1208 

Sample  room:  use  of . .1187 

Selling  expenses.  .891,  1198 


Index  Page  14, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Expenses — Concluded  ^ j -,,0^! 

Separation  agreement:  amounts  paid  under.  .Ilob 

Soldiers  and  sailors . . 1186 

Tariff  duties ..  1254,  2775 

Title:  cost  of  perfecting  or  defending ..  1190 

Traveling  expenses . . 1187 

Exol^atfon  work  alone:  in  connection  with  sale  of  mine  or  well.  .488 
Extension  of  time  for  filing  returns.  .1847  (Special  for  1920.  .2570) 

By  commissioner.  .1848,  1851 
Enemies . . 1854 
Foreign  corporations . . 1852 
Military  and  naval  forces . . 1852 
Nonresident  aliens . . 1852 
Persons  abroad . . 1852 
Extension  of  time  for  paying  tax.  .2008 
Fac-simile  signature  on  certificates  of  ownership.  .1864 
On  substitute  certificates . . 1703 

Failure  to  make  return ..  1889,  1901,  1902  inRi 

Fair  market  value:  in  connection  with  exchange  of  property  for  stock.  .1U»1, 

Fair  market  value  on  March  1,  1913.  .1059 
Fairs:  contributions  to ..  1228 

"False”  construed  in  connection  with  false  returns . . 1259 
False  returns.  .1864,  1884,  1889,  1902 

No  limitation  on  collection  of  tax.  .2029 
Family  corporation.  .724 
Family  expenses.  .1186 

Farms  and  farmers .. 896  ^ 

Agricultural  and  horticultural  organizations  .that  are  not  exempt.  .766 

Capital  expenditures . . 897 

Depreciation.  .899,  1354,  2665 

Expenses . . 897 

Gross  income . .896 

Inventories.  .2692 

Losses . .898 

Pleasure:  farms  run  for,  at  continual  loss . .886-898 
Farmers' associations  acting  as  sales  agents.  .750,  768 

Farmers’  mutual  hail,  cyclone,  or  fire  insurance  companies . .749,  767,  2960 
Federal  employees:  salaries  of.  .803,  873,  2813,  2835 
Pensions  or  retiring  allowances.  .873 
Quarters,  mileage,  subsistence,  etc.  .879 
Federal  land  banks.  .752 
Securities.  .1131,  1136 

Federal  Reserve  Banks:  dividends  on  stock.  .1137 
Federal  taxes  deductible.  .1246,  1253,  1254,  2484,  2652,  2775 
Fees  of  notaries  public.  .1167 

Fidelity  bond:  premium  on ..  1202  ^ ^ t>  oav 

Fiduciaries:  returns  by  (See  "Returns  by  Fiduciaries  at  1,  Index  Page  30) 
Fiduciaries;  taxes  to  be  paid  by . .641 

Liability  attaches  to  person  of  fiduciary . . 643 
Fiduciary  defined.  .670_ 

"Agent”  vs.  "fiduciary”  . .672 

Committee  of  property  of  incompetent.  .671,  703,  2705 

Estate  or  inheritance  taxes  paid. . 1264,  2839,  2848 

Foreign  fiduciaries.  .706 

Information  at  the  source:  returns  of . .1743 

Law  of  individuals  applicable  to  fiduciaries . .711 

Ownership  certificates  to  be  used  by  fiduciaries . . 1673 

Power  of  attorney.  .672 

Final  returns.  .1816-1819,  2770  -/.-■oa^'a 

Fire  Insurance  companies,  mutual.  .749,  767,_29bU 
Fire  insurance  on  own  house ..  1186  a,o 

Fire  losses  compensated  for:  replacement  fund . .942,  943 
Fire  losses  deductible.  .1303,  1305,  1312 
First  taxable  year.  .798 
Fiscal  year  defined.  .797 

Change  to  calendar  or  to  other  fiscal.  .800,  1862,  2784 
Must  be  definitely  established.  .799 
Fiscal  years  differing  in  case  of  affiliated  corporations.  .1832 
Fiscal  years  embracing  parts  of  calendar  years  with  differing  rates.. 613,  627 
Corporations.  .622,  626 
Individuals.  .625,  626 
Partnerships.  .601 

Personal  service  corporations.  .601,  624 

Fixed  and  determinable  annual  payments.  .1596,  1736 
Food  Administration  Grain  Corporation  Notes  .1160 
Foreclosure  proceedings:  status  of  bad  debt  deduction.  .1320 
Bonds  of  insolvent  corporation,  secured  by  mortgage  . . 1323 
Foreign  ambassadors.  .1163 
Foreign  consuls.  .1163 

Foreign  corporations. . 1008  ^ , ..1  , • nmn 

Acceptances;  purchase  and  sale  of,  on  account  of  the  foreign  corporation . .2670 
Accounts  current:  interest  on . . 1620 
Agent  of..  1018,  1019,  1044,  1048 


Index  Page  15. 


CONSULT^THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  number#. 


For^gn  corporations — Concluded 

Commissions  on  sales  made  abroad  . .1028 
Consolidated  returns . . 1827,  1843 
Credit  for  amounts  withheld  at  source.  .1061 
Credits  against  income . , 1041,  1633 
Credits  against  tax . .1042 
Deductions  allowed . . 1028 

Apportionment  and  allocation  of.  .1033,  1036 
Income  solely  from  dividends  and  interest.  .1036 
Dividends  of . .1617,  2482,  2895 
Dividends  on  domestic  stock.  .1025 
Deductions  allowed . . 1036 
Exempt  organizations . . 1012 
Exemption  claims  at  the  source . . 1619 
Extension  of  time  for  filing  returns . . 1852 
Gross  income  of..  1016.  1025,  1027,  2994  . ^ 

Income:  what  income  is  taxable.  .720,  2670,  2994  “ 

Interest:  debit  and  credit  items  between  banks.  .1621 
Interest  deductions.  .1031 
Interest  on  accounts  current . . 1620 
Interest  on  domestic  securities.  .1025 
Deductions  allowed.  .1036 
Net  income  of.  .1015,  2994 
Ownership  certificates.  .1696,  1697 
Personal  service  corporations ..  674,  584 
Principal  office  of . . 1048 

Profits  on  manufacture  and  disposition  of  goods  in  U,  S , . 1027 
Returns  by . .1044 

Extension  of  time  for  filing . . 1852 
Steamship  companies ..  1023,  1546,  3011 
Stock  dividends . .864 
Tax  on . . 1007 

Tax-free-covenant  bonds:  U.  S.  fiscal  agent..  1646,  2780 
Taxes  deductible.  .1032 
Withholding  at  the  source ..  1614,  1626,  1642 
Foreign  diplomatic  ministers.  .1163 
Foreign  fiduciaries.  .706 

No  exemption  claims  at  source.  .710 
Foreign  governments:  income  from  United  States  sources.  .1162 
American  citizens  serving.  .1163 
Officials  of . . 1163,  1646 
Foreign  insurance  companies.  .1018 

Branches  in  the  United  States.  .1018 
Foreign  items:  collection  of . . 1749 

Exchange:  prevailing  rate  governs,  when  deposited  abroad, ,900 
Information  at  the  source.  .1749 
Branch  offices . . 1760 
License  required . .1766 

Ownership  certificates.  .1751,  2750,  2751,  2780 
When  none  accompanies  item.  .2498,  2751 
Penalties . . 1767 
Returns  of  information.  .1762 
Source  of  information.  .1760 
Substitute  certificates  not  permitted  . . 1762 
Foreign  partnerships.  .1010,  1553,  2994 

Accounts  current,  interest  on:  withholding.  .1612 
Ownership  certificates.  .1696,  1697 
Foreign  steamship  companies.  .1023,  3011 

Charter  money  and  freight  payments . . 1646 
Foreign  taxes  paid. . 1281-1301,  2711,  2892 
Foreign  trade:  sales  in.  .810,  2994  ^ 

Foreign  trade,  vessels:  resident  and  nonresident^liens.  .519 
Forgiveness  of  indebtedness . ,943 
I Forms  and  their  uses:  (See  also  Supplementary _Page^l.)j 
17 — Notice  and  demand  for  tax.  .2021 

46 — Claims  for  refund  of  taxes  and  penalties  erroneously  collected ,.2 133 
46 — Claim  for  allowance  of  net  loss.  .1107 

46 —  Claim  for  refund:  inventory  losses  or  rebate  payments.  .1482 

47 —  Claim  for  abatement  of  taxes  erroneously  assessed . .2119 

47 — Claim  for  abatement:  inventory  losses  or  rebate  payments.  .1482,  1483 
47A — Claim  for  credit  against  future  installments  of  the  tax.  .2124 
‘ Because  of  payment  of  tax  on  stock  dividends.  .2646,  2653,  2842 

1000 — General  use  of . . 1695  ^ 

L 1000— Personal  service  corporations  in  connection  with  tax-free  covenant  bond 
interest.  .1696 

1000 — Alien  property  custodian.  ,1699,  2503,  2814 

1000 — Bank  receiving  coupon  without  ownership  certificate  attached,^! 704,  2762 
1000 — Registered  bonds;  no  ownership  certificate  filed  by  owner..  1706 

1000 —  Foreign  tax-free-covenant  bond  interest.  .1761,  2750,  2751,  2780 

>.  1000 — Partnership  with  member  having  personal  exemption  in  excess  of  taxable  income 
. .2966 

1001 —  General  use  of . .1697 

1001 — Exemption  claims  by  citizens  and  residents  on  tax-free  covenant  bond  interest.  .1647 


Index  Page  16, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Forms  and  their  uses — Continued 

1001 — Alien  property  custodian.  .1699,  2503,  2814 
1001 — Registered  bonds:  no  ownership  certificate  filed  by  owner . . 1706 
Sinking  Fund  Trustee.  .2876 

1001 A — Ownership  certificate  in  connection  with  foreign  items.  .1751,  2750,  2751,  2780 
lOOlA — Foreign  tax-free-covenant  bond  interest.  .1751,  2750,  2780 

1001 B — Exemption  claims  by  nonresident  aliens  on  tax-free-covenant  bond  interest.  .1650, 
2501 

1010 — License  for  collecting  foreign  items . . 1758 

1012 — Monthly  return  of  amounts  withheld  at  source  on  bond  interest . . 1709 

1012 —  Monthly  return — foreign  items . . 1752 

1013 —  Annual  return  ol  amounts  withheld  at  source  on  bond  interest.  .1709 
1013 — Annual  return — foreign  items.  .1752 

1017 — Application  for  license  for  collection  of  foreign  items . . 1758 
1031T — Tentative  annual  return  form  for  corporations.  .1850  (See  ^2570) 

1040 —  Annual  return  by  individual:  net  income  of  more  than  $5,000.  .1773 
— Same:  by  minor . .702 

— Same;  by  fiduciary  for  individual  or  estate  or  trust.  .684 
— Same:  by  foreign  fiduciary . .706 

— Same:  by  fiduciary  for  decedent  to  time  of  death.  .684,  699 
— Same:  by  fiduciary  for  nonresident  alien  beneficiary . . 705,  2569 
— Same:  by  receiver  for  individual . .701 

— Same:  by  guardian  of  minor  or  committee  for  incompetent.  .703 
— Same:  by  alien  member  of  foreign  partnership.  .1554 
— Same:  by  nonresident  alien.  .1579 
1040A — Annual  return  by  individual:  net  income  of  $5,000  or  less.  .1773 
— Same;  by  minor . . 702 

— Same:  by  fiduciary  for  individual  or  estate  or  trust.  .684 
— Same:  by  foreign  fiduciary.  .706 

— Same:  by  fiduciary  for  decedent  to  time  of  death.  .684,  699 
— Same:  by  fiduciary  for  nonresident  alien  beneficiary.  .705,  2569 
— Same:  by  receiver  for  individual . .701 

— Same:  by  guardian  of  minor  or  committee  for  incompetent.  .703 
— Same:  by  alien  member  of  foreign  partnership.  .1554 
— Same:  by  nonresident  alien. . 1079 

1040C — Return  by  nonresident  aliens  for  taxable  period  1919:  on  leaving  the 
country . . 2082 

1040T — Tentative  annual  return  form  for  individuals . . 1850 

1041 —  Annual  return  by  fiduciary  of  distributed  or  distributable  income.. 684 
— Same:  by  foreign  fiduciary.  .706 

— Same;  two  trusts.  .700 

— Same:  two  or  more  nonresident  beneficiaries.  .705 

1042 —  Annual  return  of  amounts  withheld  at  source  on  other  than  bond  interest.  .1709 
1042 — Return  of  information  covering  payments  to  nonresident  aliens  and  certain  foreign 

corporations . . 1746 

1068 —  Substitute  certificate  of  ownership:  tax  not  to  be  paid  at  source , . 1700 

1069 —  Substitute  certificate  of  ownership  tax  to  be  paid  at  source.  .1700 
1066 — Partnership  annual  return . . 660 

1065 — Personal  service  corporation  annual  return . . 697 
1065 — Annual  return  by  receiver  for  partnership.  .701 
1078 — Certificate  for  use  by  alien  to  show  residence.  .523,  1600 
Disposition  of  by  withholding  agents.  .624,  627 
Oath  628 

Records  thereof  to  be  made  by  employers.  .627 
Reliance  on  by  employers  . . 523,  524,  1600 
Resident  aliens  should  file  to  avoid  inconvenience.  .524 
Substitutes  for.  .623,  1600 

Use  of  is  proof  of  residence  unless  rebutted  . .619,  1600 
Witnesses . .528 

1087 — Disclosing  that  record  owner  is  not  actual  owner  of  stock.  .1777 

1096 —  Annual  list  return  of  information  at  the  source  (miscellaneous  payments  aggregating 

$1,000)..  1736 

— Same:  by  partnerships,  personal  service  corporations  and  fiduciaries.  .1743 
1096A — Monthly  list  return  of  bond  interest  where  there  has  been  no  withholding ..  1710 
1096B — Annual  list  return  of  bond  interest  where  there  has  been  no  withholding.  .1710 
1096B — Annual  list  return  of  foreign  items.  .1752 

1097 —  Returns  of  information  relating  to  dividends . . 1763 

1098 —  Annual  information  return  of  amounts  other  than  bond  interest  paid  to  nonresident 

aliens  or  to  foreign  corporations  having  no  oflTice  or  place  of  business  in  the 
United  States ..  1709,  1746 

1099 —  Annual  slip  retirrn  of  information  at  the  source  (miscellaneous  payments  aggre- 

gating $1,000)..  1736 

— Same:  by  partnerships,  personal  service  corporations  and  fiduciaries . . 1743 

1100 —  Returns  of  information  by  brokers,  .1766 

1114 — Application  for  permission  to  establish  a replacement  fund  for  fosses  compen- 
sated for . . 942 

1116 — ^ecific  exemption  claimed  at  source  by  nonresident  alien  employee.  .1677 

1116 —  Claim  for  credit  for  foreign  taxes  paid — individuals.  .1293 

1117 —  Bond  for  use  in  connection  with  form  1116.  .1293 

1118 —  Claim  for  credit  for  foreign  taxes  paid — corporations.  .1301 
— Same;  foreign  corporations . . 1042 

1119 —  Bond  for  use  in  connection  with  form  1118.  .1301 


Index  Page  17. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Forms  and  their  uses — Concluded 

1120 — Annual  return  by  corporations  generally.  .1780 
— Same:  foreign  corporations ..  1044 

— Same:  consolidated  return  by  affiliated  corporations.  .1827 
1122 — Return  by  affiliated  corporations  in  connection  with  consolidated  returns.  .1827 
1124 — Bond  in  connection  with  claim  for  abatement  on  account  of  inventory  losses  or 
rebate  payments.  .1485,  1508 

Forms:  table  of  current,  and  reproduction  of  (See  Supplementary  Page  1.) 

Forms  to  be  supplied  to  taxpayers.  .1787 
Fractional  part  of  cent.  .2089 
Fractional  part  of  year:  return  covering. . 1863 
Franchises:  depreciation  on  account  of . . 1332 
Fraternal  beneficiary  societies.  .742,  757 

Freight  by  boats:  certain  associations  organized' to  carry.  .764 
Fruit  growers'  associations  acting  as  sales  agents.  .750,  768 
Fruit  growing  organizations  755 

(See  “Farms  and  farmers”  at  1,  Index  Page  15.) 

Fruit  trees;  depreciation  and  loss  by  death.  .2665 
Furniture  in  house:  depreciation. . 1331 

Gain  or  loss,  basis  for  determining,  on  disposition.  .1055,  1305, 

Assets  of  decedent’s  estate.  .686 
Bequests . . 1074 

Bonds:  sale  and  retirement  of.  .951 
Bonus  stock.  .911 
Capital  assets  . . 966,  1244 
Consolidations . . 1082 

Depfet^n  to  be  given  consideration  . .1058,  1305,  2507 
Depreciation  to  be  given  consideration  . .1058,  1305,  2507 
Exchange  of  property  for  other  property . .1076,  2506 
Homestead.  .2804 
Gifts . . 1074 
Good  will.  .913 

Insurance  policies.  .1177,  2485 
Lumber.  .1072 
Mergers . . 1082 

Partial  liquidating  dividend:  sale  of  stock.  .868 
Patents . .912 

Personal  property  on  installment  plan.  .914,  2672,  2822,  2965 
Real  estate  in  lots  . 931 

Real  estate  on  deferred  payment  plan.  .932,  937,  2672 
Real  estate  on  installment  plan.  .932,  936,  2672 
Reorganizations . . 1082 
Rights..  911 

Securities,  by  committee  for  incompetent.  .2705 

Itock’dMdends:  sale  of  stock  received.  . 865,  911,  2655,  2847,  2884,  2885 

Stock  received  in  connection  with  merger,  consolidation  or  reorganization . . 108  /,  1088, 

Value  as  of  March  1,  1913:  basis  for  determining.  .1058,  2804 
Gain  or  profit  from  every  source  is  taxable.  .806,  2810 
Gambling.  .1305,  2507,  2807 
Gas  district  bonds.  .1135,  2872,  2971 

Gas  Wells  (See  “WeUs”  at  1,  Index  Page  40.) 

General  administrative  provisions  of  law  applicable ..  1998 
Gentlemen  farmers.  .896,  898 
Gifts  made: 

Associated  charities;  to..  1457 
Churches  and  church  funds:  to.  .1453,  1457 
Corporations:  by..  1181,  1227,  1448,  1460,  2499,  2516,  2666 
For  benefit  flowing  directly  to  the  corporation. . 1227 
Employees:  employers  to . .877,  1219 
Estates  or  trusts:  by . .652,  2499,  2516,  2666 
Individuals:  by . .1447,  2499,  2516,  2666 
Loss  suffered  by  donor;  none.  .2507 
Needy  family:  to . . 1458 
Nonresident  aliens:  by . . 1567 
Partnerships;  by . .652,  2516,  2666 

Benefit  of,  taken  by  members.  .554,  2516,  2666 
Personal  service  corporations:  by.. 696 

Property  other  than  money  given:  valuing.  .1448,  2499,  2516,  266b 
No  taxable  profit  accrues  to  donor.  .1469 
Real  estate  to  city  for  public  park.  .1448,  2499,  2516,  2666 
Red  Cross:  to..  14 52,  1457  ^ 

Securities  g ven:  no  taxable  profit  to  donor . . 145y 
Stockholders  to  corporation: 

Forgiveness  of  indebtedness.  .943 
Stock  for  resale.  .949 
Voluntary  assessment  on  stock.  .950 
War  chests.  .1448,  2499,  2516,  2666 
Y.  M.  C.  A..1457 
Gifts  received..  1128 

Gain  or  loss  from  sale  of . . 1074 
Stock.. 1076 


Index  Page  18. 


CONSULT  THB  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Good  will  considered  in  valuing  stock  as  of  March  1,  1913.  .1063 
Good  will:  depreciation  of ..  1332 
Good  will:  sale  of  . .913 

Government  amortization  claims:  recent  unsettled  conditions . .946 
Government  contract  defined . .578 

Canceled:  compensation:  amended  returns  . .945 
Commissioner  to  have  access  to . .579,  580 
Consolidated  returns  of  affiliated  corporations.  .1822 
Personal  service  corporations  . .575,  684 
Railroads . .579 

Returns  in  connection  with.  .579,  680 
Unenforcible  contracts  subsequently  ratified  . . 579 
Government  employees:  salaries  of.  .803,  873,  2813,  2835 
Pensions  and  retired  pay . .873 
Quarters,  mileage,  subsistence,  etc . . 879 
Grain  growing  organizations.  .755 

(See  “Farms  and  farmers'  at  1,  Index  Page  15.) 

Gratuities  to  employees . .876,  1209 
Gross  income . . 802 

Corporations . .808 

Exclusions  from . . 1109 

Farms  and  farmers  . .896 

Foreign  corporations.  .1016.  1025,  1027 

From  business.  .891  , , . . j tios 

Gift  bequest,  devise,  descent:  income  from  property  received.  .lUf4, 
Income  on  which  tax  withheld  included.  .1718,  1722 
Income  taxes  paid  by  another  to  be  included . .869,  871 
Insurance  companies.  .983,  2873 
Need  not  be  in  cash  . .780,  810 
Nonresident  alien  individuals.  .1542,  1545 
When  accounted  for.  .807,  945,  2421 
Group  Insurance;  premiums  on.  .2650 
Guam:  taxation  of  certain  citizens  of  . .531 
Guardian  included  in  term  “fiduciary” . .670 
May  make  return.  .673,  702.  703 
Guardian : income  collected  by,  for  infant . 644 
Hail  insurance  companies:  mutual.  .749,  767,  2960 
Harbor  district  bonds.  . 1135,  2872,  2971 
Hawaii  included  in  “United  States”.  ,1009 

Income  accruing  to.  .1164  

Interest  on  obligations  of.  .1130,  1135,  2872,  2971 
Salaries  of  Government  employees.  .803,  2813,  2835 
Hawaiian  partnerships.  .550 
Head  of  family:  defined..  1522 

Return  requirements.  .1770,  2903 
Specific  exemption.  .1519,  1522 

Head  tax  as  proof  of  resiffence  519  , oq. 

Health  insurance,  combined  with  life  and  accident  in  one  policy.  .994 
Health  insurance:  exempt.  .1111,  1114 
Holding  companies  for  exempt  organizations . . 751 
Holding  companies  guaranteed  dividends  for  subsidiaries.  .1192 
Holding  companies  taking  up  earnings  of  subsidiaries  on  books.  .1327 
Holding  companies  withholding  profits  from  stockholders.  .498,  506 
Homestead:  disposition  by  original  entryman.  .2804 
Horticultural  organizations.  .740,  755 
Clubs.. 766 

Horse  race  winnings  and  losses.  .2807 
Husband  and  wife: 

Community  property.  .2903 
Returns  by.  .1769,  1771 

Delinquency  of  one  return.  .1771 
Specific  exemption . . 1619,  1523 

Divisible  as  they  please.  .1526 
Surtax  computed  on  separate  incomes.  .490 
United  States  bond  exemptions.  .1156 
Wife  abroad,  in  case  of  resident  alien.  .521 
Wife  of  nonresident  alien . .613 
Hypothetical  questions:  rulings  on  2230 
Illegal  transactions:  losses  in.  .1305,  2507,  2807 
Illegally  acquired  compensation.  .1215 
Illinois  limited  partnerships . . 734 
Illness  (See  “Sickness”  at  1,  Index  Page  33.) 

Import  duties,.  1254,  2775 

Impro^v  of:  mines,  oil  and  gas  wells.  .1397,  1432,  1433,  1443,  2950 

Made  by  lessee.  .939,  2695,  2899 
Permanent.  .791,  1188,  1189,  1200 
Income  accounted  lor,  when.  .807,  946,  2421 
Income  accruing  prior  to  March  1,  1913. 

Income  accumulated  in  trust , .639,  641,  2 J3o 

Income  accumulated  or  distributed  in  discretion  of  trustee.. 642 
Income:  allocation  of,  to  particular  source. . .489 
Income  collected  by  guardian  for  Infant.  .644 


Index  page  19. 


CONSULT  THE  PINK  SHEET. 


GENERALi  INDEX. 

The  references  are  to  paragraph  numbers. 


Income:  constructive  receipt  of.  .783,  946 
As  opposed  to  accrual . .946 
By  decedent  prior  to  death  . .685 
Income  distributable  to  beneficiaries . . 644 
Income  from  every  source  is  taxable.  .806,  2810 
Income  held  for  future  distribution.  .640,  641 
Income:  illegally  acquired. . 1216 
Income,  net  (See  “Net  Income"  at  1,  Index  Page  24.) 

Income  tax  in  Porto  Rico  and  Philippine  Islands.  .634 
Income  taxes  paid  for  another ..  869,  871,  1231,  1279,  1280,  2817,  2900 
Income  taxes  paid  to  other  countries 
Credit  for . .1283,  1296,  2711,  2892 

Affiliated  domestic  and  foreign  corporations.  .1843 
Estates  and  trusts:  beneficiarieB  of.  .1287 
Foreign  corporations . . 1042,  1843 
Partnerships;  members  of . .572,  1287 
Personal  service  corporations;  stockholders  of.  .600 
Porto  Rico  and  Philippine  Islands . . 644,  645 
Deductible . . 1281,  1282 
Effect  on  liability  to  U.  S.  Income  tax.  .476 
Income  taxes  paid  to  possessions  of  the  U.  S. 

As  a credit . . 644,  645 
As  a deduction.  .1247,  1253 

Income  taxes  paid  to  the  United  States:  not  deductible ..  1246.  1263 
Incompetent:  return  for . .703 
Incorporation  fees..  1192 
Incurred  or  paid.. 781 
Indebtedness;  forgiveness  of . .943 
Indemnifying  of  withholding  agents..  1717 
Individuals,  tax  on 
Normal  tax.  .476 
Surtax..  482 

Information  at  the  source  (See  “Returns  of  Information  at  Source”  at  2,  Index  Page  31.) 
Inheritance  taxes.  .1264,  2839,  2848 

Injuries;  amounts  paid  to  employees  on  account  of.  .1226 
Injuries;  amounts  received  on  account  of.  .1111,  1114 
Insane  person;  return  for . .703 

Delay  in  payment  of  tax.  .2011,  2014 
Insolvent  persons:  delay  in  payment  of  tax . .2011,  2014 
Inspection  of  retorns.  .1955,  2427,  2450 
State  officials.  .1970,  2456 
StfMskholdera  . .1972,  2442,  2473 
Inspectors,  Income  tax:  duties  of . .1868 
Leaves  of  absence . . 2239 
Installment  purchases  of  Victory  Notes..  1155 
Installment  sales: 

Changing  method  of  accounting.  .914,  915,  2822,  2965 
Isolated  sales  by  one  not  a dealer.  .2672 
Personal  property,  .914,  2822,  2965 
Real  Estate . .932 

Installments:  payment  of  tax  in.  .2000 

Does  not  apply  in  case  of  failure  to  make  return . . 1899 
If  installments  are  not  paid  when  due  all  of  tax  is  payable,  .2017 
Recomputation  of . . 1880 

Insurance,  accident  and  health:  exempt.  1111,  1114 
Insurance  agents  and  agencies:  information  at  the  source.  .1740 

Premiums  collected  in  one  year  turned  over  to  company  in  next.  .2517 
Insurance  companies  are  “corporations”.  .729 
Foreign.  .1018 

Branches  in  United  States . , 1018 
Returns  of . . 1002  1003 
Tax  on.  .983.  2517,  2673,  2815 

Insurance  companies,  mutual:  certain  exempt . .749,  767,  2960 
Insurance:  compensation  for  losses.  .1303-1305,  1310-1312 
Insorance  fund  for  benefit  of  employees.  .983 
Insurance,  life  (See  “Life  Insurance”  at  2,  Index  Page  22.) 

Insurance  on  life  of  officer  or  employee,  for  benefit  of  employer.  .1191,  1196,  2704 


Insurance  on  own  house. . 1186 

Insurance  policy:  surrender  value  as  of  March  1,  1913.  .1177,  2485 
Insurance  premiums:  commissions  on.  .873,  887 
On  own  policy  by  agent.  .888 

Insurance  premiums,  business;  as  expense  items.  .1198,  1203,  2704 
Reserves  in  lieu  of ..  1204 

Insurance  premiums  received  by  agent  in  one  year  remitted  to  company  in  next.  .2517 
Insurance  premiums  paid  to  employer.  .889,  1191,  1196,  2660 
Insurance:  War  Risk. . 1114 
Intangible  property:  depreciation.  .1332 
Interest  accrued  prior  to  March  1,  1913.  .1177 
Status  as  to  withholding.  .1177 
Interest  as  income.. 805 

Brokers:  carrying  securities  for  customers.  .905 
Constructive  receipt  of . .947 

By  decedent  prior  to  death . . 685 
March  1,  1913;  accrued  prior  to.  .1631 
Nonresident  aliens.  .1643,  1645,  1546 


Index  Page  20. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Interest  as  income — Concluded  oq  \ 

United  States  bond  interest  (See  United  States  bonds  at  2,  Index  Page  38.) 

Summary  of  tax  exemptions.  .1152 
Year  of  accrual.  .1631 
Interest  deductions . . 1232 
Banks  on  deposits . . 1238 
Capital:  interest  on.  .1243 
Car -trust  certificates . . 1239 
Equipment  trust  certificate  . . 1239 
Foreign  corporations . . 1031 
Mortgage  indebtedness.  .1232,  1236 
Nonresident  aliens . . 1563 
Preferi  ed  stock . . 1238 

Purchasing  and  carrying  tax-free  obligations.  .1233 
Dividend  paying  stock.  .1237 
Scrip  dividends.  .1238 

Tax-free  covenant  bond  interest:  State  tax  paid  by  debtor.  .1280 
Interest  on  accounts  current:  withholding. . 1612,  1620 
Interest  on  domestic  securities:  information  at  source.  .1747 
Interest  on  domestic  securities:  withholding  of  tax ..  1625 

(See  “Withholding  at  the  source”  at  2,  Index  Page  40.) 

Interest  on  tax:  delayed  payments . .2010,  2011,  2014 
Interest  paid  in  lieu  of  rental.. 967 
Interest,  tax-free:  when  distributed  as  dividend.  .816 
Internal  revenue  agents,  inspectors,  etc.:  duties  of.  .1868 
Leaves  of  absence.  .2239 

Internal  Revenue  Collection  Districts.  .Sup.  Pages  101-106 
Names  and  addresses  of  collectors.  .Sup.  Pages  101-106 
Intestate’s  real  estate.. 642 
Invalidating  clause.. 2240 
Inventories.  .789,  1090,  2834,  2877 

Accrual  method  necessary  where  inventories  are  used  . .783 
Basis  adopted  to  be  applied  to  each  item . . 1092 
Changes  in  method  of  valuing.  .1092,  2877 
Contracts  to  purchase  goods.  .2785 
Cost..  1093,  2877 

Cost  or  market,  whichever  is  lower . . 1092 
Dealers  in  securities.  109  5 

Depreciation  does  not  apply  to  inventories ..  1331 
Dry  goods  dealers.  .2877 
Farmers.  .896,  898,  899,  2692 
Income  determining  factor  . .771 

Inveetment  of  funds  in,  is  proper  employment  of  income.  .607 


Live  stock  raisers.  .2692 

Lossev  substantial:  special ..  1467,  1477,  2784 

Lumber  manufacturers.  .2706 

Market.  .1094,  2834 

Materials..  1199 

Supplies  1199 

Unidentifiable  goods  1092 

Valuation  of.  .1092,  2877,  2834 


What  to  be  included  in  10:>1 
Inventory  losses:  special ..  1467,  1477,  1605 

Invested  capital  :affiliated  corporations  ..  1821 

Invested  capital:  value  on  March  1,  1913,  has  no  bearing  on.  .1068 

Invested  capital:  valuing  in  case  of  mergers,  consolidations  of  reorganizations. 

Iowa  drainage  district  assessments . . 1262 

Irrigation  companies,  mutual . .749,  767 

Irrigation  districts 

Assessments  for . . 1262 
Bonds  of:  shrinkage  in  value . 1309 
Interest  on  bonds  of. . 1135,  2872,  2971 
Joint  adventure  or  venture.. 736 
Joint  fiduciaries:  returns  by . .681 
Joint  owners  of  bonds..  1667 

Joint  owners  of  property  not  necessarily  partners . . 736 
Joint  returns  by  husband  and  wife  1769,  1770,  2903 
Joint-stock  companies  are  “corporations” . .729 

2669,2713, 2766, 28i8, 2835 

Judgments  in  connection  with  bad  debts. . 1318 

Judgments  pa'd:  when  deductible . .792 

Judgments  received:  when  included  in  gross  income.. 945 

Jurisdiction  of  district  courts.  .1878 

Kindt 

Compensation  paid  in.  .889,  2568,  2660 
Dividends  paid  in  . .828 
Exchanges  generally.  .1076,  2506 

Farm  produce  exchanged.  .896 
Partnership  dtetributions  on  dissoiution  . . 1089 
Property  passing  to  legatee . . 638,  686 
Labor  as  expense  item  . . 1198,  1208 
Labor  organizations.  .740,  755 


.1087 


Index  Page  21. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Land  and  buildings  acquired  for  lump  sum:  depreciation.  .1348,  134?,  2901 
Land  apart  from  buildings:  no  depreciation.  .1331 
Land:  sale, of,  in^lots  . .931 

Land:  sale'of,  on  installment  or  deferred  payment  plan . .932,  2672 
Landlord  (See  “Lessees  and  Lessors”  at  below.) 

Last  due  date . . 1820 

Leased  line  certificates:  dividends  . .910  ^ 

Leased  property:  dividends  and  interest  in  lieu  of  rental.  .967 
Leasehold,  purchase  of:  apportioning  the  expense . .1231,  2900 
Leaseholds,  mines  and  oil  and  gas  wells:  depletion.  .1401,  1409,  1410 
Leaves  of  absence  of  interna  revenue  officers  . . 2239 
Leaving  country:  declaration  of  termination  of  taxable  period.  .2073 
Legal  holiday  in  connection  with  last  due  date . .1820^ 

Legatees:  amounts  paid  or  credited  to  duiing  administration.  .646,  653 

Depreciation  allowances  to  lessee  who  has  erected  a building  on  leased  ground.  1231,  2900 
Improvements  made  by  lessee.  .939,  1231,  2695,  2899,  2900 
Leased  line  certificates:  dividends.  .910 

Leaseholds:  apportioning  the  expense ..  1231,  2900  oo'to 

Mines,  oil  and  gas  wells:  depletion  apportioned  . .1401,  1408-1410, 

But  not  under  prior  Acts.  .2319,  2668 
New  buildings:  cost  of  erecting  by  lessee.  .1221,  2695,  2899,  2900 
Payments  made  to  another  than  the  lessor . .939,  967,  2399 
Rent  and  rentals  as  items  of  expense.  .1229 
Rent  and  rentals  as  items  of  income.  .805,  939,  2899 
Repairs  made  by  lessee . . 1231,  2900 
Royalties . . 9 39 , 2 89 9 
Stock  trust  certificates:  dividends  910 
Taxes  paid  by  tenant.  .1231,  2900 
Levee  districts: 

Assessments  for . . 1262 
Interest  on  bonds  of.  .1135,  2872,  2971 
Tennessee.  .1262 
LfabilUiee:  assuming . .966 

Liabilities  of  one  year:  effect  on  next  year . .792 
Liability  of  fiduciaries . .677 
Liability  of  withholding  agent.  .1716 
Liability  to  tax,  generally.  .474 

Aliens:  status  on  last  day  of  taxable  year  governs.  .622 
Beneficiaries:  for  payment  by.  .646 
Citizens  and  resident  aliens.  .611 
Corporations . .717,  720 
Estates  and  trusts.  .637 
Fiduciaries:  for  payment  by  641 
Foreign  corporations . . 1015,  2994 
Insurance  companies , .983 
Nonresident  aliens.  .611,  618,  1636 
Partnership? . .646,  651 
Personal  service  corporations  . . 693 
Liberty  bonds  (See  “United  States  bonds”  at  1,  Index  Page  38.) 

“Date  of  the  tax  return” . .2558 
Summary  of.  for  exemptions.  .1162 
License  fees  or  taxes . . 1254 

Automobile  licenses  ..  1263  ^ 

License:  none  required  for  use  of  substitute  certificates.  .1701 
License  required  for  collection  of  foreign  items.  .1755 
Licenses:  depreciation  on  account  of  ..  1332 

Life,  health,  and  accident  insurance  combined  in  one  policy . .994 
Life  insurance  companies.  .983,  986,  2873 
Life  insurance:  premiums  on  groups . .2650 

Life  insurance  policy:  surrender  value  as  of  March  1,  1913.  .1177,  2430 
Lifelinsurance:  premiums  on  own ..  1186  , ,,oi  hoc  o70/« 

Life-insurance:  premiums  on,  when  a beneficiary  under  the  policy . .1191,  1196,  2704 
Life. Insurance;  proceeds  of ..  1112,  1114 

Annuity  and  endowment  contracts . .938 
Corporation  beneficiaries.  .809,  1197,  2704 
"Distributions  on  paid  up  policies.  .938,  1119 
Dividends:  938,  1113,  1118,  1119 
i Estate  of  insured  ..  1112,  1114 

Individual  beneficiaries . .1112,  1114,  1197,  2704 
Partnership  beneficiaries  .2420 

Light  district  bonds.  . 1135,  2872,  2971  n , j 0170 

Limitation  as  to  suits  for  recovery  of  taxes  wrongfully  collected  . .2173 
Limitation  of  surtax:  sale  of  mines,  oil  and  gas  wells . .487 
Limitation  on  assessment  of  or  suits  for  collection  of  taxes.  .2029 

LimitaUon'on  claim  for^credlt  against  future  installments  or  for  refund  as  result  of  examination  of 
returns  of  prior  years  . .2122 
Limitation  on  ordinary  claims  for  refund  . .2180 
Limited  partnerships.  .734 

Certain,  held  to  be  corporations.  .736 
Liquidating  corporation:  gross  income  of . .968 
Distribution  of  assets . .866 
Returns.. 969,  1816,  1818,  2770  ’ 


Index  Page  22. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Liquidating  dividends.  .866  t,  j . iooo 

Liquor  dealers:  obsolescence  of  good  will,  trade  brands,  etc . . 

List  of  individuals  making  returns  to  be  posted.  .1986 
Livestock:  farmers . .896-899,  2692 
Living  expenses. . 1185 

Living  quarters  furnished  employees.  .889,  2650 
Lobbying  expenses. . 1227 

Local  benefits:  assessments  or  taxes  for . . 1260 
Construction  vs.  maintenance  . . 1262 
Lodge  system  defined.  .757 
Lodging  in  lieu  of  cash  rent.  .940 
Losses.  .1303,  2507,  2807 

Basis  for  determining  on  sale  or  other  disposition . . 1053 


case  under  1913  Act.  .2754) 


Business.  .1303,  2507 

Outside  of  business.  .1310-1312,  2807,  (Court 
Buildings:  voluntary  removal  or  demolition  of . .1306 
Capital  stock:  sale  of  own  by  corporation . .949,  1194,  1244 
Depreciation:  effect  to  be  given  to,  in  computing.  .1058,  1305,  250 < 

Discovered  in  later  year . .792 

Embezzlement:  when  deductible . .792  « • • ckc  okcq 

Estates  and  trusts:  bearing  on  taxable  income  of  beneficiaries . .655,  2563 

Farmers . .898 

Fruit  trees  by  death . .2665 

Gifts  made;  no  loss  to  donor.  .2507 

Gross  income:  losses  in  connection  with.  .891 

Illegal  transactions.  .1305,  2507,  2807 

Insurance.  .1303-1305,  1310-1312,  2507  ^ icna  o7sa 

Inventory  losses,  substantial:  special.  .1467.  1477.  1505,  2784 

Machinery:  scrapping  of  old  . .1306 

Net  losses.  .1097 

Nonresident  aliens.  .1566 

Rebate  payments:  special . .1468,  1477,  1505 

Replacement  fund;  compensation  for  losses  . .941,  942 

Reserves  for . .1322 

Residence:  individual’s  own . .1305,  2507 
Stocks  and  bonds:  shrinkage  of  value..  1308,  1323,  1343 
Theft:  when  deductible.  .792 
Trees  by  death.  .2665 
Useful  value:  loss  of..  1307 
Lumber:  gain  or  loss  from  sale  of  . .1072 
Lumber  manufacturers;  inventories . .2706 
Machinery,  amoritzation  of:  war  purposes  . .1376 
Machinery:  scrapping  of  old.  .1306 
Machinery:  statement  as  to  estimated  life  of . .1364 

Maintenance  of  local  benefits:  assessments  for ..  1262  1/197 

Manufacture  and  disposition  of  goods  in  U..S.;j  profits  of  foreign  corporations . .1027 
Nonresident  alien  individuals  . .1644 
Manufacturing  business :_.lncome^from  . .891 
March  1.  1913: 

Bad  debtslexlsting'prior.to . . 1318 
Bequests  acquired  prior  to:  sale  of  . -lO'’ 

Depreciating  property:  basis  for . .1348,  2901 

Discovery  of  mines,  oil  and  gas  wells  subsequent  to.  .1410,  1426,  29 <2 

Dividends  accrued  prior  to.  .1177,  2651 

Dividends  ^rom  prior  earnings  . .826 

Dividends  from  subsequent  earnings.  .812 

Gain  or  loss  based  on  value  on.  .1056,  1305 

Gifts  acquired  prior  to:  sale  of . . 1074 

Income  accruing  prior  to.  .1177 

Insurance  policy:  surrender  value.  .1177,  2485 

Interest  accrued  prior  to.  .1631 

Lumber  value  on . . 1072 

Services  rendered  prior  to.  .1177 

Timber  value  on.  .1072,  1445,  2952 

Value  on,  how  determined  . .1058 

Has  no  bearing  on  invested  capital . .1058 
Marine  Corps:  compensation ..  1172 
Marine  insurance  companies:  mutual . .996 
Mariners.  .519,  1647 

Market:  inventories ..  1092,  1094,  2834  , , * „i  mai  okor 

“Market  value”  in  connection  with  exchange  of  property  for  stock.,  1081,  2506 
Market  values:  effect  on  depreciation  . . 1359,  2894 
Marriage  settlement:  amount  paid  under.  .1129 
Married  persons:  returns  by ..  1769,  1770,  1771,  2903 
Married  persons:  specific  exemption ..  1619,  1623 
Divisible  as  they  please ,.  1626 
Maryland  ground  rents:  payments  m^de  for.  ,1236 
Massachusetts  savings  bank.  .766 
Massachusetts  Trusts.  .732,  2399 

Material  as  expense  item:  manufacturer.  ,1198,  1199 
Inventories  in  connection  with  . ,1199 
Meals  and  lodgings  while  traveling. . 1187 

Mechanic  arts,  colleges:  compensation  of  certain  employees,,  1167 
Merchandising  business:  gross  Income  from  . ,891 

Index  Page  23, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Merchant  Marine  Act,  1920  (Sec.  23) . .2712 
Mergers:  profit  or  loss  resulting  from  . . 1082 

Profit  or  loss  from  subsequent  sale  of  securities  . . 1087.  2479 
Michigan  limited  partnerships.  .734  -i 

Michigan  partnership  association.  .735 
Mileage.  .879,  1187 

Military  and  naval  forces  of  the  United  States;  defined.  .1173 
Active  service  defined  ..  1176 

Compensation  of  during  war.  .1172  < 

Return  requirements . . 1176 

Extension  of  time  for  ^ing.  .1852  - 

May  file  at  Baltimore.  .1815  t'-  ; 

Mines:  depletion  of  ..  1397  . ‘ 

Depreciation  of  improvements  . .1397,  1482 
Lessees.  .1401,  1409-1410,  2319,  2668,  2372 
Under  prior  Acts.  .2319,  2668 
Mines;  depreciation  of  improvements ..  1432 
Mines:  discovery  of.  .1426,  2972 
Mines,  sale  of:  limitation  of  surtax.  .487 
Mining  business:  gross  income  from.  .891 
Ministers:  fees  received  by  . .873 
Ministers,  foreign  diplomatic.  .1163 

Minors:  allowances  or  wages  to  one’s  own  children . .1186 
Minors:  return  and  tax  liability . .702 
Income  of,  a.s  parents  income.  .702 
Return  for,  by  guardian.  .673,  702,  703 
Minors:  United  States  bond  interest  exemptions ..  1156 
Models:  depreciation ..  1362 

Mortgage  foreclosure  in  relation  to  bad  debts . . 1320 
Mortgage  foreclosure:  return  by  receiver.  .1786 
Mortgage  indebtedness;  interest  paid  on.  .1232,  1236 
Mortgage  on  property  purchased  by  State:  interest  on.  .1136 
Mortgaged  real  estate;  receiver  of  rents,  etc.  .701 
Municipal  bonds:  interest  and  discount  on.  .1130,  1135,  2872,  2971 
Interest  on  indebtedness  to  purchase  or  carry.  .1233 
Ownership  certificates  not  required  . .1659 
Municipal  officers  and  employees:  compensation.  .1167 
Special  counsel . . 1170 
Municipal  taxes  deductible . . 1248 

Except  local  benefits  assessments  . .1260 
Munition  inspectors  of  foreign  governments . 1546 
Mutual  automobile  insurance  companies  767,2360 
Mutual  ditch  or  irrigation  companies.  .749,  767 
Mutual  hall,  cyclone  or  fire  insurance  companies.  .749,  767,  2960 
Mutual  insurance  companies  taxable.  .983,  996,  2517,  2673,  2815 
Mutual  marine  insurance  companies.  .996 
Mutual  savings  banks.  .741,  756 
Mutual  telephone  companies.  .749,  767 
National  banks:  assessments  on  stockholders  of.  .1190 
Stock  dividends  not  lawful.  .2993 
National  farm  loan  associations.  .752 
Income  from  securities.  .1131,  1136 
National  Red  Cross:  gifts  to.  .1447,  1452,  1457 
Naturalized  citizens  residing  abroad.  .512,  515 
Navy,  Army  and;  compensation.  .1172 
Navy  Nurse  Corps,  Female:  compensation.  .1172 
Net  income  defined.  .771 
I Net  Income:  how  computed.  .769,  780,|783 
Accounting  methods . .778 

To  reflect  true  income  . .779,  780 
Affiliated  corporations . . 1828 
Corporations . .7'<0 
Estates  and  trusts.  .651 
Foreign  corporations . .1015 
Individuals . .769 
Nonresident  aliens . .1540 
Partnerships . . 552 
Personal  service  corporations.  .696 
Statutory  vs.  commercial  net  income.  .771 
Net  income  is  based  on  annual  accounting  period  . .778 , 793 
Change  of  accounting  period.  .800,  2763,  2784 
Net  income  of  affiliated  corporations.  .1821,  1828 
Net  losses. . 1097 

Beneficiaries  of  estate  or  trust . . 1106 
Claim  for . .1107 
Partnerships.  .668,  1105 
New  buildings:  expenditures  for ..  1188 

By  lessees  on  leased  ground.  . 1231,  2695,  2899,  2900  k ^ 

New  York  limited  partnerships.  .734 
New  York  transfer  tax.  . 1265,  2839,  2848 

No  greater  aggregate  par  or  face  value:  application  of  the  limitation.  .1086 
Non-par-valne  stock;  in  connection  with  mergers,  consolidations  and  reorganizations ..  1086 
Normal  tax  on  citizens  and  residents . .476 

Credits  (See  “Credits”  at  1,  Index  Page  .9) 

Spebfal  rat©  of  first  $4,000  applies  to  each  individual . .481 

Index  Page  24, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Normal  tax  on  estates  and  trusts . .636 
Normal  tax  on  nonresident  aliens.  .481,  1636 
Credits  (See  "Credits  at  1,  Index  Page  9.) 

Notaries  public;  fees  received  by. . 1167 

Notes  (See  “Promissory  notes”  at  1,  Index  Page  28.) 

Notice  and  demand  for  tax.  .2019 
In  case  of  first  installment.  .2013 
In  case  of  no  return  or  false  return . . 1899 
Notice  in  connection  with  change  of  accounting  period.  .801 
I Nonresident  aliens.. 511,  618,  1536 
’ Actual  vs.  record  owner  of  stock . . 1777 

Agents  of . . 1579 

All  aliens  presumed  to  be  nonresidents . . 623,  1699 

American  wife  of.  .613 

Annual  accounting  period . . 1541 

Brokers  acting  for . . 1579,  1580 

Change  of  status . .1608 

Charter  money  received  by.  .1646 

Contributions  to  charitable,  etc.,  institutions . . 1667 

Credits ..  1570,  1571,  1677 

Allowed  conditionally.  .1574 

Source;  credits  may  not  be  claimed  at  generally.  .1676 
Source;  specific  exeroptionon  claimed  at.  .1576 
Deductions  allowed  . . 1561 

Allowed  conditionally.  .1574 

Source:  may  not  be  claimed  at  source  generally.  .1576 
Defined.  .618,  1536 

Distraint:  property  subject  to,  for  tax . . 1682 
Dividends  on  domestic  stocks  as  income.  .1543,  1545  1646 
As  credit  1571 
Exempt  income  of  . .1546 
Extension  of  time  for  filing  returns.  .1852 
Freight  payments  received  by  - . 1546 
Gross  income  of . . 1642,  1545,  2994 
Income  not  subject  to  tax . . 1546 
Income  of  not  subject  to  tax . . 1646 
Interest  deductible . . 1563 

Interest  on  accounts  current  and  on  bank  deposits.  .1612 
Interest  on  domestic  securities  as  Income . . 1543,  1646,  1546 
Leaving  the  country . . 2073 
Losses  deductible . , 1565 

Manufacture  and  disposition  of  goods  In  United  States. . 1644.  1646 

Net  income  of.  .1640,  2994 

Normal  tax  on.  .481,  1636 

Ownership  certificates  for  use  by.  .1677,  1649 

Partnerships,  foreign:1663,  2994 

Personal  service  compensation  earned  abroad  . .1546 

Property  of,  subject  to  distraint  for  tax . . 1682 

Record  vs.  actual  owner  of  stock . . 1777 

Refund  by  employer  for  amounts  withheld  . .1679 

Refund  by  government  of  excess  amounts  withheld  . .1679 

Rentals  on  property  abroad  . .1646 

Returns . .1679 

By  agents . .1679 
By  fiduciaries.  .680,  706,  2669 

Deductions  and  credits  allowed  only  if  full  return  is  made  . 1674 
Extension  of  time.  .1852 
When  filed..  1808,  1809 
Where  filed..  1811,  1812 
Salaries  of:  withholding  of  tax.  .1685 
Seamen . . 1547 

Specific  exemption.  .1670,  1677,  2505 

Claiming  at  source.  .1576,  1649,  2601 
Status  determined  on  last  day  of  taxable  year.. 622 
Stock:  profit  from  sale  of . . 1662 
Surtax..  482,  1639 
Tax:  payment  of . .1684 
Tax  withheld  at  source.  .1686,  1626,  1636 
Taxes  deductible . . 1664 
United  States  bond  Interest.  .1660 
As  credit.  .1671 

Wages  of:  withholding  of  tax.  .1686 
Withholding  of  tax  at  source ..  1686,  1626,  1636 

(See  "Withholding  of  tax  at  source”  at  2,  Index  Page  40.) 

Nonresldept  foreign  corporation  defined..  1010 

(See  “Foreign  corporations”  at  2.  Index  Page  16.) 

Nonresident  foreign  corporations;  withholding  at  the  source ..  1614,  1626,  1636 
(See  “Withholding  at  the  source”  at  2,  Index  Page  40.) 

Oath:  returns  to  he  rrade  under..  1788 
Obsolescence  of  business  property ..  1328 

Failure  to  take  into  consideration  prior  to  1918.  .1369,  2894 
Good  will,  trade  names,  brands,  etc.  . 1332,  1338 
prohibition  legislation:  effect  of.  . 1333 
(See  “Depreciation”  at  1,  Index  Page  11.) 

**Of  a purely  local  character” . .767 


Index  Page  25, 


CONSULT  THE  PINK  SHEET, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Offers  in  compromise.  .1928,  1944 
Officers:  insurance  on  lives  of.  .1191,  1196 
Oil  lands:  co-owners  of . .736 
Oil  wells  (See  “Wells”  at  1,  Index  Page  40.) 

Orchards:  depreciation  and  death  of  trees.  .2665 
Orchestral  music  organizations . .761 
Organization  expenses  of  a corporation.  .1192 
Owner  unknown:  withholding  on  bond  interest ..  1627,  1644 
1 Ownership  certificates.  .1659,  2764,  2816 
Addresses  on . . 1662 

Agent:  no  stamp  “Satisfied  as  to  identity”  required . . 1670 

Fac-simile  signatures . . 1664,  1703 

Fiduciaries:  use  of  proper  certificates  by.  .1673 

Foreign  items.  .1751,  2498,  2750 

Furnished  by  Government.  .1684 

Improper  form,  substitution  of  proper  certificate  by  collecting  agent.  .2764 
Indorsement  on  back  not  required  1671 
Initials . 1665 

Interest  dates:  purchase  and  sale  of  bonds  between. . 1677,  2817,  2889 
Interrogatories  to  be  answered  fully . . 1660 
Joint  owners . . 1667 

Language:  may  be  printed  in  more  than  one . . 1688 
Maturity  dates:  differing.  .1668 
Necessity  for . . 1669 

None:  coupons  presented  without  certificates.  .1704,  2498,  2703,  2751 
Number  of  bonds  not  required  1661 
Old  forms  acceptable.  .1691,  2671 

Partnership  with  member  having  personal  exemption  in  excess  of  taxable  income.  .2966 

Privately  printed  . . 1685 

Registered  bonds.  .1695,  1697,  1706 

Retirement  of  bonds . 1676 

Return  of  monthly  1709 

Signatures . . 1664-1666 

Size,  color,  etc  1682 

Substitute  certificates.  .1700,  2500,  2764,  2816 
Use  of  not  permitted  when  1700.  1762 
Tax-free  bond  interest;  no  certificate  required.  .1669 
Tax-free-covenant  bond  interest.  .1647,  1650,  1695,  1697,  2817,  2899,  2966 
Trustee  under  mortgage  deed  of  trust.  .1680 
Trusts:  more  than  one  . . 1667 

United  States  bond  interest;  no  certificate  required  . . 1669 
Usufruct  of  foreign  owned.  .1678 
Withholding  not  required.  .1697 
Withholding  requir^  . .1696,  2966 
Paid  or  accrued.. 781 
Paid  or  incurred.  781 
Parent  of  minor  702 
Partition  proceedings,  receiver  in.. 701 
Partnershipa . . 646 

Association  vs.  partnership.  .781 

Corporations  as  members  of  partnership.  .736 

Corporations;  partnerships  not  considered  as.  .473 

Credits  allowed  members.  .671 

Dissolution  of . . 1089 

Distributive  shares  of  members: 

Accounted  for  by  member.  .664 
Constructive  receipt  of.  .664,  947 
Shown  on  return  of  firm  . .557 
Domestic  partnership  defined  . .1632,  1553 
Foreign . . 1010,  1663,  2994 
Gifts  or  contributions.  .652,  2516,  2566 

Benefit  of,  taken  by  members.  .654,  2616,  2566 
Hawaiian  partnerships.  .650 
Income  of,  how  computed  . .662 
Information  at  the  source:  returns  of . .1743 
Insurance,  proceeds  of:  received  by.  .2420 
Joint  owners  of  property.  .736 
Joint  ventures . .736 
Limited.. 734,  736 
Net  losses . .668 
New  partner  admitted  . . 1089 
Ownership  certificates  ..  1696,  1697,2966 
Persons;  partnerships  considered  as  . .472 
Private  banks . .731 

Readjustment  of  partnership  interests . . 1089 
Receiver  for . .701 
Returns  required  . .661,  656 

Contents  of  666,  661,  1089 

Selling  out  to  corporation:  future  salaries  as  part  of  purchase  price.  .1211 
Tax  liability  of  member  646,  651 
Fiscal  year  partnerships  . .601 

Tax  rates  differing:  application  of  different  rates  to  particular  income.  .632 
Taxable  year  embracing  parts  of  calendar  years  with  differing  rates . .601 
Taxable  year  of  member  and  firm  differing.  .666 
United  States  bonds;  application  of  exemptions.  .1158 

Index  Page  26, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Patent  Infrlntfement,  judgment  paid:  when  deductible . .792 

Patent  Infringement,  judgment  received.  .945 

Patenta,  depreciation  of.  .1332,  1361 

Patents,  cost  of:  determination  of  . .1361 

Patents,  royalties  on  .939 

Patents,  sale  of . .912 

Paying  agents  may  be  appointed  by  debtors.  .1654 

Payments  made,  on  account  of  creditor  to  anothor . .869,  871,  1231,  125b,  2yuu 
Penal  bonds:  U.  S.  bonds  as  security.  .1500 
Penalties. . 1864 

Compromises . . 1928 

Disclosure  of  contents  of  returns.  .1976 

By  stockholder  of  corporation  after  Inspection ..  1973 
Failure  to  make  return.  . 1889,  1901,  1902 

Failure  to  supply  information  relative  to  Government  contracts  on  request.. 581 

Faise  returns.  .1864,  1884,  1889,  1902 

Foreign  items:  collection  of  . .1757 

Information  at  source  ..  1902 

Refund  of  penalties  erroneously  collected.  .2116 

Specific  penalties  . . 1902 

Will  not  be  asserted  in  certain  cases,  .1904 
Suits  to  enjoin  collection  of  . .2175 
Tax:  neglect  or  refusal  to  pay . .1902,  2011,  2016 
Tax  payments:  delay  in  maldng  . .2011,  2016 
Tentative  returns:  failure  to  file  complete  return  . • looO 
Understatements  in  returns.  ,1864,  1884,  1889,  1902 

Withhol^^i^g  ^^t  p^y  tax  by  debtor  or  creditor  when  other  has  done 

90.. 1721  , 

Pennsylvania  ground  rents:  payment  for ..  1236 
Pennsylvania  partnerships.  .735 
Pension  funds:  contributions  to ..  1226 
Pensions.  .873,  1226 

Per  diem  allowance  in  lieu  of  subsistence.  .886 
Percentage  of  profits:  salary  based  on.  .873 
Permanent  Improvements . .791,  1188.  1200 
On  leased  property ..  939,  1231,  2899,  2900 
“Person”  defined.. 472 

Personal  expenses  vs.  business  expenses ..  1185 

Personal  property  sold  on  installment  plan.  .914,  2672,  2822,  2965 
Personal  service  corporations.  .593,  753 
Activities  of  stockholders.  .587 
Capital  of . .691 

Borrowed  capital.  .592 
Change  of  ownership  . .690 
Consolidated  returns . . 1827 
Defined.. 673  583 
Dividend  distributions . .816,  1325 

Credits  to  stockholders.  .600,  1514 
Distributions  that  are  not  dividends.  .827 
Excess  profits  tax  . .697 

Credit  to  stockholders . . 604 
Foreign  corporation  not  included . .674,  584 
Gifts  made  by . .596 
Government  contracts.  .676,  684 
Income  of,  how  computed  . .696 
Information  at  the  source:  returns  of . .1743 
Ownership  certificates . .1696 
Partial  personal  service.  .686 
Personal  service  defined  . . 585 
Retu  ns  by . .697 

Stock  owned  by  another  corporation  . .684 
Stockholders; 

Activities  of . .687 
Capital  Invested  by . .692 

Distributive  shares  to  be  returned  by.  .696,  699 
Fiscal  year  corporations.  .601 

Stocwfolders'of^corporatlon  which  withholds  its  profits  taxed  as  members  of  personal 
ser^dce  corporations.  .497 
Tax  liability.  .693  ........ 

Fiscal  years  beginning  in  1917  . .596,  697  ^ 

Tax  rates  differing;  application  of  different  rates  to  . 

Taxable  years  embracing  parts  of  calendar  years  with  different  rates . .601, 

Test  as  to  what  is  a personal  service  corporation.  .683 
Trading  as  a principal.  .675,  584 

United  States  bonds:  application  of  exemption#  . . 1168 
Philippine  Islands:  income  taxes  in . .634 

Credit  for  income  and  excess  profits  taxes.  .844,  645,  1^28.3 

Dividends  of  corporations  there  taxed  . . 640,  543 

Taxation  of  citizen  of  United  States  resident  in  Philippines.. 544 

Taxation  of  certain  corporations.  .634,  645 

Taxation  of  certain  citizens  of.  .631  534 

Withholding  against  Philippine  corporations,  .845 

lodcr  Page  27. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Photographer:  personal  service  corporation.  .^86 
Pipe  extensions:  public  utilities.  .1205 
Political  subdivision  of  State  or  Territory 
Defined.  .1135 
Income  accruing  to.  .1164 
Interest  on  obligations  of.  .1135,  2872,  2971 
Officers  and  employees:  compensation.  .1167 
Port  improvement  bonds.  .1135,  2872,  2971 
Porto  Rico:  income  taxes  in . . 534 

Credit  for  income  and  excess  profits  taxes.  .544,  545,  1283 
Dividends  paid  by  corporations  there  taxed  . . 540,  543 
Taxation  of  citizens  of  the  United  States  resident  in  Pcrto  Rico  544 
Taxation  of  certain  corporations.  .534,  545 
Taxation  of  certain  citizens  of  Porto  Rico.  .531,  534 
Withholding  against  Porto  Rican  corporations  . . 545 
Possessions  of  the  United  States  defined  . .533,  1292 
Credit  for  taxes  paid  to.  .544,  645,  1283 
Income  taxes  in  Porto  Rico  and  the  Philippines.  .634 
Tax  liability  of  citizens  of . .631 
Postage  is  not  a tax . . 1253 

Postal  savings  bank  accounts:  interest  on.  . 1139 
Poultry  raising  organizations.  .765 

(See  “Farms  and  farmers”  at  1,  Index  Page  15.) 

Power  of  attorney  does  not  create  fiduciary  relationship  672 

Preferred  stock:  dividends  vs.  interest.  .1238 

Preferred  stock:  redemption  of.  .965 

Premium:  bonds  issued  or  retired  at.  .951 

Premium:  capital  stock  sold  at.  .949 

Premium  coupons:  subtraction  for  redemption  of . . 1178 

Premium;  fidelity  bond  . . 1202 

Premium;  preferred  stock  redeemed  at,  .965 

Premiums  collected  by  agents  in  one  year  remitted  to  company  in  next.  .2517 
Premiums  life  insurance:  when  a beneficiary  under  the  policy.  .1191,  1196,  2704 
Premiums:  on  own  life  insurance.  .1186 
Premiums  on  group  insurance.  .2650 
Present  war  defined.  .1174 
Termination  of.  .1175 

President  of  the  United  States:  salary.  .803,  2669,  2713 

Prevention  of  cruelty  to  children  or  animals:  gifts  on  account  of  (See  “Gifts  ’ at  2,  Index 
Page  18  ) 

Corporations  orearised  for  746  760 
Priests:  fees  received  by . . 873 
Principal  office  of  foreign  corporation.  .1048 
Prior  laws:  continuing  effect  of . .2032 
Private  banks.  .731,  842.  894 
Privilege  taxes  deductible.  .1254 
Professions: 

Capital  expenditures  incident  to. . 1201 
Expenses  incident  to.  .1186,  1201 
Income  from.  .804 

Profit  or  loss  (See  “Gain  or  loss”  at  1,  Index  Page  18.) 

Prohibition  legislation:  obsolescence  allowances  on  account  of.  .1383 
1 Promissory  notes: 

As  compensation.  .890 

Discounted:  accounting  for  proceeds  . 890 
Sales  of  personal  property.  .914,  2822,  2965 
Sales  of  real  property  . .936.  937 

Valuing  in  connection  with  allowance  for  bad  debts.  .1318,  1323 
Proof  of  residence  by  aliens.  .521,  523 
Propaganda:  expenditures  for  exploitation  of . .1227 
Property : 

Amoritzation:  property  used  for  war  purposes  1376 
Deprec  ation  of . . 1328 

(See  “Depreciation”  at  1,  Index  Page  11.) 

Dividends  paid  in  828 

Exchanged  for  other  property.  .1076,  2506 

Exhaustion  of . . 1328 

(See  “Depreciation”  at  1,  Index  Page  11.) 

Income  from  dealings  in  . . 804 

Loss  of  useful  value.  .1307 

Losses  on  account  of.  .1303.  1305.  1311 

Compensation  for;  replacement  fund.. 941,  942 
Obsolescence  of . . 1328 
Salary  as  part  payment  for.  .1211,  1215 
State  purchasing  property  subject  to  mortgage,  .1135 
Title  to:  cost  of  defending  or  perfecting.  .1190 
Use  of  permanently  discontinued  . .1371 
Public  records:  returns  are. . 1955.  2450 
Public  school  teachers;  compensation.  .1167 

Public  utility:  affiliated  corporation  for  consolidated  return ..  1833,  1839 
Public  utility  operating  State  owned  property.  .727 
Public  utility  privately  operated  under  contract  with  State..  1166 
Public  utility:  service  connections  or  pipe  extensions ..  1206 
Purchasing  agents  of  foreign  governments . . 1546 

Index  Page  28, 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Purpose  to  avoid  surtax;  undistributed  profits  of  corporations . .497 
Evidence  of.  .606 
Quarters:  federal  employees . .879 
Quarters  furnished  employees.  .889,  2650 
Race  or  race  track  associations.  .755 
Race  track  winnings  and  losses.  .2807 
Railroad  fares.  .1187 
Railroads:  government  contracts.  .679 

Railroads:  interest  on  car-trust  or  equipment  trust  certificates  . .1239 
Railroads:  special  tax  provisions.  .737 
Expenses  of  . . 1206 

Rates  for  computing  depreciation . . 1352 
Rates,  tax  (See  “Tax  rates  ” at  1,  Index  Page  36.) 

Razing  of  old  buildings. . 1306 

Real  estate  apart  from  improvements;  depreciation.  .1331,  1848.  1349,  2901 
Real  estate  as  compensation  for  services:  title  in  dispute.  .945 
Real  estate:  determination  of  cost.  .1064 
Real  estate  sold  in  lots.  .931 

Real  estate  sold  on  instalment  or  deferred  payment  plan.  .932,  2672 

Real  estate  transferred  by  excercise  of  right  of  eminent  domain  or  in  anticipation  thereof.. 941 
Rebate  payments,  special:  allowance  for.  .1468.  1477.  1506 
Receipts  for  taxes.  .2102 

Amounts  withheld  at  source  . .2114 
Receiver  appointed  by  State  court:  commissions  1167 
Receiver  in  partition  proceedings.  .701 
Receiver  of  corporation  in  liquidation.  ,968 
Receiver  of  rents  and  profits  of  mortgaged  parcel.  .701,  1786 
Receiver  operating  business  or  property  of  a corporation  . 1786 
Receivers:  returns  by.  .701,  1786 
Common  law.  .701 

In  possession  of  part  only  of  property  of  individual  669.  701 
Statutory.  .701 

Reclamation  district  bonds.  .1135,  2872,  2971 
Recomputation  of  tax  installments.  . 1880 
Record  vs.  actual  owner  of  stock.  .1777 
Records  to  be  kept.  .1998 

By  employers  of  Form  1078  received.  .527 
Recoveries  of  bad  debts  or  accounts  charged  off  . .946 
Recoveries  on  Judgments.  .945 
Recoveries  on  patent  infringements.  .946 
Red  Cross:  gifts  to  .1447,1462.1467 
Redemption  of  bonds  by  corporations.  .951 
Redemption  of  preferred  stock.  .966 
Redemption  of  trading  stamps:  subtraction  for.  .1178 
Refund  claims  (See  “Claims  for  refund"  at  1,  Index  Page  6.) 

Refund  by  employers  of  excess  amounts  withheld  against  nonresident  aliens.  .1606,  1610 
Refund  of  amounts  found  to  be  due  the  taxpayer  as  result  of  examination  of  returns  of  prior 
years . .2121 

Refund  of  excess  amounts  paid  on  account  of  underestimating  foreign  tax  accruals. . 1288,  129  i 

Refund  of  excess  amounts  paid  on  installment  tax  payments.  .1882 

Refund  of  taxes  paid  in  prior  years:  effect  on  income.  .1263,  2775 

Registered  interest:  no  ownership  certificate  filed  by  owner.  .1706 

Regulations:  Commissioner  authorized  to  make.  .2227 

Regulations  No.  45:  promulgation  of  . .2228 

(See  Finder  Page  1,  immediately  following  page  432.) 

Religious  purposes:  gifts  on  account  of  (See  “Gifts"  at  2,  Index  Page  18.) 

Corporations  organized  for.  .745,  760 
Removal  of  old  buildings.  . 1306 
Renewal  premiums:  commissions  on.  .887 
Rent  as  expense . . 1229 

Leasehold:  purchase  of. . 1231,  2900 
Professional  men.  .1186,  1201 
Rent  as  income.  .805,  939 

Improvements  by  lessee  rental . .939,  2899 
Payments  in  lieu  of  rental . .939,  940,  967,  2899 
Rental  value,  loss  of  or  increase  of:  effect  on  depreciation.  .1359,  2894 
Reorganization  of  corporations:  profit  or  loss  resulting  from  . .1082 
Profit  or  loss  from  subsequent  sale  of  securities . . 1087,  2479 
Reorganization  defined . . 1085 
Reorganization  of  partnership.  .1089 

Repairs  as  deductible  or  nondeductible  item.  .1189,  1200 
Lessees  . . 1231,  2900 
Local  benefit  assessments . . 1262 
Replacement  fund  for  loss.  .941,  942 

Replacements:  expense  vs.  capital  investment.  .791,  1188,  1200 

Repossessing  property  sold  on  installments  or  on  deferred  payment  plan.. 914,  927,  936,  937, 
2822,  2965 

Inability  to  repossess.  .930 
Reserve  funds:  insurance  companies.  .991  +,  2617 
Net  decrease,  as  income.  .985 
Released  reserve  taxable  income.  ,2617 
Reserves  for  losses. . 1322 
Reserves  in  lieu  of  insurance . . 1204 
Residence  abroad:  citizen.  .511,  612,  515 
Residence:  depreciation  on ..  1331 


Index  Page  29. 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


,1306 


Residence,  loss  of  status:  by  alien.  .622,  1611 
Residence,  loss  of  individual’s  own  by  fire,  etc . 

Sale  of.  .2507 
Residence,  proof  of:  by  alien.  .619,  521,  623,  1600 
By  use  of  Form  1078.  .619,  623 

Resident  aliens:  taxable  status  of ..  511  . , loac  ovii  9M9 

Credit  for  income  and  excess  profits  taxes  paid  to  foreign  countries.  .1286,  2711, 

With  children  abroad  is  not  “head  of  family” . .1522 

With  wife  abroad  is  not  “living  with  wife”  for  purposes  of  specific  exemption. . 1628 
Resident  foreign  corporation  defined . . 1010 

(See  “Foreign  corporations”  at  2.  Index  Page  15.) 

Retailers:  inventories.  .1090,  2877 
Retired  pay  or  retiring  allowances.  .873,  1226 
Retirement  of  bonds,  by  corporation.  .961,  1244 
Ownership  certificates . . 1675 
Sinking  fund.  .902,  1374 
Returns.  .1766 

Absence.  .674,  1847 

Accounting  period:  calendar  year  or  fiscal  year . 799 
Change  of . .800,  1855,  2763,  2784 
Advisable  to  make  return  even  though  no  net  income.  .1772 
Affiliated  corporations.  .1821,  1827 

AUen^^operty  custodian:  property  turned  over  to..  1854,  2497,  2814 
Amended  returns  (See  "Amended  returns”  at  1,  Index  Page  2.) 

Assistance  from  collectors  in  preparing . . 1803 

Basis  for  making ..  799 

Bond  interest  where  no  withholding . .1710 

Brokers:  special ..  1764 

Calendar  year  or  fiscal  year  basis.  .799 

Community  property.  .2903  ^ 

Consolidated  returns  of  affiliated  corporations . . 1821 
Affiliated  corporations  defined . . 1835 
Assessment  of  tax . . 1824,  1829 
Different  fiscal  years . . 1832 
Foreign  corporations . . 1843 
Forms  for  making . . 1827 
Government  contracts . . 1822 
Necessity  for . . 1826 
Net  income . . 1828 
Public  utiUties  . , 1833,  1839 
Specific  credit  of  $2,000 . . 1825 
Corporations:  annual  tax  returns  by  . . 1778 
Affliated  corporations. . 1821,  1827 
Assignees  operating  business  or  property.  .1785 
Change  of  corporate  name . . 1784 
Consolidated  returns . . 1821,  1827 
Dissolved  prior  to  October  4,  1917.  .1783 
Dissolved  prior  to  passage  of  Revenue  Act  of  1918. . 1780 
Dissolved  prior  to  time  for  filing  return.  .1781,  1819 
Foreign  corporations . . 1044 
Forma  for  making . . 1780 
In  existence  during  any  part  of  year . . 1780 
In  liquidation.  .969,  1816,  1818,  2770 

Organization  not  perfected  and  no  income.  .1780 

Receivers,  trustees  in  bankruptcy  and  trustees  in  dissolution.  .701,  968,  969,  1786 
Correct  returns  essential . .792 
Correction  of.  .1866,  1989 
Decedent  to  time  of  death . . 684,  699 
Disclosing  contents  of . .1976 

(See  “Inspection  of  returns”  at  1,  Index  Page  31.) 

Dividend  payments:  special . . 1762 
Dividends:  actual  vs.  record  owner . . 1777 
Each  year’s  return  to  be  complete  in  itself . .792 
Examination  of  persons  and  books.  .1877 
Extension  of  time  for  filing.  .1847,  2570 
Failure  to  make  return.  .1889,  1901,  1902 
False  returns . . 1864,  1884,  1889,  1902 
Fiduciaries:  returns  by.  .654,  669,  676 

Administration  of  estate  completed . . 699 
Contents  of . . 682 

For  nonresident  alien.  .680,  706,  2569 

Foreign  fiduciaries.  .706 

Forms  to  be  used  . .684 

Guardian  or  committee.  .703 

Income  of  minor.  .702 

Receiver.  .701 

Termination  of  trust.  .699 

Two  or  more  joint  fiduciaries.  .681 

Two  trusts.  .700 

Final  returns.  .1816,  1818,  1819,  2770 
Fiscal  or  calendar  year  basb.  .799 
Foreign  corporations . . 1044 
Foreign  items . .1749 


Index  Page  30. 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Returns — Concluded. 

Forma  for  making  returns.  .1737 
Corporations . . 1780 

Consolidated  returns . . 1827 
Fiduciaries . . 684_ 

Foreign  corporations . . 1044 
Individuals.  .1773 

Information  at  the  source.  .1736,  1743,  1746,  1748 
Nonresident  aliens.  .1579 
Partnerships . . 560 
Personal  service  corporations . . 597 
Withholding  at  the  source.  .1709 
Fractional  part  of  year.  .1863 
Furnishing  copies  of  returns ..  1968,  1969,  2450 
Government  contracts.  .579,  580 
Head  of  family . . 1770 
Husband  and  wife..  1769,  1770,  1771,  2903 
Community  property.  .2903 
Delinquency  of  one  return.  .1771 
Incompetents . .703 
Increases  by  collector.  .1864 
Individuals . . 1766 

Forma  for  making.  .1773 

Information  at  the  source . .1728  „ , , r.  \ 

(See  "Returns  of  information  at  the  source”  at  2,  Index  Page  dl.) 
Inspection  of  generally.  .1956,  2427,  2450 
State  officials.  .1970,  2456 
Stockholders  of  corporation.  .1972,  2442,  2473 
Insurance  companies . . 1002 
Last  due  date . . 1820 
Legal  holiday . . 1820 
List  of  individuals  making . . 1986 
May  be  requested  of  any  person . .1876 
Minors.. 702,  703 
Nonresidence.  .674 

Nonresident  aliens:  by..  1579  u j 

Deductions  and  credits  allowed  only  if  full  return  be  made.,  1574 
For  nonresident  by  agents.  .1579 
For  nonresident  by  fiduciaries.  .680,  705,  2569 
Forms  for  making.  .1579 
Oath:  returns  to  be  made  under.  .1788 
Partnerships.  .551,  555,  2966 

Accounting  period  changed . . 560 
Contents  of.  .556,  561,  1089 
Form  for  making . . 560 
Period  covered  by . . 655,  660 
Period  covered  by.  .799 

Change  of . .800,  1855,  2763,  2784 
Personal  service  corporations . . 697 
Place  of  filing . .1811 
Profits  and  losses:  how  reported . . 1776 
Public  records.  .1955,  2450 
Receivers.  .701,  968,  969,  1785 
Rent  receipts:  how  reported.  .1774 
Secret  of . .1976  „ i u \ 

(See  "Inspection  of  returns  at  1,  above.) 

Sickness.. 674,  1847  ^ ^ 

Soldiers  and  sailors . .1176,  1816,  1852 
Sunday.. 1820  , 

Tax-free-covenant  bond  interest:  how  reported  . .1774 
Tentative  returns.  .1787,  1850,  2570 

TmsteeJin&hft^on  and  in  bankruptcy . .701,  968,  969,  1785 

Understatements.  .1864,  1884,  1889,  1902 

United  States  bond  holdings . .1134,  1773 

Verification  of . . 1788 

When  filed.  .1807 

Where  filed..  1811 

Withholding  at  the  source.  1707,  1709 

(See  “Withholding  at  the  source  at  2,  Index  Page  40.) 

Returns  of  Information  at  the  source.  .1728 

$1,000:  returns  as  to  payments  aggregating.  .1736 

Annuities . .1744  . t • u*.  -in  a a 

Bills  paid  for  merchandise,  telephone,  freight,  etc.  .1744 
Board  and  lodging  in  lieu  of  cash . .1739 
While  traveling.  .1744 
Branch  offices:  heads  of,  to  report.  .1738 
Branches  of  business  houses  in  foreign  countries . .1744 
Brokers:  customers’  transactions . . 1764 
Corporations:  payments  made  to . . 1744 
Dividends.  .1744,  1762,  2895 
Fiduciary  returns.  .1748 


Index  Page  31 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Retariis  of  information — Concluded 
Foreign  items.  .1749 

License  required.  .1755 

Name  and  address  to  be  furnished  on  demand.  .1753 
Ownership  certificates.  .1751 

When  none  accompanies  item.  .2498 
Penalties.  .1757 
Return  of  information . . 1752 
Source  of  information . . 1750 
Substitute  certificates  not  permitted . . 1752 
Forms  for  making  returns.  .1736,  1743,  1746,  1748 
Government  salaries  to  employees . . 1744 
Insurance  agents  and  agencies . . 1740 
Interest  on  corporate  obligations . . 1747 

Large  number  of  employees  moving  from  place  to  place . .1738 
Miscellaneous  payment  aggregating  $1,000 . . 1736 
Name  and  address  to  be  supplied  on  demand . .1753 
No  returns  required  in  certain  cases.  .1744,  2895 
Nonresident  aliens ..  1744,  1746 

Ownership  certificates  constitute  returns  in  case  of  bond  interest.  .1748 

Partnership  returns . . 1743 

Payee  not  actual  owner  of  income  . . 1754 

Personal  service  corporation  returns.  .1743 

Piece  work  payments . . 1742 

Rent  payments . . 1744 

Sailors,  resident  alien . . 1548 

United  States  bond  interest . . 1744,  1745 

Wages  and  salaries  of  employees.  .1738,  1742 

When  filed..  1736 

Where  filed..  1736 

Revenue  Act  of  1916;  of  1917;  of  1918:  entitling  of . .773 

Review  and  Appeal:  Committee  on.  2224 

Revocable  deed  of  trust . . 654 

Rights,  sale  of.  .911 

Road  district  bonds.  .1135,  2872,  2971 

Royalties  as  income.  .809,  939,  2899 

Rules  and  regulations:  Commissioner  authorized  to  make.  .2227 
Rulings  upon  abstract  questions.  .2230 
Sailing  permits.  .2082 

Sailors;  merchant  marine;  resident  or  nonresident  aliens . .519,  1547 
Naval  forces  of  the  United  States:  compensation  . .1172 
Equipment  of.  .1186 
Return  requirements.  .1176 

Extension  of  time  for  filing . . 1852 
May  file  at  Baltimore . .1815 
Salary  paid  by  employer  during  war.  .1226 
Salaries: 

As  item  of  expense . , 1208,  2489 
As  item  of  income . . 873 

(See  “Compensation  for  personal  services’*  at  2,  Index  Page  6.) 

Sale  of 

Bonds  (its  own)  by  a corporation.  .951,  1244 
Capital  assets:  income  from.  .804,  809,  966,  1244,  2876 
Capital  stock  by  a corporation.  .949,  1193,  1244 
Lumber . . 1072 

Plant,  machinery,  equipment,  etc.,  installed  or  acquired  on  or  after  April  6,  1917: 
losses.  .1099 

Property  to  corporation  for  its  stock . . 1080 
Timber . .1072 

Sales  agents:  farmers’  or  fruit  growers’  associations  acting  as . .750,  768 
Sales:  income  from . .804 

Basis  for  determining  profit  or  loss.  .1055,  1305 
Deferred  payment  sales.  .914-937,  2822,  2965 
In  foreign  commerce.  .810 
Installment  sales. . 914-936,  2672,  2822,  2965 
Personal  cre^t  of  vendee.  .914,  2822,  2965 


Salvage  values:  amortization  claims.  .1387,  1388 

Salvage  values:  gain  or  loss  on  sale  of  depreciable  property  . .1371 

Sample  room:  use  oL.  1187 

Savings  bank  interest  credited  but  not  drawn.  .947 
Scho^  district  bonds.  .1135,  2872,  2971 

Scientific  purposes;  gifts  on  account  of  (See  “Gifts’’  at  2,  Index  Page  18.) 

Corporations  organized  for.  .745,  760 
Scrapping  of  old  machinery . . 1306 
Scrip  dividends . .828 
Interest  on . . 1238 

Seamen  alien  or  otherwise.  .519,  1547 

Second  assessments:  abatement  and  refund.  .2176 

Secrecy  of  returns.  .1976 

(See  “Inspection  of  returns’’  at  1,  Index  Page  31.) 

Secret  formulae  or  processes:  depreciation  of  . .1332 
Secretary  defined . . 503 


net 


Index  Page  32. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Secared  debts  taxes , . 1253 
Necarities : 

Commissions  paid,  for  buying  or  selling.  .1190 
Dealers  in : inventories . . 1095 
Banks  as . . 1096 

Income  from  as  gross  income.  .805,  809,  891,  2876 
Foreign  corporations.  .1025 
"'■■Nonresident  aliens . . 1543 

Purchase  of  by  corporation  not  employment  of  income  in  its  business . . 506 
Purchased  and  carried  for  customers:  interest  paid  and  received . .905 
Shrinkage  in  value  of,  or  worthless.  .1308,  1323,  1343 
State:  interest  and  discount  on.  .1130,  1135,  2872,  2971 
United  States  (See  “United  States  bonds”  at  1,  Index  Page  38.) 

Selling  expenses  in  connection  with  gross  income.  .891 
In  connection  with  net  income.  .1198 
Separation  agreement:  amount  received  by.  .1129,  1186 
Service  connections:  public  utility  . .1205 
Sewer  district  bonds.  .1135,  2872,  2971 
Shareholders  (See  "Stockholders”  at  1,  Index  Page  34.) 

Ships  (See  “Vessels”  at  1,  Index  Page  39.) 

Shipwreck  losses  ..  1303,  1305,  1311 

Compensated  for:  replacement  fund.  .941,  942 

1 Sickness: 

Agent  may  make  return  . .674 

Amounts  received  on  account  of;  insurance,  etc  . .1111,  1114 
Cause  for  extension  of  time  for  filing  returns.  .1847,  1850 
Single  person:  specific  exemption  . .1518 
Sewer  district  bends.  . 1135,  2872,  2971 
Sinking  funds.  .2876 

Additions  not  deductible.  .1374 
Creation  of.  .2876 
Employment  of  income  . .507,  2876 
Investment  in  corporation’s  own  bonds.  .902,  1374 
Sixteenth  Amendment  to  the  Const: tuition . .2269 
Smith-Lever  Act:  compensation  of  college  employees  . .1167 
Soldiers: 

Compensation  of.  .1172 
Equipment  of . . 1186 
Return  requirements.  .1176 

Extension  of  time  for  filing  . . 1852 
May  file  at  Baltimore.  .1816 
Salaries  paid  by  employers  during  the  war  . 1226 
Source:  information  at  fSee  '‘Returns  of  information  at  source”  at  2,  Index  Page  81.) 
Source:  withholding  at  (See  “Withholding  at  the  source”  at  2,  Index  Page  40.) 
Special  assessment  districts: 

Exempt  interest  on  obligations  of.  .1513 
Taxes  for  benefit  of . . 1260 
Special  counsel  to  a municipality.  .1170 

2 Specific  exemption ..  1158 

Corporations.  .1531 
Affiliated.  .1825 

Apportioning  on  change  of  accounting  period.  .1861 
Date  determining  status  for.  .1526 
Decedent  dying  during  taxable  year.  .1626 
Dependents . . 1524 
Estates  and  trusts . . 667 
Fiduciaries  for  beneficiaries.  .673,  682,  704 
Heads  of  families ..  1519,  1522 
Married  persons.  .1519,  1523 

Divisible  as  they  please.  .1526 
Nonresident  aliens.  ,1570,  1577,  2505 
Claiming  at  source.  .1576,  1649 
Single  persons.  .1518 

Surtax;  specific  exemption  does  not  apply  to.  .495 
Tax-free-covenant  bond  interest:  withholding.  .1646 
Nonresident  aliens . . 1649 
Specific  penalties.  .1902,  2015 

Recoverable  by  suit  only.  .1903 
Will  not  be  asserted  in  certain  cases.  ,1904 
Stamp  taxes  are  deductible.  ,1254,  2652 
State  Contracts:  income  from.  .893 
State:  income  accruing  to..  1164 

Public  utilities  operated  under  contract.  .1165 
Workmen’s  compensation  insurance  funds.  .1166 
State  officers  and  employees:  compensation  . .1167 
State  officers:  inspection  of  income  tax  returns.  .1970,  2456 
State  securities  interest  on.  .1130,  1135,  2872,  2971 

Dividends  by  corporations  receiving  such  tax  free  interest.  .815 
Interest  payments  on  indebtedness  to  purchase  or  carry.  .1233 
Ownership  certificates  not  required.  .1659 
Purchase  by  State  of  property  subject  to  mortgage.  .1136 
State  taxes  deductible.  .1248,  1253 

Tax-free-covenant  bond  interest . . 1280 


Index  Page  33. 


CONSULT  THE  PINK  SHEET, 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Statement  as  to  inventory  losses  and  rebate  payments.  .1484 
Statement  as  to  net  losses  sustained . . 1107 
Statement  as  to  redemption  of  trading  stamps.  .1178 

Statement  by  foreign  corporations  when  claiming  ^refund  of  excess  amounts  withheld  at 
source . . 1053 

Statement  by  nonresident  aliens  when  claiming  refund  of  excess  amounts  withheld  at 
source. .1679 

Statement  (affidavit)  to  be  filed  by  exempt  organizations ..  754 
Statements  made  as  part  of  or  supplemental  to  returns:  inspection  of.  .2436 
Statements  to  be  submitted  on  request: 

Government  contract  data.  .579,  580 

In  case  of  unreasonable  accumulation  of  profits  by  corporation ..  600 
Statements  to  be  submitted  on  requesting  authority  to  change  method  of  accounting.  .786 
Statements  to  be  submitted  with  return: 

Allocation  of  deduction  and  income  to  particular  source.  .489 
Depletion  of  mines.  .1424 
Depletion  of  oil  and  gas  wells.  .1425 
ff  Depletion  of  timber.  .1444,  2951 

Liberty  and  other  United  States  bond  holdings.  .1134 
Statistical  information  to  be  reported  annually  by  Commissioner.  .1987 
Statutory  net  income  vs.  commercial  net  income.  .771 
Statutory  receivers.  .701 
Steamship  companies  foreign  . .1023 
Stock,  bank:  taxes  paid  by  bank.  .1256 
Stock:  actual  vs.  record  owner  of.  .1777 

Stock:  bonus  in  common  in  connection  with  sale  of  preferred  or  bonds.  .911 
Stock:  bonus  to  employees.  .889,  946,  1222 

Stock,  capital:  sale  of  its  own  by  a corporation.  .949,  1193,  1244 
Expenses  incident  to  sale  of.  .1193 
Stock:  commissions  paid  in  . .1225 

Stock  dividends  (See  “Stock  dividends”  at  1,  Index  Page  12.) 

Stock  exchanged  for  other  property  . . 1077,  2506 

Mergers,  consolidations  and  reorganizations . . 1082,  2479 
Stocks  and  bonds  exchanged  for  other  property . .1079 
Stock  insurance  companies.  .1003 
Stock  in  trade:  no  depreciation  of.  .1331 

Stock,  non  par  value:  in  connection  with  mergers,  consolidations  or  reorganizations.  .1085 
Stock  of  other  companies:  dividends  paid  in  . .828 

Stock  paid  and  received  by  way  of  compensation.  .889,  946,  1222,  1226,  2660 
Stock,  preferred  dividends  vs.  interest . . 1238 
Stock,  preferred:  redemption  of.  .965 
Stock,  profit  or  loss  from  sale  of.  .911 

By  a corporation  of  its  own  . .949,  1193,  1244 

Expenses  incident  to  sale  of  by  a corporation.  .1193 
Nonresident  aliens.  .1552 
Slock  raising  corporations.  .755 

(See  “Farms  and  Farmers”  at  1,  Index  Page  15.) 

Stock  received  as  gift.  ,1075 
Slock  received  in  payment  for  property . . 1080 
Stock  returned  to  corporation  for  resale.  .949 
Stock:  treasury ..  949 
Stock  trust  certificates:  dividends.  .910 
Stock:  value  as  of  March  1,  1913.  .1060 
Good  will  considered.  .1063 
Stock:  worthless,  as  a deduction.  .1308 
I Stockholders: 

Actual  vs.  record  owners  of  stock . . 1777 
Assessments  on  stock.  .950,  1190 

Assets  distributed  may  be  followed  for  corporation’s  tax.  .2770 
Building  and  loan  associations:  amounts  credited  to.  .947 
Canceling  debt  of,  or  to,  corporation.  .943 
Consolidations:  profit  or  loss.  .1082,  2479 
In  corporation  failing  to  distribute  profits.  .497 

In  corporation  owning  mine  or  well  in  connection  with  sale  thereof,  .488 

Inspection  of  corporation’s  return . . 1972,  2442,  2473 

Liquidating  corporation:  tax  collectible  from  stockholders.  .1818,  2770 

Mergers:  profit  or  loss.  ,1082,  2479 

Mines  and  wells:  no  depletion  allowance.  .1407 

Names  and  addresses,  and  distributive  shares  to  be  furnished  by  corporation  on 
request . . 500 

National  bank;  assessments  on  . .1190 
Personal  service  corporation . . 587 
Tax  liability.  .593 

United  States  bond  interest  exemptions.  .1158 
Reorganizations:  profit  or  loss . . 1082,  2479 
Returning  stock  to  corporation  for  resale.  .949 
Salaries  as  officers.  .1211,  1215 

United  States  bond  interest  in  relation  to  the  corporation.  .1159 
Personal  service  corporations ..  1158 

Unreasonable  accumulations  of  profits:  stockholder  under  no  obligation  to  ascertain 
facts . . 602 

Stockholdings:  salaries  based  on.  .1211,  1215 

Stocks  and  bonds  received  in  exchange  for  property . . 1079,  2606 

Stocks  and  bonds:  shrinkage  in  value  of,  or  worthless.  .1308,  1323,  1343 


Index  Page  34, 


CONSULT  THE  PIN  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Storm  losses..  1303,  1305  1312  o.i 

Compensated  for;  replacement  fund.  .941,  942 
Crops  by  farmers,  .898 
Subsidiaries:  dividends  on  stock  of.  .1327 
Guaranteed  by  holding  company ..  1192 

Subsidiary  relationship:  reasonable  expenditure  of  income  in  stock  of  subsidiary 
Substitute  certificates.  .1700,  2500 

Endorsement  on  certificates  of  ownership.  ,1702 
Fac-simile  signatures.  .1703 
License:  none  required. . 1701 
Use  of  not  permitted.  .1700,  1752 
Subtraction  for  redemption  of  trading  stamps,  .1178 
Suits  for  collection  of  taxes . .2070 
Five  vear  limitation . . 2029 

Suits  for  recovery  of  taxes  wrongfully  collected.  .2177,  2982,  3014 
Claims  for  refund  of  amounts  recovered  by.  .2210 
Example  of  proper  procedure.  .2189, 

Limitation  as  to  such  suits . .2178,  2982,  3014  ^ oom 

May  be  brought  only  against  the  collector  who  collected  the  taxes.. 2201 
Suits  to  restrain  assessment  or  collection  of  the  tax.  .2164 
Suits  to  restrain  or  enjoin  collection  of  penalties,  .2175 
Sunday  in  connection  with  last  due  date.  .1820 
Supertax  (See  “Surtax”  below). 

Supplies  as  expense  item . .1198,  1199 

Inventories  in  connection  with  . .1199 

SDpremi'c«S?fdSi'nsf  Act  ot  1913.  .2242:  also,  2517,  2661.  2673,  2816 
Acts  of  1916,  1917,  1918.  .2241,  2575,  2713,  2766 
Act  of  1909  (recent  cases) . .2317,  2517,  3014 
Surgeons,  army  contract:  compensation  . .1176 
Surplus:  dividend  distributions . .818,  825 

Beneficiaries:  income  received  through  fiduciaries .. 492 
Dividends  received  through  fiduciaries ..  494’ 

Citizens  and  residents.  .482 
Computation  of  surtax . . 486 

In  case  of  sale  of  mine  or  well.  .488 
Corporations  not  liable  to.  .493  . jan 

Corporations  withholding  profits  to  relieve  stockholders  of  tax . .497 
Credits  for  normal  tax  not  applicable  to  surtax.  .483,  1516 
Estates  and  trusts.  .636 

Husband  and  wife:  separately  computed.  .490 
Mines,  oil  and  gas  wells,  sale  of:  maximum  limitation . .487 
Nonresident  aliens.  .482,  1539 
Sword,  cost  of:  army  officer.  .1186 
Tangible  property:  depreciation . .1331 
Tariff  duties..  1264,  2775 

Tax  Board:  Adrlsory . ,2211  • xj  j tcooi 

Tax  collected  as  prescribed  by  Commissioner  unless  otherwise  provided.  .16831 
Tax:  collection  and  payment  of.  .2000 
Assessment  of.  .2013,  2030 

Five  year  limitation . .2029 
Notice  of  may  be  sent  by  mail.  .2027 
Three  year  limitation.  .2032 
Claims  for  abatement:  effect  of . .2012 
Distraint.  .2071 

Enforcement  of  tax  lien  by  bill  in  equity . .2072 
Extension  of  time.  .2008 
Fractional  part  of  cent.  .2089 
In  full.. 2006,  2017 
In  installments ..  2000 

Assessment  of  first  installment.  .2013 
Credit  or  refund  for  excess  payments . .1881 
Does  not  apply  in  case  of  failure  to  make  return  . .1899 
If  not  paid  when  due  all  of  tax  becomes  payable . .2017 
Notice  and  demand  for  first  installment.  .2013 
Penalties:  understatements.  .1884 
Recomputation  of . . 1880 
Interest  on  . .2010,  2011,  2014 
Penalties.  .1902,  2011,  2016 
Receipts.  .2102 

Suits  for.  .2029,  2032,  2070,  2982,  3014 

Suits  to  restrain  collection  of . .2164 

Treasury  certii.cates  of  indebtedness . .2091,  2608 

Uncertified  checks.  .2091 

When  paid.  .2000-2009 

When  withheld  at  source.  .1708 

Where  paid.  .2007 

Tax:  Interest  on . .2010,  2011,  2014  « j » • o'rno 

Tax  liability  corrected:  adjustment  of  over  a period  of  prior  years.  .2702 
Tax  lien:  enforcement  of  by  bill  in  equity . .2072 


.606 


Index  Page  35. 


CONSULT  THE  PINK  SHEET 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


1 


Tax  notice  and  demand.  .2019 
First  installment.  .2013 
In  case  of  no  return  or  false  return.  .1899 
May  be  sent  by  mail.  .2027 
Tax  on  corporations.  .713 

Foreign  corporations . . 1007 
Insurance  companies,  983,  2517 
Tax  on  estates  and  trusts . . 636 
Paid  by  beneficiaries  . . 645 
Paid  by  fiduciaries.  .641 
Tax  on  foreign  corporations.  .1007 
Tax  on  Individuals . . 511 
Normal  tax . .476 
Surtax . . 482 

Undistributed  profits  of  corporations.  .497 
Tax  on  Insurance  companies.  .983,  2517,  '2*673,  2815,  2960 
Tax  on  members  of  partnerships.  .546,  551 
Tax  on  nonresident  aliens.  .511,  1535 
Normal  tax.  .481,  1536 
Surtax.  .482,  1539 

Tax  on  railroads  under  government  control.  .737 
Tax  on  stockholders  of  personal  corporation  . . 593 
Tax  rates  differing  for  parts  of  taxable  year.  .613,  627 

Allocation  of  different  rates  to  particular  income.  .628 
Corporations . . 622,  626 
Individuals ..  625,  626 
Partnerships . . 601 

Personal  service  corporations.  .601,  624 
Tax  rates  for  1918: 

Corporations.  .715 
Individuals: 

Normal  tax.  .477 

Special  for  citizens  and  residents.  .478 
opecial  rate  applies  to  each  individual  .481 
Surtax . . 485 

Nonresident  aliens.  .1537,  1539 
Tax  rates  for  1919  and  subsequent  years: 

Corporations . . 716 
Individuals: 

Normal  tax.  .479 

Special  for  citizens  and  residents.  .480 
Special  rate  applies  to  each  individual.  .481 
Surtax . . 485 

Nonresident  aliens.  .1538,  1539 
Tax  rates  (surtax)  for  prior  years.  .861 
Tax  rates  on  dividends.  .816,  823 
On  stock  dividends.  .856,  861 
Tax  rates:  withholding  at  source.  .1626,  1645 
Tax  receipts.  .2102 
Tax:  recomputation  of  . 1880 


cieditiJr^‘foTri719^®  “Withholding  of  tax  at  the  source”  at  2,  Index  Page 

If  paid  by  creditor  then  not  recollected  from  debtor  1720 
Taxable  year.  .780,  794 

Change  of . .800,  2763,  2784 
Declaration  of  termination  of.  .2073 
First  taxable  year . . 798 

Taxable  year  embracing  parts  of  calendar  years  with  different  rates.. 613.  627 
Corporations . . 622,  626 
Individuals.  .625,  626 
Partnerships.  .601 

Personal  service  corporations . . 601,  624 
Taxes,  additional:  payment  of.  .1882,  1899 

Foreign  taxes:  overestimated  accruals ..  1288,  1294 
Taxes:  credit  for  excess  profits  taxes  payable  to  United  States.  1529 
Taxes:  credit  for  income  and  excess  profits  taxes  paid  or  accrued  to  other 
tions.  .544,  545,  1283,  2711,  28D2 
Taxes  deductible  or  not  deductible . . 1245 
Bank  stock:  taxes  paid  by  bank.  .1256 
Capital  stock  tax.  .1254,  1255 
Estate  taxes.  . 1264,  2839,  2848 
Federal  excise,  etc.  .1254,  2484,  2652,  2775 
Foreign  corporations.  .1032 
Foreign  taxes . . 1281 

Income  and  excess  profits  taxes:  other  jurisdictions.  .1281,  1282 
Income  and  excess  pro 'Its  taxes:  United  States.  .1246,  1253 
Inheritance  taxes . . 1264,  2839,  2848 
New  York  transfer  tax.  .1265,  2839,  2848 
Local  benefit  taxes  or  assessments.  .1260 
Construction  vs.  maintenance. . 1262 
Municipal  taxes . . 1248,  1260 
Nonresident  aliens . . 1564 

Paid  for  or  on  account  of  another:  deductible ..  1280 
Not  deductible  by  the  payor.  .1256,  1264,  1279 


40.) 


jurisdic- 


Index  Page  36. 


CONSULT  THE  PINK  SHEET. 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Taxe.s  deductible  or  not  deductible — Concluded 
Postage  is  not  a tax . . 1253 

Refund  of  taxes  paid  in  prior  years:  effect  on  income.  .1263,  2775 
Secured  debts  taxes. .1253 
Stamp  taxes.  .1254,  2652 
State  taxes,  1248,  1253 

Tax-free-covenant  bond  interest:  tax  paid  by  obligor.  .869,  1279 
Undistributed  profits  tax  of  1917  Act.  .510 
United  States  taxes.  .1246,  1254,  2484,  2652,  2775 
Taxes,  foreign ..  1281-1301,  2392 

Taxes  paid  for  another  as  additional  income  to  him . . 869,  871,  1231,  1256 
I Tax-free-covenant  bond  interest: 

Bonds  not  containing  covenant  m.ay  not  be  considered  tax-free.  .1633 
Car  or  equipment  trust  certificates . . 1242 
Court  case.  .1652 

Foreign  corporation  with  United  States  fiscal  agent.  .1645,  2780 
Form  of  covenant  which  relieves  debtor  of  obligation  to  withhold.  .1651 
Old  1%  covenant.  .1643 
Partnership.  .1695,  2966 

Tax  paid  by  obligor  additional  interest  to  obligee . . 869 
Tax  paid  by  obligor  not  deductible  by  him . . 1279 
Except  in  case  of  State  taxes  so  paid  . . 1280 
Tax  paid  by  obligor  not  deductible  by  obligee.  .869 
May  be  credited,  however.  .1719 

Withholding  tax  at  source  (See  “Withholding  at  the  source”  at  3,  Index  Page  40.) 
Tax»free  obligations.  .1130,  2872,  2971 

Interest  payments  on  indebtedness  to  purchase  or  carry.  .1233 
Dividend  paying  stock.  .1237 
Taxpayer  defined.  .470 

Teachers,  public  school:  compensation.  .1167 
Telephone  companies,  mutual  or  cooperative.  .749,  767 
Tenants  (See  “Lessees  and  lessors”  at  1,  Index  Page  22.) 

Tennessee  levee  districts:  assessments.  .1262 
Tentative  returns . . 1787,  1850,  2570 
Termination  of  present  war.  .1175 
Termination  of  taxable  period:  declaration  of.  .2073 
Terms  defined: 

Active  service  in  military  or  naval  forces.  .1176 

Affiliated  corporations.  .1835 

By  the  same  interests.  .1838,  1841 

Citizen..  612 

Collector . . 605 

Commissioner.  .604 

Corporation . .728 

Debtor..  1653 

Dividend . .811 

Domestic  corporation . , 1632,  15.53 

Domestic  partnership.  .1532,  1563 

False  (“false”  returns) . . 1259 

Farm . . 896 

Farmer.  .896 

Fiduciary.  .670 

Fisca’  year . .797 

Foreign  corporation  or  partnership.  .1008,  1653 

Foreign  country.  .1292 

Government  contract . . 678 

Lodge  system . .767 

Lumber  manufacturer.  .2710 

Market  value.  .1081,  2506 

Military  and  naval  forces.  .1173 

Net  income.  771 

Net  loss.  .1097 

Nonresident  alien. .618,  1636 

Paid.  .781 

Paid  or  accrued  . . 781 
Paid  or  incurred.  .781 

Period  of  administration  or  settlement.  .638 
Person . 472 

Persona!  service  corporation  . . 673,  683 
Political  subdivision  of  state  or  territory.  .1135,  2872,  2971 
Possession  of  the  United  States.  1292 
Present  war . . 1 174 

Reasonable  cause  for  delay  in  filing  return.  .1901 
Reasonable  compensation  as  salary  .1210,  2489 
Reorganizations . .1086 
Secretary . . 603 
Taxable  year.  .794 

Taxes  paid  during  taxable  year;  In  connection  with  credit  for  taxes  12^2 
Taxpayer.  .470 

Termination  of  present  war.  .1176 
United  States . . 1009 
Withholding  agent . . 1 622 
Territories;  income  accruing  to.  .1164 
Territories:  obligations  of.  .1130,  1136,  2872,  2971 

Index  Page  37. 


f 


CONSULT  THE  PINK  SHEET. 

GENERAL  INDEX. 

The  references  are  to  paragraph  numbers. 


Territories;  officers  or  employees  of.  .803,  2813,  2835 
Texas;  community  property  of  husband  and  wife.  .2903 
Theatrical  properties  and  costumes;  depreciation.  .1331 
Theft,  loss  from;  when  deductible.  .792 
Tips. .873 

Title  in  dispute;  real  estate  received  for  services.  .P45 
Title  to  property;  cost  of  perfecting  or  defending.  .1190 
Timber;  depletion ..  1397,  1438,  2944 

Depreciation  of  improvements.  .1443,  2950 
Timber;  profit  or  loss  from  sale  of. . 1072 

Valuing  on  March  1,  1913,  or  on  date  of  acquirement.  .1072,  1445,  2952 
Trade  brands;  depreciation  of. . 1332 
Trade  marks;  depreciation  of. . 1332 
Trade  names;  depreciation  of ..  1332 
Trades;  income  from.  .804 

Trading  as  a principal:  personal  service  corporations.  .575,  584 

Trading  stamps:  redemption  of.  .1178 

Transfer  tax  (New  York)  not  deductible.  .1265,  2839  ,2848 

Transfers  of  property  (See  “Gain  or  Loss:  basis  for  determining”  at  1,  Index  Page  18.) 

Traveling  expenses.  .1187 

Treasury  Certificates  of  Indebtedness 

Exempt  status  of  interest.  .1139,  1141,  1153  (II) 

Payment  of  taxes  by  means  of.  .2091,  2508 
Treasury  Decisions:  effective  date  of.  .2229 
Treasury  stock. .949 

Trees:  depredation  and  loss  by  death  . .2665 

Truck  farms  (See  “Farms  and  Farmers”  at  1,  Index  Page  15.) 

Trust  deeds  with  tax-free-covenant:  bonds  issued  under.  .1645 

Trustee;  car-trust  or  equipment  trust  certificates.  .1240 

Trustee:  compensation  over  period  of  years.  .874 

Trustee  in  bankruptcy.  .701,  968-970 

Trustee  In  dissolution  of  corporation.  .701,  968 

Trustee  included  in  term  "fiduciary”  . .669 

Trustee  to  trustee:  transfer  of  property;  appreciation  in  value.. 686 

Trustee  who  is  also  executor.  .638 

Trusts:  common-law . .730,  732,  2399 

Trusts  (See  “Estates  and  trusts”  at  1,  Index  Page  13.) 

Trusts,  Massachusetts.  .732,  2399 
Trusts:  sinking  fund.  .2876 

Uncertified  checks:  payment  of  taxes  by  means  of.  .2091 
Uncompleted  contracts.  .892 

Understatements  in  returns.  .1864,  1884,  1889,  1902 
Undistributed  profits  of  corporations;  tax  liability.  .497 
Tax  under  1917  Act.  .609 
Undistributed  profits  tax,  1917  Act 
Deductibility  as  a “tax”.  .510 
Fiscal  years  ending  in  1918.  .509 
Undivided  profits  and  surplus:  dividends.  .818,  825 
. . Unearned  Increment;  depreciation . .1351 
ff  United  States  bonds: 

Dividends  paid  in . .825,  829 
Valuing  the  dividend . . 840 
Interest  on  (See  at  1,  Index  Page  38.) 

Medium  for  payment  of  debt  or  dividend.  .829,  872 
Security  in  connection  with  penal  bonds.  .1600 
Stock  exchanged  for . . 1077 
Undistributed  profits  invested  in . . 608 

2 United  States  bonds  (including  Liberty,  and  Victory  notes):  interest  on..  1132,  1138  ,116<2 
Advertising  sale  of:  expense  of . . 1227 
Application  of  exemption; 

Corporations  and  their  stockholders.  .1169 
Estates  and  trusts  and  beneficiaries.  .1167 
Husband,  wife,  and  children.  .1156 
Partnership  and  members.  .1158 

Personal  service  corporations  and  stockholders.  .1168 
Corporations  not  subject  to  income  tax  on  . .1528,  1533 
Credit  against  income  for  corporations.  .1528,  1533 
Credit  for  individual  normal  tax.  .1516 
Beneficiaries  of  estate  or  trust . . 665 
Estates  and  trusts . . 667 
Nonresident  aliens.  .1571 
Partnerships:  members  of . .671 
Personal  service  corporations:  stockholders  of . .600 
"Date  of  the  tax  return”.  .2558 
Effect  of  conversion  of  Liberty  bonds.  .1154 
Effect  of  installment  plan  payments.  .1155 
Food  Administration  Grain  Corporation  notes..  1160 

Information  at  the  source . .1744,  1745  tooo  tooc 

Interest  payments  on  indebtedness  to  purchase  or  carry  certain . .1233,  14ao 
Mutual  organization  receiving.  .767 
Nonresident  aliens . .1560 
As  credit..  1671 

Original  subscription  to  Victory  notes.  .1149 


Index  Page  38, 


CONSULT  THE  PINK  SHEET. 


M (.  I,  / 1 I' 


I 


GENERAL  INDEX. 

The  references  are  to  paragraph  numbers 


United  States  bonds — Concluded 

Ownership  certificates  not  required.  .1659 
Return  of . .1134 

Treasury  certificates  of  indebtedness.  .1139,  1141,  1163  (II) 

Victory  Liberty  Loan  notes.  .1146,  1152 
“Date  of  the  tax  return”.  .2558 
Original  subscription  to.  .1149 
War  Savings  Certificates.  .1139,  1141,  1153  (II) 

United  States  contracts  (See  “Government  contracts”  at  1,  Index  Page  19.) 

United  States  courts: 

Jurisdiction  of  District  Court.  .1878 
Salaries  of  judges.  .803,  2669,  2713,  2766,  2813,  2835 
“United  States”  defined.  .1009 

United  States:  taxes  imposed  by  authority  of.  .1246,  1254,  2652 
Unreasonable  accumulation  of  profits  by  a corporation.  .497 
Evidence  of . . 606 

Stockholders  under  no  obligations  to  ascertain  facts  . . 602 
United  States  bonds:  investment  in . .608 
What  constitutes  “unreasonable  accumulation”.  .607 
Use  of  forms  (See  “Forma”  at  I,  Index  Page  16.) 

Useful  value..  1307 
Validating  clause.  .2240 
Valuing: 

Bad  debts  existing  prior  to  March  1,  1913.  .1318 
Bequests  on  subsequent  disposition  . .1074 
Bonds,  worthless:  in  connection  with  bad  debts . . 1323 
Compensation  paid  other  than  in  cash . . 889,  2650 
Deposits:  for  purposes  of  depletion  . .1412 
Depreciation:  valuing  property  for  purposes  of . .1348,  2901 
Patents  and  copyrights  . .1361 
Dividends  paid  in  Liberty  bonds.  .840 
Dividends  paid  in  property  . .828 
Dividends  paid  in  stock.  .849,  2841,  2884 

Subsequent  sale  of  stock.  .865,  2655,  2847,  2884,  2885 
Gifts  on  subsequent  disposition  . .1074 
Gifts  when  made  in  kind.  .1448,  2499,  2516,  2666 
Good  w ill  on  sale  of . .913 

Insurance  policies:  surrender  value.  .1177,  2485 

March  1,  1913:  fair  market  price  or  value  on.  .1058,  2804 

Market  value.  .1081,  2506 

Mines,  oil  and  gas  wells:  date  of  discovery  or  30  days  thereafter ..  1426,  1429 
Promissory  notes  in  counection  with  bad  debts.  .1318,  1323 
Promissory  notes  received  as  compensation  . . 890 
Stock  on  March  1,  1913.  .1060,  1063 

Stock  received  as  stock  dividend:  sale  of.  .865,  2655,  2847,  2884,  2885 
Stock  received  in  connection  with  merger,  consolidation  or  reorganization ,,  1087,  1088 
Stock  sold  on  which  partial  liquidating  dividend  has  been  paid.  .868 
Timber.  .1072,  1440,  1445,  1446,  2946  2952,  2953 
Warrants  received  for  public  work  done.  .893 
Vessels  amortization  of:  war  purposes ..  1376 
Vessels:  co-owner*  of . ,736 
Vessels:  foreign  steamship  companies.  .1023 
Charter  money  and  freight  payments.  .1546 
Vessels:  residence  of  seamen . .619  ...  , . . 

Vessels:  special  exemption  on  proceeds  of  sale  of  under  certain  conditions.  .2712 
Victory  Liberty  Loan  notes.  .1146,  1152 
“Date  of  the  tax  return”.  .2558 
Installment  purchases.  .1155 
Original  subscription . .1149 
Violations  of  iaw  to  be  reported  by  collectors  . .2068 
Virgin  Islands:  taxation  of  certain  citizens  of.  .631 

Credit  for  income  and  excess  profits  taxes  paid  to  . . 1283,  1292 
Vocational  Rehabilitation  Fund:  contributions  to.  .1447 
Vocations:  income  from  . .804 
Voluntary  assessments  on  stock  . .960 

Wages  (See  “Compensation  for  personal  services”  at  2,  Index  Page  6.; 

War:  amortization  of  buildings,  equipment,  vessels,  etc.,  used  for  war  purposes ..  1376 
War  chests:  gifts  to,  as  common  agency.  .1448,  2499,  2516,  2666 
War  Finance  Corporation  bonds:  interest  on.  .1133,  1138,  2480 
Credit  for  corporation  tax  . .1528 
Credit  for  normal  tax . . 1615 
War:  “present  war”  defined ..  1174 

War  profits  tax  (See  Excess-profits  taxes”  at  1,  Index  Page  14.) 

War  Risk  Insurance.  .1114 

War:  salaries  paid  to  absent  employees  during.  .1226 

War  Saving  Certificates:  exempt  status  of  interest.  .1139,  1141,  1163  (II^ 

War  termination  of:  defined..  1176 
Wards;  return  for.  .703,  704 
Warrant  of  distraint:  $5  charge.  .2016,  2747 
Warrants  received  for  public  work  done.  .893 
Water  district  bonds.  .1135,  2872,  2971 

Wear  and  tear  of  property  (See  “Depreciation”  at  1,  Index  Page  11 .) 


39. 


CONSULT  THE  PINK  SHEET. 


/ 


GENERAL  INDEX. 


The  references  are  to  paragraph  numbers 


Wells  o5l  and  gas:  depletion.  .1397,  2874,  2902,  2972  . . . 

Combined  holdings.  .2874 

Depreciation  of  improvements . . 1433  - 

Discovery . . 1410,  1428  2972 
Lessees ..  1401,  1409-1410,  2319,  2668,  2972 
Under  prior  Acts.  .2319,  2668 
Wells,  oil  and  gas;  discovery  of.  .1428 

Wells,  oil  and  gas;  sale  of:  maximum  surtax  limitation  . .487 

Widov:  statutory  allowance  paid  to.  .642 

Wife  (See  “Husband  and  wife”  at  2,  Index  Page  19.) 

Withholding  agents  defined.  .1622 

Withholding  agents  held  liable.  .1716 

Withholding  agents  indemnified.  .1717 

Withholding  agents  may  be  appointed  by  debtors.  .1654 

Withholding  in  1918  . .1711 

Releasing  excess  amounts  withheld.  .1714 
Withholding  at  the  source.  .1585 
1918:  special.  .1711 

Assignee  assuming  payment  of  bonds.  .1659 

Banks,  domestic  and  foreign:  debit  and  credit  items.  .1621 

Certificates  required ..  1695,  1697  u j-  , * -icoc 

Citizens  and  residents:  no  withholding  except  on  tax-fre^covenant  bondinterest . .1635 
Corporations,  domestic  and  foreign  resident:  no  withholding  against . .159o 
Coupons  exchanged  for  funding  bonds.  .1672 
Coupons  purchased  abroad  . .1634 
Credit  for  amounts  withheld.  .1719,  1722 
Foreign  corporations.  .1051,  1723 
Creditor  paying  the  tax  it  is  not  recollected  from  debtor . 172U 
Debtor  only  withholds  the  tax . . 1658 
Dividends:  no  withholding  in  any  case  1594 
Employers:  duties  of . .1597 

Exemption  claims  at  the  source ..  1697  ...  u iciq 

Foreign  corporations  having  office  or  place 

Nonresident  aliens  for  specific  exemption.  1577,  164J  2„U1 
Ownership  certificates  (See  “Ownership  certificates  at  1,  index  Page  2b.) 
Tax-free-covenant  bond  interest:  citizens  and  residents  ..lb4b,  Iby/ 
Tax-free-covenant  bond  interest:  nonresident  aliens.  .1649 
Fixed  or  determinabl  e annual  or  periodical  income  defined  . .lo9b 
Foreign  bonds:  tax-fee-covenant  bond  interest.  .1751,  2750,  2/bO 
Foreign  corporations.  .1614 

Credit  for  amounts  withheld.  .1051  . car 

Porto  Rican  and  Philippine  corporations  are  foreign  corporations . .546 
Income  on  which  tax  is  withheld  included  in  creditor  s return . .1718,  1722 
Interest  on  bank  deposits  or  accounts  current.  .1612,  1620 
Interest  on  domestic  securities . . 1625 

March  1,  1913:  interest  due  prior  to.  .1631 
Rates  in  force  during  year  of  collection  apply . .1631 
Unknown  owners.  .1627,  1644 
March  1,  1913,  interest  due  prior  to:  no  withholding. .1631 
Miscellaneous  income.  .1585,  1596 
Nonresident  aliens.  .1585 

Interest  on  domestic  securities  . .1625 

Specific  exemption  claimed  at  source.  .1577,  1649,  1650,  2501 
Wages  or  salaries  of  . .1585.  1595-1611 
Ownership  certificates . .1695,  1697 

(See  “Ownership  certificates”  at  1,  Index  Pap  ib.) 

Paying  or  withholding  agents  may  be  appointed  by  debtors.  .lbb4 
Penalties . .1902 
Rates  . .1626,  1645 

Rlfutds  SflyceL'lmount,  withheld  against  nonresident  alien, ..  1606.  1610 

Refund  by  Government  of  excess  amounts  withheld: 

Foreign  corporations.  .1053 

Nonresident  aliens . .1579  .....  .err- 

Retirement  of  bonds  within  an  interest  period . .1670 
Returns  of  amounts  withheld.  .1707,  1709^ 

Salaries  of  aliens  unless  proof  of  resident  is  furnished.  .523 
Specific  exemption  claims  at  the  source  by  oo^^resident  alien 

Bv  nonresident  alien  owners  of  tax-free-covenant  bonds.  .1649,  1650 
Substitute  certificates.  .1700  2764,  2816 

Tax-free-covenant  bond  interest.  .1636  oo  foT.frpe  1633 

Bonds  not  containing  covenant  may  not  be  treated  as  tax  free.  .1633 
Car  or  equipment  trust  certificates . .1242 
Court  case.  .1652  ..a  -jcdc 

Exemption  claims  by  citizens  and  residents  . .1646 
Exemption  claims  by  nonresident  aliens ..  1649,  1650,  2501 

unl^d^  6,cal  agent.  .1645.  27S0 

?l^t!,5,£r,Sl!:‘,.emSrhaving>erso„al  e,emption  in  exce,,  of  taxable 
Tax  is  additional  income  to  creditor . . 869 


Index  Page  40. 


CONSULT  THE  PINK  SHEET 


1 1 


GENERAL  INDEX 
The  references  are  to  paragraph  numbers. 


withholding  at  the  source — Concluded 

Tax  is  not  deductible  by  either  creditor  or  debtor.  .869,  1279 
Creditor  credits  the  tax . .1719,  1722 
Debtor  may  deduct  State  tax  paid . . 1280 
Trust  deeds  with  covenant . . 1646 
Unknown  owners.  .1630,  1644 

Tax  paid  to  Government  by  withholding  agent.  .1708,  1709 
Receipts  for.  .2114 

Unknown  owners  of  domestic  securities.  .1627,  1644 
Working  capital;  employment  of  funds  as.  .507 
Workmen’s  compensation;  accident  or  sickness.  .1111,  1114 
Workmen’s  comrensation  insurance  funds.  State:  income  accruing  to.  .1166 
Worthless  debts . . 1316 
Recoveries ..  945 

Worthless  securities:  deductibility ..  1308,  1323 


Y.  M.C.A.:  ts  to.. 1467 


Year;  accounting.  .779,  793 
Changing.  .800,  2763,  2784 
Year  taxable.  .780,  794 

Change  of.  .800,  2763,  2784 
Declaration  of  termination  of.  .2073 
First  taxable  year . .2073 

Year  taxable:  embracing  parts  of  calendar  years  with  different  rates . .618,  627 
Corporations . . 622,  626 
Individuals.  .625,  626 
Partnerships . . 601 

Personal  service  corporations.  .601,  624 


Index  Page  41 


Ol0rp0ratittw  ®rust 


Organized  kijjJ.8924*; 

Ser^^ices 


These  ar^  loose  leaf  binder  Services  containing,  In  addition  to  the  respective 
Acts  as  amended  and  now  in  effect,  all  official  matters,  in  force,  issued  sisice 
the  pa^  the  respective  original  Acts,  compiled,  crdss-referenced,  and 
ced,  and  kept  up  to  date  at  ail  times  by  th^ans  of  additional  ^tibse 


ally  numbered  printed  pages  sent  to  subscribers  under  first-class  postri' 
Poriiial  regulations,  informal  rulings.  Supreme  Court  decisions,  and 


•r  court  cases  are  embodied  in  these  Services. 


Federal  Income  Xax  Service — Covers  the  Fedex'al  Income  Tax  L-aw  a 
the  oiT.cial  regulations,  efc.,  bearing  thereon. 

Federal  War  Tax  Service-Covers  practically  all  the  strictly^  Internal 
Revenue  Tax  Lav7s,  except  the  Income  Tax  Law,  due  to  the  war^  ;^d 
the  official  regulations,  etc..,  beanhg  thereon.  (Does  not  touch  on  h^t, 
wine,  spirit^  soft  drinks,  tobacco,  i:iarcotics  or  child  labor.) 

Federal  Re&e.»we  Act  Service — Covers  the  Federal  Reserve  Act  and 
official  regulations,  etc.,  bearing  thereon. 

Federal  Trade  Commission,  Service — Covers  the  Federal  Trade  Commis- 
sion Act  and  the  Federal  Anti-Trust  Act  (the  Clayton  Act)  and  the 
official  orders,  rulings,  complaints,  etc.,  bearing  thereon. 

New  York  Income  Tax  Service-Covers  the  New  York  Personal  and  Cor- 
poration Income  Tax  Laws  and  the  official  regulations,  etc.,  bearing 
thereon.  p 

Departments 


Corporation  Oepartiiient — Assists  attorneys  in  thix  organization  of  cor- 
porations and  in  th%  licensing  of  foreign  corporations  in  every  state  and 
the  Provinces  of  Canada. 

Report  and  Ts^^^epartinent — Attends  for  attorneys  to  corporation  reports 
; end  tax  matters  in  every  State  and  Province.  ° 

-Reports  on  pending  legislation;  furnishes  copies 
lew  laws  in  every  State  and  Congress. 

Trust  Department — Acts  as  trustee  under  deed  of  trust,  custodian  of 
securities,  .escrow  depository  and  deposit or3^  for  reorganization  com- 
rnittees. 


Legislative  Departc^ent- 


of  bills 


Transfer  Depat^ent — Acts  as  registrar  and  transfer  agent  of  stocks,  bonds 
and  notes.  ® ^ 

Federal  Department — Reports  decisions  of  the  United  States  Suprerpe 
Court,  rulings  of  the  Interstate  Commerce  Commivssion,  Federal  Trade 
Commission,  Bureau  of  Internal  Revenue  and  Federal  Reserve  Board." 

Furnishes  agent  at  Washington  for  common  carriers  to  accept  serv- 
ice of  orders,  process,  etc.,  of  Interstate  Commerce  Commission. 


THE  CORPORAnON  TRUST  COMPANY 


.37  Wall  Street,  New  York 


Affiliated  with 

®f)e  Coiporation  ISCru^t  Companp  System 


15  ExebanRe  Place,  Jeroey  City 


Oreanized  1892 


I; 


Bouton,  53  State  Street 
(Corporation  Regiatration  Co.) 
Chicago,  112  W.  Adams  Street 
Pittsburgh,  1202  Oliver  Bldg. 
Washington,  501  Colorado  Bldg. 


Philadelphia,  1428  I.^nd  Title  Bldg,,  iy 
Portland,  Me.,  2S1  St.  jo’em  Street  ; f | 
St.  Loai'i,  Federal  Reserve  Battk  Bldgv 
Wilmington,  4 lOS  dttPoiit  Bldg, 
(Corporation  Trust  Co»  of  AnadrSca} 


Los  Angeles,  Title  Insurance  Bldg. 
(The  ^Corporation  Company) 


